WEB-BASED BUSINESS MODELS
Class #1 #2 #3 #4 and #5 – February 2014
Prof. Eduardo Larrain
Eduardo Larrain - Linkedin - Webs...
This lecture was taught at a French business school by Eduardo Larrain

Eduardo Larrain
•

HEC 2005 – Strategic Management...
Agenda of the web-based business model lecture

1. Let’s all talk the same language!
• What’s the web? …………………………………………………...
What’s the web

Eduardo Larrain - Linkedin - Website

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What’s the Web?

ICT
Internet
Web

Definitions

• Web (or World Wide Web or WWW) is a global set of documents, images and ...
Is Internet only about Web presence?
• In the European Union, two-thirds of all businesses have a Web presence (McKinsey, ...
Is Internet only about Web presence?
• Exhibit - Looking at top 100 websites in UK, France, Germany, Italy, Spain, Switzer...
Is Internet only a distribution channel for online retail/ecommerce?
• In retail alone, G-20 consumers researched online a...
Internet is not just a distribution channel or
just about Web presence

Eduardo Larrain - Linkedin - Website

9
Is Internet an Industry?
• 75% of the economic impact of the Internet arises from traditional companies that don’t define
...
Internet is not just an industry

Internet is touching every part of the
economy (like electricity)

Eduardo Larrain - Lin...
Internet is a technology on which are based numerous activities across
industries

Internet-based activities
1.

Web activ...
Internet accounts for 3-4% of worldwide GDP

Exhibits – Economic impact of the Internet by McKinsey and BCG

McKinsey, Int...
Though, the Internet economic impact goes beyond GDP generating
consumer surplus when there is not monetary reward

Real e...
What’s a business model

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What’s a business model?

Basic definition

• A business model is a coherent way to manage and develop an economic activit...
What’s a business model?

Very basic definition

• A business model is “show me the money”.
• It is a simple expression of...
A Business Model is not a Business Plan

What’s a Business Plan?
• A Business plan is a document that describes how a proj...
A Business Model is not Strategy

What’s Strategy?
• Strategy is a plan of action and the allocation of resources necessar...
What’s a startup

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What’s a startup?

Basic definition

• A startup is a company, a partnership or temporary organization designed to
search ...
The problem of business plans for startups

• For young companies with predictable revenues (like opening a new bakery), a...
The lean startup methodology

How to build a product that people want?

• Developing a new product should resemble simulta...
The lean startup methodology

Why early adopters are so important?

• Early adopters accept-in fact prefer an 80 percent s...
The lean startup methodology

The importance of MVP: build-measure-learn feedback loop

• A minimum viable product (MVP) h...
The lean startup methodology

The Concierge MVP: have your customers design the first version of your product

• Wait for ...
The lean startup methodology

Principles

theleanstartup.com, 2014

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Why study Internet-based business models

Business
Models

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Internetbased

28
Business models have been studied for 30 years

Traditional business models: trying to explain success with profit models
...
Business models have been studied for 30 years

Traditional business models: trying to explain success with profit models
...
Business models have been studied for 30 years

Traditional business models: trying to explain success with profit models
...
Business models have been studied for 30 years

Traditional business models: trying to explain success with profit models
...
Why study Internet-based business models?

Two reasons

i.

The technological revolution increased exponentially the numbe...
(i)The technological revolution (IT, Internet, biotechnologies, nanotechnologies,…)

Ray Kurzweil video on TED, 2005
The a...
Marginal cost of digital information comes closer to nothing

Basic economics
• In basic economics, price falls to the mar...
• The great power of the eBay business model is the fact that a small number of salaried employees
and outsource partners ...
Long tail enables larger segmentation of customers

Long tail
• Long tail is about selling less of more:
• They focus on o...
• Amazon sells blockbusters products but also niche hard-to-find products (online book stores bring
access to increased pr...
Better assets rotation can enable new businesses with low margin

The only formula you need to know in this class!
• Techn...
Better assets rotation can enable new businesses with low margin

Design to cost
• Then, new business models with low marg...
Better assets rotation can enable new businesses with low margin

Pyramid base: targeting tier 5 population
• Developing c...
Better assets rotation can enable new businesses with low margin

Mobile banking case
• Half population is unbanked worldw...
Other big trends in creating new Internet-based companies

Current trends
• Pyramid based strategy: create a business mode...
(ii) We are better at understanding business models

One Business Model Canvas

Alexander Osterwalder and Yves Pigneur, Bu...
What are the key elements
of a business model

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A business model describes what makes an company unique looking from the
value propositions to cost structure

Key element...
A business model is an ecosystem

Rationale beyond those key elements

Cost-side

Value-side

Alexander Osterwalder and Yv...
1 - The proposition value

Definition and scope
• The value proposition describes the bundle of products and services that...
1 - The proposition value

Elements that can contribute to customer value creation
• Newness: some value propositions sati...
1 - The proposition value
Defining a promise helps understanding the proposition value

Defining the promise or tagline
• ...
• Starbucks promise: a “third space” of conviviality between home and work

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1 - The proposition value
Defining a promise helps understanding the proposition value

Company promise or tagline
• What ...
1 - The proposition value
The proposition value has to take into account all customers

Two customers
• Most of the time, ...
• Companies have long engaged in head-to-head competition in search of sustained, profitable
growth
• Yet in today’s overc...
1 - The proposition value
Differentiate from competitors or innovate within the value

Red Ocean Strategy vs. Blue Ocean S...
1 - The proposition value
Differentiate from competitors or innovate within the value
Four questions to challenge an indus...
• In the 80s, Circus was a declining industry with decreasing audiences because of increasingly
attractive alternative for...
1 - The proposition value
Cirque du Soleil created a new value curve offering the best of both circus
and theater and elim...
• With which industry do Southwest airlines compete?
• In what do they focus, in what they differ and what are they taglin...
1 - The proposition value
Southwest airlines created a new curve offering high-speed transport with
frequent and flexible ...
• With which industry do Logan compete?
• In what do they focus, in what they differ and what are they tagline?

Eduardo L...
1 - The proposition value
Logan created a new curve offering a new car for the price of an used-car

Logan canvas
• Logan ...
2 – Revenue stream

Definition and scope
• Revenue stream is the cash a company generates from each customer segment
• A b...
2 – Revenue stream

Ways to generate revenue streams
• Asset sale: selling the ownership rights to a physical product. E.g...
2 – Revenue stream
Each revenue stream might have different pricing mechanisms

Pricing mechanisms

Alexander Osterwalder ...
How do you set a price

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Price is determined by what a buyer is willing to
pay and the competition is allowing to be
charged (not by markup on cost...
2 – Revenue stream
Reminder

Pricing strategy depending of the product life cycle
• Product introduction:
• Market skimmin...
How can a product be free

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2 – Revenue stream
Introduction to Free

Definition and scope
• Free is giving without a cost… all included
• Free is not ...
2 – Revenue stream
Introduction to Free

The penny gap theory
• The penny gap is the difference between cheap and free

• ...
2 – Revenue stream
Introduction to Free

The economics of abundance (vs. scarcity)
• Digital technologies have become too ...
2 – Revenue stream
Introduction to Free
4 revenue streams around: first two been very old but evolving and the last two ar...
2 – Revenue stream
A – Direct Cross-Subsidies

Definition and scope
• This is the oldest and most familiar model where the...
2 – Revenue stream
A – Direct Cross-Subsidies
How can you sell airlines tickets far under cost?
« People pay attention on ...
2 – Revenue stream
A – Direct Cross-Subsidies

Famous examples of direct-cross subsidies

Free or far under cost

Where th...
2 – Revenue stream
A – Direct Cross-Subsidies

More examples of direct-cross subsidies
• Give away services, sell products...
2 – Revenue stream
B – Three-parties or Two-sided markets

Definition and scope
• A third party pays participate in a mark...
2 – Revenue stream
B – Three-parties or Two-sided markets

Markets with three-parties revenue stream
• Three-parties is no...
2 – Revenue stream
B – Three-parties or Two-sided markets

More examples of three-parties
• Give free voice calling (in th...
2 – Revenue stream
C – Freemium

Definition and scope
• Freemium is giving a free basic version to most of people and char...
2 – Revenue stream
C – Freemium

Different kind of limitation of the basic free version
• Functionnalities
• e.g. Linkedin...
2 – Revenue stream
C – Freemium

Why go for Freemium business model?
• Marketing:
• By definition, having a free product m...
2 – Revenue stream
C – Freemium

Key success factors (if not, choose another business model)
• Get lots and lots of free u...
2 – Revenue stream
C – Freemium

Examples of freemium
• Give away basic information, sell richer information in easier-to-...
2 – Revenue stream
D – Nonmonetary markets

Definition and scope
• People give away content with no expectation of Payment...
• Google is getting the public to identify house numbers and signs from Street View photos as part of
its reCAPTCHA anti-s...
reCAPTCHA is a free CAPTCHA service that helps to digitize books,
newspapers and old time radio shows

Answers to reCAPTCH...
Features with poor usability can be an opportunity for revenues

CAPTCHA can also be used for advertising and generate rev...
• How’s the music industry going?

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2 – Revenue stream
Looking at the music industry
Global recorded music sales were decreasing since end of the 90’s due to ...
2 – Revenue stream
Looking at the music industry
Music downloads still accounts for 80 per cent of digital music revenues ...
2 – Revenue stream
Looking at the music industry

Streaming and downloads make the digital proposition value
• Consumers a...
2 – Revenue stream
Looking at the music industry
Music streaming business model is already the largest market in Sweden, a...
2 – Revenue stream
Looking at the music industry

Digital recorded music is expected to overtake physical sales in 2015

P...
2 – Revenue stream
Looking at the music industry
What about content production and consumption?
The amount of content bein...
2 – Revenue stream
Looking at the music industry

What about musicians revenues?

• Psy with its Gangnam Style song, viewe...
2 – Revenue stream
What has the Entertainment industry learned from the Music industry?
Other Entertainment industries con...
2 – Revenue stream
What has the Entertainment industry learned from the Music industry?
Some Entertainment industries have...
2 – Revenue stream
What has the Entertainment industry learned from the Music industry?
Though not all new business models...
• Has the internet decimated the entertainment industry, or are we living in a new gold age for both
content creators and ...
• How’s the video game industry going?

Eduardo Larrain - Linkedin - Website
2 – Revenue stream
Looking at the video game industry
Video games sales have grown with the digital revolution and cross t...
2 – Revenue stream
Looking at the video game industry

Purchases of digital content are growing the video games industry
•...
2 – Revenue stream
Looking at the video game industry

Looking at the video game download business model

• Piracy of vide...
2 – Revenue stream
Looking at the video game industry

Looking at MMO business models

• Massively Multiplayer Online game...
2 – Revenue stream
Looking at the video game industry

Looking at the online casual business model

• Online casual games ...
2 – Revenue stream
Looking at the video game industry

Looking at the mobile video game business model

• Ten of thousands...
2 – Revenue stream
Looking at the video game industry

Looking at social games

• Social games are those games played prim...
2 – Revenue stream
Looking at the video game industry

Looking at the e-sports business model
• Twitch launched 18 months ...
2 – Revenue stream
Looking at the video game industry
What’s next for the game industry?

• “Gamification” trend meaning t...
2 – Revenue stream
Short focus at online video services
Purely online video services are not yet collecting revenues at th...
• How’s the book publishing industry going?

Eduardo Larrain - Linkedin - Website
2 – Revenue stream
Looking at the book publishing industry

Sales of e-books expected to compensate the decline of the phy...
2 – Revenue stream
Looking at the book publishing industry

New revenues streams are emerging and changing current busines...
2 – Revenue stream
Looking at the book publishing industry
Non-traditional book publishing on the internet is 8X the outpu...
2 – Revenue stream
What’s the business model of self-publishing?

The traditional business model of book publishing

Alexa...
2 – Revenue stream
What’s the business model of self-publishing?

A new business model by lulu.com

Alexander Osterwalder ...
2 – Revenue stream
Looking at the book publishing industry
The best opportunity for the book publishing market is volume e...
2 – Revenue stream
Short look at the film industry

Film industry is growing but new digital-based business models are yet...
3a – Customer segments

Definition and scope
• Customer segments are the different groups of people or organizations an en...
3a – Customer segments

Different types of Customer Segments
• Mass market: e.g. consumer electronic sector
• Niche market...
3a – Customer segments
Noncustomers differ in their relative distance from your market but they all
offer big blue ocean o...
3a – Customer segments

How to attract each tiers of noncustomers
• First-tier: Pret targeted UK workers who used not to g...
3b – Channels

Definition and scope
• Channels are the way how a company communicates with and reaches its customer segmen...
3b – Channels

Type of channels
• Distribution channels can be owned (sales force, web sales, own stores) or done with par...
3c – Customer Relationship

Definition and scope
• Customer Relationships are the type of relationships a company establis...
3c – Customer Relationship

Categories of Customer Relationships
• Personal assistance: relationship based on human intera...
3c – Customer Relationship
Great blocks to utility can be identify looking at the buyer experience in order
to be removed ...
4a – Key ressources

Definition and scope
• Key resources are the most important assets required to make a business model ...
4b – Key activities

Definition and scope
• Key activities are the most important things a company must do to make its bus...
4c – Key partnerships

Definition and scope
• Key partnerships are the network of suppliers and partners that make the bus...
4c – Key partnerships

Motivations for creating partnerships
• Optimization and economy of scale: optimize the allocation ...
4c – Key partnerships

Tracking partnerships with the code bar and code packer
Exhibit - Code bar

Exhibit - Code packer

...
5 – Cost structure

Definition and scope
• Cost structure is all costs incurred to operate a business model
• Naturally en...
Use a business canvas just to be sure you have covered all key elements of a
business model

One Business Model Canvas

Al...
2 – Revenue stream
Looking at the book publishing industry
Non-traditional book publishing on the internet is 8X the outpu...
2 – Revenue stream
What’s the business model of self-publishing?

The traditional business model of book publishing

Alexa...
2 – Revenue stream
What’s the business model of self-publishing?

A new business model by lulu.com

Alexander Osterwalder ...
2 – Revenue stream
Looking at the book publishing industry
The best opportunity for the book publishing market is volume e...
2 – Revenue stream
Short look at the film industry

Film industry is growing but new digital-based business models are yet...
Who are the Internet heavyweights

Eduardo Larrain - Linkedin - Website

142
Looking at Internet heavyweights…
Biggest Internet IPOs of the last 10 Years

Top Internet IPOs
Internet companies

IPO
ye...
• What is Google business model?

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What is Google’s business model?
Google value proposition

Google value proposition
Organize the world’s information and m...
What is Google’s business model?
Google has changed the ad industry by giving products away to end users for free
(in retu...
What is Google’s business model?
Google revenue stream comes from Google AdWords and Google AdSense

Google revenue stream...
What is Google’s business model?
Two-thirds of Google revenues come from AdWords and remaining from AdSense

Google quarte...
What is Google’s business model?
Newspaper ad revenue after Google

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What is Google’s business model?
Google give products away in return for advertising (two-sided market) and
Google reduce ...
What is Google’s business model?
Google is trying to remain central in the Mobile experience

Google strategy on mobile
• ...
What is Google’s business model?

Google’s stock quote highly volatile since it is in the advertising business

Eduardo La...
• What is Facebook business model?

Eduardo Larrain - Linkedin - Website
What is Facebook’s business model?
Facebook value proposition

Facebook value proposition
•

Facebook helps Internet users...
What is Facebook’s business model?
Its revenue stream is mainly advertising-based

Facebook key operational figures
•

Fou...
What is Facebook’s business model?
Its revenue stream is mainly advertising-based

Facebook key financial figures
•

5.1 b...
What is Facebook’s business model?
Facebook replicated Google’s formula... with relatively less success

Facebook advertis...
What is Facebook’s business model?
Facebook’s main asset is the connections and interactions between users
Facebook’s Soci...
What is Facebook’s business model?
Looking at the Canvas

Facebook business model using the Canvas

Business Model Innovat...
What is Facebook’s business model?

Facebook’s stock quote highly volatile since the company is still growing fast and it ...
Facebook validated its business model assumptions on Mobile ads even
though mobile is considered “a horrible ad medium”

•...
What is Facebook’s business model?
Facebook vs. MySpace
Automated news feed launched in 2006 gave the illusion of a contin...
What is Facebook’s business model?
Similar to Google’s Page Rank, Facebook’s created its Edge Rank based on
an algorithm
F...
What is Facebook’s business model?
Its new Open Graph is expected to leverage its current business model (key
partners)
Fa...
What is Facebook’s business model?
Facebook is a social media (not only network) based on advertising
Facebook’s like butt...
• What is Zynga business model?

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Slides of the lecture "Web-based business models" taught by Eduardo Larrain at HEC, a French business school (Strategic Management Master) during 5 classes in January and February 2014

1 - Let’s all talk the same language!
- What’s the web? (page 4)
- What’s a startup? (15)
- What’s a business model? (20)
- Why study Internet-based business models? (28)

2 - What are the key elements of a business model?
- Value proposition and revenue streams (45)
- How’s the music, video games and book publishing industries going? (90)
- Customer channels, customer relationships, key partners, activities, resources, cost structure (121)

3 - What are the business models of Internet heavyweights publicly traded? (142)
- Google (143)
- Facebook (153)
- Zynga (166)
- Twitter (174)
- Linkedin (180)
- Groupon (185)

4 - What are the most promising business models among non-publicly traded Internet companies? (192)
- ZocDoc (198)
- SnapChat (200)
- Airbnb, UberPop, Feastly (202)

5 - Conclusion and farewell (204)
- Appendix: group project and individual test (205)

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Web-based business models in 2014

  1. 1. WEB-BASED BUSINESS MODELS Class #1 #2 #3 #4 and #5 – February 2014 Prof. Eduardo Larrain Eduardo Larrain - Linkedin - Website 1
  2. 2. This lecture was taught at a French business school by Eduardo Larrain Eduardo Larrain • HEC 2005 – Strategic Management • Founder of an Internet start-up called Kel Quartier • Strategy consultant at Roland Berger Strategy Consultants and Atos – 40 projects Eduardo Larrain - Linkedin - Website 2
  3. 3. Agenda of the web-based business model lecture 1. Let’s all talk the same language! • What’s the web? …………………………………………………………………………………………………………………………………………………. 4 • What’s a startup? ……………………………………………………………………………………………………….……..……………………………….. 15 • What’s a business model? ……………………………………………………………………………………………………………………….…………. 20 • Why study Internet-based business models? ..………………………………………………………………………………………….……..… 28 2. What are the key elements of a business model? .……………………………………………………………………………………………………….. 45 • Value proposition and revenue streams ………………………………………………………………………………………………………….….. 82 • How’s the music, video games and book publishing industries going? …………………..………………..………………….……. 115 • Customer channels, customer relationships, key partners, activities, resources, cost structure …….....….……….….. 130 3. What are the business models of Internet heavyweights publicly traded? ..………………………………………………………………….. 142 • Google (143), Facebook (153), Zynga (166), Twitter (174), Linkedin (180), Groupon (185) 4. What are the most promising business models among non-publicly traded Internet companies? ……………..…………...…… 192 • ZocDoc (198), SnapChat (200), Airbnb, UberPop, Feastly (202) 5. Conclusion and farewell ………………………………………………………………………………………………………………………………………………… 204 • Appendix: group project and individual test (205) Eduardo Larrain - Linkedin - Website 3
  4. 4. What’s the web Eduardo Larrain - Linkedin - Website 4
  5. 5. What’s the Web? ICT Internet Web Definitions • Web (or World Wide Web or WWW) is a global set of documents, images and other resources, logically interrelated by hyperlinks. Web = HTTP, HTML, CSS, JPEG,… • Internet (or Net) is a global system of interconnected computer networks that use the standard Internet protocol suite (TCP/IP) to serve billions of users worldwide. It is a network of networks that carries an extensive range of information resources and services, such as the inter-linked hypertext documents of the Web and the infrastructure to support email. Internet = Web + mail + data transfer e.g. FTP incl. P2P, VoIP, streaming media, video conferencing, mobile apps (not HTML 5 based) • Information and Communication Technology (ICT) is the use of computers and telecommunications equipment (IT) which also encompasses other information distribution technologies such as television and telephones (C). ICT = Internet + IT + C Wikipedia Eduardo Larrain - Linkedin - Website 5
  6. 6. Is Internet only about Web presence? • In the European Union, two-thirds of all businesses have a Web presence (McKinsey, 2011) • Exhibit - Looking at top 100 French websites: NEWS ECOMMERCE SOCIAL MEDIA BLOGS PORN TV SEARCH VIDEO PROFESSIONAL EVERYDAY LIFE LEGEND Category Ranking Unique visitors per month Titiou Lecoq / Diane Lisarelli, Encyclopédie de la Web Culture, January 2011 Eduardo Larrain - Linkedin - Website 6
  7. 7. Is Internet only about Web presence? • Exhibit - Looking at top 100 websites in UK, France, Germany, Italy, Spain, Switzerland, Brazil, US and Australia Number of unique users, January 2010 BBC, SuperPower: Visualising the internet, January 2010 Eduardo Larrain - Linkedin - Website 7
  8. 8. Is Internet only a distribution channel for online retail/ecommerce? • In retail alone, G-20 consumers researched online and then purchased offline (ROPO) more than $1.3 trillion in goods in 2010 Boston Consulting Group, The Internet Economy in the G-20, March 2011 Eduardo Larrain - Linkedin - Website 8
  9. 9. Internet is not just a distribution channel or just about Web presence Eduardo Larrain - Linkedin - Website 9
  10. 10. Is Internet an Industry? • 75% of the economic impact of the Internet arises from traditional companies that don’t define themselves as pure Internet players (McKinsey, 2011) Profits des 100 plus 100 plus grandes time: • Exhibit - Looking at top 100 USdes grandes through sociétés US Chiffre d'affaires companies sociétés US 100% 100% Conglomerate Conglomerate Professional, Scientific, and Technical Professional, Scientific, and Technical Services Services 90% 90% Finance and Insurance Finance and Insurance 80% 80% Information Information HealthHealth Care andAssistance Care and Social Social Assistance 70% 70% Wholesale Wholesale Trade Trade 60% 60% Retail Retail Trade Trade Utilities Utilities 50% 50% Transportation and Warehousing Transportation and Warehousing 40% 40% Manufacturing Telecommunication Manufacturing Telecommunication 30% 30% Manufacturing Automotive Manufacturing Automotive Manufacturing Manufacturing 20% 20% Metal Métaux Métaux 10% 10% 0% 0% 1955 1955 Pétrole Petroleum Pétrole Agriculture, Forestry, Fishing and Hunting Agriculture, Forestry, Fishing and Hunting 1960 1960 1965 1965 1970 1970 1975 1975 1980 1980 1985 1985 1990 1995 1995 2000 2000 2006 2006 1990 Analysis based on Fortune 500, 2007 Eduardo Larrain - Linkedin - Website 10
  11. 11. Internet is not just an industry Internet is touching every part of the economy (like electricity) Eduardo Larrain - Linkedin - Website 11
  12. 12. Internet is a technology on which are based numerous activities across industries Internet-based activities 1. Web activities using Web as a support • 2. Telecommunication based on IP communication • 3. Internet service providers Software and services activities linked to the Web • 4. Ecommerce, content, online, advertising IT consulting, software development Hardware manufacturers, maintenance providers of Web-specific tools • Computers, Smartphones, hardware equipment, servers used for the Internet McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011 Eduardo Larrain - Linkedin - Website 12
  13. 13. Internet accounts for 3-4% of worldwide GDP Exhibits – Economic impact of the Internet by McKinsey and BCG McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011 Boston Consulting Group, The Internet Economy in the G-20, March 2011 Eduardo Larrain - Linkedin - Website 13
  14. 14. Though, the Internet economic impact goes beyond GDP generating consumer surplus when there is not monetary reward Real economic impact of the Internet • Free services value are excluded from GDP: • Emails • Search • Collaborative services (wikis, blogs and social networks) • Similar to housewife activities excluded from GDP • E.g. • Craigslist has generated consumer value though reducing classified ad revenues of the US newspaper industry • Facebook has generated consumer value McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011 Eduardo Larrain - Linkedin - Website 14
  15. 15. What’s a business model Eduardo Larrain - Linkedin - Website 15
  16. 16. What’s a business model? Basic definition • A business model is a coherent way to manage and develop an economic activity. • A business model describes the rationale of how an organization creates, delivers, and captures value. • A business model describes how an enterprise proposes to make money. Eduardo Larrain - Linkedin - Website 16
  17. 17. What’s a business model? Very basic definition • A business model is “show me the money”. • It is a simple expression of the strategy of the company on how to make money without going into too much details • In French, we use the english word « business model » rather than translations: • Modèle économique • Modèle d’activité • Modèle d’affaires • Modèle de revenus, modèle de profit Eduardo Larrain - Linkedin - Website 17
  18. 18. A Business Model is not a Business Plan What’s a Business Plan? • A Business plan is a document that describes how a project can be implemented. • A Business plan usually aims at selling the project because “you can’t have a funding without a Business Plan” • A Business plan usually includes a description of: • The team • The Business Model • A Financial Analysis (e.g. financial spreadsheets) • A Business Environment Analysis (e.g. market, competitors and competitive advantage analysis) • An Implementation roadmap (e.g. operation plan, milestones) • A Risk analysis (e.g. SWOT, Critical Success Factors) Eduardo Larrain - Linkedin - Website 18
  19. 19. A Business Model is not Strategy What’s Strategy? • Strategy is a plan of action and the allocation of resources necessary for carrying out these goals • Michael Porter’s view on Strategy: • Strategy is a plan to differentiate the company and give it a competitive advantage • “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value” • Then decisions can only be defined as strategic if they involve consciously doing something “differently” from competitors and if that difference results in a sustainable advantage • e.g. making existing methods more efficient (“operational efficiency”) are not strategic since they can be easily copied by others Eduardo Larrain - Linkedin - Website 19
  20. 20. What’s a startup Eduardo Larrain - Linkedin - Website 20
  21. 21. What’s a startup? Basic definition • A startup is a company, a partnership or temporary organization designed to search for a repeatable and scalable business model • A startup is a human institution designed to create a new product or service under conditions of extreme uncertainty Eduardo Larrain - Linkedin - Website 21
  22. 22. The problem of business plans for startups • For young companies with predictable revenues (like opening a new bakery), a business plan will be necessary to get a bank loan • For startups, “a good plan, a solid strategy, and thorough market research may not work leading to startup failures • In a startup's earliest days there is not enough data to make an informed guess about what the quantitative financial model might look like • You have to confirm that your leap-of-faith questions of your business model are based in reality to do a business plan for a startup: • Did we build a product that people want (value creation hypothesis)? • What is the growth model (growth hypothesis)? • The role of strategy is to help figure out the right questions to ask • Followers ot the just-do-it school of entrepreneurship are impatient to get started. They start building immediately, often after just a few cursory customer conversations. Unfortunately, because customers don't really know what they want, it's easy for those entrepreneurs to delude themselves that they are on the right path Eric Ries, The Lean Startup, 2012 Eduardo Larrain - Linkedin - Website 22
  23. 23. The lean startup methodology How to build a product that people want? • Developing a new product should resemble simultaneously driving a car (testing your product), tuning the engine (continuously improving the product) and steering (adapting your business model when needed) • Startups need to conduct experiments that help determine what techniques will work in their unique circumstances • Startup need extensive contact with potential customers to understand them so get out of the building and start learning • Metrics are people too. At the end of the day, customers are breathing, thinking, buying individuals. • You should talk to early adopters not mainstream customers. Eric Ries, The Lean Startup, 2012 Eduardo Larrain - Linkedin - Website 23
  24. 24. The lean startup methodology Why early adopters are so important? • Early adopters accept-in fact prefer an 80 percent solution; you don't need a perfect solution to capture their interest. Early adopters use their imagination to fill in what a product is missing • This is hard truth for many entrepreneurs to accept. After all, the vision entrepreneurs keep in their heads is of a high-quality mainstream product that will change the world, not one used by a small niche of people who are willing to give it a shot before it's ready • First products aren't meant to be perfect. Most of the time, you are going to be rejected if you go to mainstream customers because most people are not early adopters and will not sign up for a new service sight unseen Eric Ries, The Lean Startup, 2012 Eduardo Larrain - Linkedin - Website 24
  25. 25. The lean startup methodology The importance of MVP: build-measure-learn feedback loop • A minimum viable product (MVP) helps entrepreneurs start the process of learning as quickly as possible. It is not necessarily the smallest product imaginable, though; it is simply the fasted way to get through the Build-Measure-Learn feedback loop with the minimum amount of effort. Contrary to traditional product development that strives for product perfection, the goal of the MVP is to begin the process of learning, not to end it • Unlike a prototype or concept test, an MVP is designed not just to answer product design or technical questions but to test fundamental business hypothesis • Several types of MVPs: problem exploration, product pitch (e.g. video mvp), concierge • Once the MVP is established, a startup can work on tuning the engine. This will involve measurement and learning and must include actionable metrics that can demonstrate cause and effect question • Always test first your riskiest assumptions Eric Ries, The Lean Startup, 2012 Eduardo Larrain - Linkedin - Website 25
  26. 26. The lean startup methodology The Concierge MVP: have your customers design the first version of your product • Wait for the first customer before developing anything, solve one customer's problem • Each week you are learning more and more about what is required to make the product a success. After weeks you are ready for another customer. Each customer you bring on make it easier to get the next one. Only when you have a lot of customers, start to invest in automation in the form of product development • So you are focused on scaling something that is working rather than trying to invent something that might work for the future. As a result development efforts involves far less waste that is typical. • In a concierge MVP this personalized service is not the product but a learning activity designed to test the leap-of-faith assumptions in the company's growth model Eric Ries, The Lean Startup, 2012 Eduardo Larrain - Linkedin - Website 26
  27. 27. The lean startup methodology Principles theleanstartup.com, 2014 Eduardo Larrain - Linkedin - Website 27
  28. 28. Why study Internet-based business models Business Models Eduardo Larrain - Linkedin - Website Internetbased 28
  29. 29. Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 1. Customer Solutions 2. Product Pyramid 3. Multi-Component Invest to know the customer, create a solution, develop the relationship E.g. GE At the base are products and services that are low price and high volume; at the top products and services that are high price and low volume E.g. Air France Group: Air France for business and long haul flights, Transavia for leisure and Hop! for local flights Several of the components represent a disproportionate share of the profits E.g. business seminars at hotels, advertising (Google, Yahoo, Facebook)? Profit Profit zone Profit Basic activity 0 Other components Time Time 4. Switchboard 5. Time Profit 6. Block Buster profits Multiple sellers communicating with multiple buyers. The more buyers and sellers join the great the organization builds on itself E.g. eBay, Alibaba, Amazon, Monster, Seloger Or the opposite: desintermediation (Dell) Seller Buyers Takes advantage of uniqueness, profit margins erode as competition seeks to imitate. Time profit companies must take the lead and maintain a "two year" lead over their competitors E.g. Intel, Microsoft F/unité Revenue realized is so powerful and fast that in a quick swoop the model pays for development and marketing costs E.g. movies, books Time Project return Project types Adrian Slywotzky and David Morrison, The profit Zone, 1998 Eduardo Larrain - Linkedin - Website 29
  30. 30. Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 7. Multiplier 8. Entrepreneur Profit 9. La spécialisation Strong customer brand E.g. Disney, Google Hierarchical design with multiple subsidiaries to maintain closeness with the customer E.g. Biotechnologies, Google Small teams Specialist are several times more profitable than the generalist. Characterized by lower cost, higher quality, stronger reputation, shorter selling cycles, and better price realization E.g. Home Depot Return Different offers Specialists Basic activity Generalists Key asset 10. Install Base 11. Defacto Standard 12. Brand Initial product sales or profits are slim and profit is realized on the follow-up products and services E.g. HP printers and Gillette Razors, Ryanair The more players who buy that enter in the system, the more valuable the network E.g. Microsoft, Oracle, Skype, Linkedin, spotify, Facebook The Company expends significant marketing investment in order to build awareness and is reinforced by customer experience. You know Brand is working when a consumer says, "I won't change because I trust AT&T". E.g. Google Price Margin Margin Complementary products Brand price Basic product Average market price Market share Adrian Slywotzky and David Morrison, The profit Zone, 1998 Eduardo Larrain - Linkedin - Website 30
  31. 31. Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 13. Specialty 14. Local Leadership 15. Transactional Scale Specialty companies enjoy a higher premium for their products and services until competitors start to imitate E.g. Merck, 3M, Photoshop Many businesses and their company economies are totally local. Risk occurs when these companies fail to recognize they are a local business model E.g. Wal-Mart Local return Transactions go up but the cost to provide the transaction does not go up as quickly E.g. investment banking, real estate, transportation Marge 5 years ago Transaction return Nowadays Leading Leading Common 0 Common Local market share Transaction size 16. Value Chain 17. Cycle Profit 18. After-Sales Profit Specific activities pass through a chain of specialist offering value E.g. softwares, Intel Industries characterized by distinct and powerful cycle. The company can not control the cycle, but it works to maximize its position within the cycles grip. As capacity tightens the companies lead price increases, as capacity loosens, its lag price declines E.g. Dow Chemical, Toyota Return by unit produced The company's profit does not direct come from the sale of the product, but the after sale financing or services of the product E.g. General Electric, banking After-sales offers Basic offer Adrian Slywotzky and David Morrison, The profit Zone, 1998 Eduardo Larrain - Linkedin - Website Capacity / Occupancy 31
  32. 32. Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 19. New Product Profit 20. Relative Market Share Profit 21. Experience Curve Profit As new products are introduced profit margins are high and growth rapid. As the product mature the profit margins fall Companies with high market share tend to be more profitable. Large companies have price advantages due to manufacturing experiences and volume economies, such as purchasing capability and economies of scale Return Experience drives down the transactional cost Diffusion Time Relative market share Unit cost Cumulated experience 22. Low Cost Business Design The company trives on reducing the cost per unit through cumulative experience E.g. Southwest Air, Dell, Internet as an channel distribution (fnac.com,…) Unit cost Traditional Low cost Adrian Slywotzky and David Morrison, The profit Zone, 1998 Eduardo Larrain - Linkedin - Website 32
  33. 33. Why study Internet-based business models? Two reasons i. The technological revolution increased exponentially the number of business models types: • • Long tail enables larger segmentation of customers • ii. Marginal cost of digital information comes closer to nothing Better assets rotation can enable new businesses with low margin After 30 years, we are better at understanding complex business models Eduardo Larrain - Linkedin - Website 33
  34. 34. (i)The technological revolution (IT, Internet, biotechnologies, nanotechnologies,…) Ray Kurzweil video on TED, 2005 The accelerating power of technology 14’00-19’10 Eduardo Larrain - Linkedin - Website 34
  35. 35. Marginal cost of digital information comes closer to nothing Basic economics • In basic economics, price falls to the marginal cost which increases with production… Exhibit – Market supply and demand Exhibit – Costs of one company Price Price Supply Marginal cost Average cost Demand Quantity Quantity • … Though with the technological revolution, marginal cost of digital information comes closer to nothing • Moore law: “number of transistors on a chip doubles every 18 months” Eduardo Larrain - Linkedin - Website 35
  36. 36. • The great power of the eBay business model is the fact that a small number of salaried employees and outsource partners can handle a huge and growing volume of business: • Doubling of transaction volume can be accomplished with relatively modest investments • Software and servers do the heavy lifting eBay Headquarters, San Jose California Eduardo Larrain - Linkedin - Website 36
  37. 37. Long tail enables larger segmentation of customers Long tail • Long tail is about selling less of more: • They focus on offering a large number of niche products, each of which sells relatively infrequently • Aggregate sales of niche items can be as lucrative as the traditional model whereby a small number of bestsellers account for most revenues • Long Tail business models require low inventory costs and strong platforms to make niche content readily available to interested buyers • Add-on by a student: Internet by lowering search costs and accessibility costs can even increase the size of the “Head” Chris Anderson, The Long Tail, 2006 Eduardo Larrain - Linkedin - Website 37
  38. 38. • Amazon sells blockbusters products but also niche hard-to-find products (online book stores bring access to increased product variety) • Customer customization has enabled Dell to sell a large volume of products in small numbers Amazon warehouse, somewhere Eduardo Larrain - Linkedin - Website 38
  39. 39. Better assets rotation can enable new businesses with low margin The only formula you need to know in this class! • Technological revolution increase assets productivity decreasing the amount of assets immobilized Formula of Return on Equity ROE = Net Income (R) / Equity (K) ROE = (R / K) * (Income / Income) * (Assets / Assets) ROE = (R / Income) * (Income / Assets) * (Assets / K) ROE = Gross Margin * Assets rotation * Financial lever Eduardo Larrain - Linkedin - Website 39
  40. 40. Better assets rotation can enable new businesses with low margin Design to cost • Then, new business models with low margin can be designed and have the same return than more profitable activities • E.g. Logan, the low-cost brand new vehicle, was designed to be sold at 5 000€ (ultimately 8 000€ in France) Exhibit – Different business positioning with same ROE Gross Margin Assets rotation Eduardo Larrain - Linkedin - Website 40
  41. 41. Better assets rotation can enable new businesses with low margin Pyramid base: targeting tier 5 population • Developing countries are inventing new business models in regions with very low purchasing power where populations where traditionally excluded from any economical business modeling. E.g. Tata vehicule costing 2 500€ even cheaper than Logan • 4 billion people live with less than 1 500 USD per year C. K. Prahalad, The Fortune at the Botton of the Pyramid, 2006 Eduardo Larrain - Linkedin - Website 41
  42. 42. Better assets rotation can enable new businesses with low margin Mobile banking case • Half population is unbanked worldwide leaving: • People with no official financial service to save or to borrow: • Unofficial lending rates range between 50% and 400% p.a, microfinance rates are 20-40% • One day per month is lost in Morocco to pay invoices • Enabling mass tax avoidance from States with low budgets • Raising the cost and complexity for companies t pay their employees • Though new mobile banking offer are emerging in developing countries. E.g. half public servant in Kenya are paid with mobile banking 120% Portugal 110% Russie Mobile penetration 2008 100% Royaume-Uni Suède Irlande Moy. UE Espagne Finlande Autriche Danemark Allemagne Pays-Bas Pologne Belgique 90% Roumanie 80% Chili France Afrique du Sud Jamaïque Etats-Unis 70% Tunisie Colombie Algérie 60% Moy. Afrique 50% 40% Botswana Mexique Maroc Guatemala Guyane Nicaragua Arménie Pakistan Sénégal Egypte Vietnam Kirghizstan Kenya Lesotho Tanzanie 30% 20% 10% Ouganda Canada Brésil Chine Namibie Côte d'Ivoire Inde Djibouti 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Banked population 2008 Eduardo Larrain - Linkedin - Website 42
  43. 43. Other big trends in creating new Internet-based companies Current trends • Pyramid based strategy: create a business model based on people very low purchasing power • Blue ocean strategy: look for a new ocean rethinking differentiation and low-cost and go beyond industry boundaries • Cloning strategy: clone successful internet sites and replicate them in other countries • Lean startup strategy: helps you build a product that people want eliminating waste Eduardo Larrain - Linkedin - Website 43
  44. 44. (ii) We are better at understanding business models One Business Model Canvas Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 44
  45. 45. What are the key elements of a business model Eduardo Larrain - Linkedin - Website 45
  46. 46. A business model describes what makes an company unique looking from the value propositions to cost structure Key elements of a business model Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 46
  47. 47. A business model is an ecosystem Rationale beyond those key elements Cost-side Value-side Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 47
  48. 48. 1 - The proposition value Definition and scope • The value proposition describes the bundle of products and services that create value for a specific customer segment • Value proposition is marketing territory: • It can be functional (solves a customer problem, physiological need,…), social (need to belong, status,…), emotional, relationship… • It is an aggregation of the benefits that a Company offers customers (solve a customer problem or satisfies a customer need) minus sacrifices (price, technical process when buying or when recycling, travel time,…) • It is a unique combination of benefits and sacrifices • It is not a list of products and services, technologies or distribution channels Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 48
  49. 49. 1 - The proposition value Elements that can contribute to customer value creation • Newness: some value propositions satisfy an entirely new set of needs that customers previously didn’t perceive because there was no similar offering. E.g. mobile phones, ethical investment funds • Performance: improving product or service performance. E.g. bringing more powerful PC, more disk storages and better graphics • Customisation: tailoring products and services to the specific needs of individual customers. E.g. mass customisation • Getting the job done: helping a customer get a certain job done. E.g. Rolls-Royce airline engines. • Design: a product may stand out because of superior design. E.g. fashion and customer electronics • Brand/Status: customers may find value in the simple act of using and displaying a specific brand. E.g. Rolex • Price: offering similar value at a lower price e.g. Bic • Cost reduction: helping customers reduce costs • Risk reduction: reducing risks customers incur. E.g. giving a one-year service guarantee • Accessibility: making products and services available to customers who previously lacked access to them. E.g. NetJets popularized the concept of fractional private jet ownership, RIP Merrill Lynch bring Wall Street to Main Street in the 60s • Convenience/Usability: making things more convenient or easier to use. E.g. iPod. Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 49
  50. 50. 1 - The proposition value Defining a promise helps understanding the proposition value Defining the promise or tagline • The promise is not only advertising territory but it shapes all the business model • A good promise or tagline must not only deliver a clear message but also advertise an offering truthfully • A good way to test the effectiveness and strength of a strategy is to look at whether it contains a strong and authentic promise or tagline • The promise can still be simple and concise even for large international and complex companies • Zara (Inditex) promise is “fast-fashion” which has shaped all the company operations • What are the promise of those companies? • Starbucks • Ikea • Easyjet / Ryanair • Toyota • Lego • Danone • Yves Rocher Eduardo Larrain - Linkedin - Website 50
  51. 51. • Starbucks promise: a “third space” of conviviality between home and work Eduardo Larrain - Linkedin - Website 51
  52. 52. 1 - The proposition value Defining a promise helps understanding the proposition value Company promise or tagline • What are the promise of those companies? • Starbucks • A “third space” of conviviality between home and work • Ikea • Functional home furnishing, low price and design • Easyjet / Ryanair • Simple airline flights at low price faster than the car • Toyota • Auto reliability • Lego • Learning though the joy of building • Danone • Health through food and beverages to a maximum number of people • Yves Rocher • Beauty based on plants Denis Dauchy, 7 étapes pour un business model solide, 2010 Eduardo Larrain - Linkedin - Website 52
  53. 53. 1 - The proposition value The proposition value has to take into account all customers Two customers • Most of the time, the buyer is not the user of the product or service Customer 1 Mass-market products or services Services to corporations (food, transportation,…) Web-based business models class Pharmaceutical drugs Customer 2  Distributor  Final consumer  Company  Employees  Students (you!)  Companies (management consulting firms, investment banking,…)  Prescriber (dentist, general practitioner GP,…)  Patients, social security Denis Dauchy, 7 étapes pour un business model solide, 2010 Eduardo Larrain - Linkedin - Website 53
  54. 54. • Companies have long engaged in head-to-head competition in search of sustained, profitable growth • Yet in today’s overcrowded industries, competing head-on results in nothing but a bloody ”RED OCEAN” of rival fighting over a shrinking profit pool • This strategy is unlikely to create profitable growth in the future • Leading companies will succeed not by battling competitors but by creating “BLUE OCEANS” of uncontested market space ripe for growth Eduardo Larrain - Linkedin - Website
  55. 55. 1 - The proposition value Differentiate from competitors or innovate within the value Red Ocean Strategy vs. Blue Ocean Strategy • Similar to Michael Porter definition of strategy as a differentiation plan, Blue Ocean Strategy aims at changing the proposition value to gain profitable growth • Red oceans will continue to be an important part of a company’s strategy (a lot of tools and framework already exists) but invest in blue oceans will create profitable growth W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005 Eduardo Larrain - Linkedin - Website 55
  56. 56. 1 - The proposition value Differentiate from competitors or innovate within the value Four questions to challenge an industry’s strategic logic and business model • First, capture the current state of play in the known market space in order to understand competition and the principal factors (price, quality, design…) • Second, reconstruct buyer value elements trading-off between differentiation and low-cost • E.g. is the company over delivering without payback? (typical of a company caught in the Red Ocean) W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005 Eduardo Larrain - Linkedin - Website 56
  57. 57. • In the 80s, Circus was a declining industry with decreasing audiences because of increasingly attractive alternative forms of entertainment • There were star performers but none could compete with movie stars, multiple show arenas and a audience of families • There was also increasing sentiment against the use of animals in circuses by animal rights groups • Cirque du Soleil launched in 1984 and is now one of Canada’s largest cultural exports. Why? Eduardo Larrain - Linkedin - Website 57
  58. 58. 1 - The proposition value Cirque du Soleil created a new value curve offering the best of both circus and theater and eliminating or reducing everything else Cirque du Soleil canvas • By offering unprecedented utility, Cirque du Soleil has created a blue ocean and has invented a new form of live entertainment, one that is markedly different from both traditional circus and theater • Cirque du Soleil strategically priced its tickets against those of the theater because it attracted an adult theater audience • Cirque du Soleil tagline is: ”a mix of circus arts and street entertainment” W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005 Eduardo Larrain - Linkedin - Website 58
  59. 59. • With which industry do Southwest airlines compete? • In what do they focus, in what they differ and what are they tagline? Eduardo Larrain - Linkedin - Website 59
  60. 60. 1 - The proposition value Southwest airlines created a new curve offering high-speed transport with frequent and flexible departures at prices attractive to the mass of buyers Southwest Airlines canvas and the low-cost model • Southwest Airlines created a blue ocean by breaking the trade-offs customers had to make between the speed of airplanes and the economy and flexibility of car transport • Southwest emphasizes only three factors (focus) and differentiate on four others factors from the industry’s average profile (divergence) • Southwest promise or tagline: “the speed of a plane at the price of a car… whenever you need it” DIVERGENCE FOCUS W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005 Eduardo Larrain - Linkedin - Website 60
  61. 61. • With which industry do Logan compete? • In what do they focus, in what they differ and what are they tagline? Eduardo Larrain - Linkedin - Website 61
  62. 62. 1 - The proposition value Logan created a new curve offering a new car for the price of an used-car Logan canvas • Logan promise or tagline: “for the price of an used-vehicule, have a new car” FOCUS DIVERGENCE High Low price new vehicule Used-vehicule Logan Low Price Spaciousness Garanty Resistance Design Accessories Status • Similarly, Amazon launched Marketplace not only to compete with second-hand cultural goods marketplace like eBay but to close the gap between new and second items Eduardo Larrain - Linkedin - Website 62
  63. 63. 2 – Revenue stream Definition and scope • Revenue stream is the cash a company generates from each customer segment • A business model can involve two different types of Revenue streams: • Transaction revenues resulting from one-time customer payments • Recurring revenues resulting from ongoing payments to either deliver a Value proposition to customers or provide post-purchase customer support Eduardo Larrain - Linkedin - Website 63
  64. 64. 2 – Revenue stream Ways to generate revenue streams • Asset sale: selling the ownership rights to a physical product. E.g. Amazon selling a book • Usage fee: selling the use of particular service. E.g. A telecom operator charging by the minute • Subscription fee: selling continuous access to a service. E.g. Club Med Gym, WOW/World of Warcraft online • Lending/Renting/Leasing: temporary granting someone the exclusive right to use a particular asset for a fixed period in return for a fee. E.g. Autolib • Licensing: giving permission to use protected intellectual property in exchange of licensing fees. E.g. media industry • Brokerage fees: intermediation services performed on behalf of two or more parties. E.g. credit cart providers, real estate agents • Advertising: fees for advertising a particular product, service or brand. Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 64
  65. 65. 2 – Revenue stream Each revenue stream might have different pricing mechanisms Pricing mechanisms Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 65
  66. 66. How do you set a price Eduardo Larrain - Linkedin - Website 66
  67. 67. Price is determined by what a buyer is willing to pay and the competition is allowing to be charged (not by markup on cost) Price is determined by strategy Eduardo Larrain - Linkedin - Website 67
  68. 68. 2 – Revenue stream Reminder Pricing strategy depending of the product life cycle • Product introduction: • Market skimming strategy setting up a very high price . E.g. Electronic goods, luxury • Or Penetration strategy: real low price even below cost to gain market share • Growth: decrease price because of volume • Maturity: decrease price because of competition • Decline: special offer because price is the main factor of value Chris Anderson, Free the future of a radical price, 2009 Milton Friedman, There's no such thing as a free lunch,1975 Eduardo Larrain - Linkedin - Website 68
  69. 69. How can a product be free Eduardo Larrain - Linkedin - Website 69
  70. 70. 2 – Revenue stream Introduction to Free Definition and scope • Free is giving without a cost… all included • Free is not to be mistaken with “free” used by advertisers when it’s not really free: • Free “buy one get one free” is just another way of saying 50 percent off when you buy two • Free gift inside • Free shipping • Basic economics: there's no such thing as a free lunch • The "free lunch“ refers to the once-common tradition of saloons in the United States providing a "free" lunch to patrons who had purchased at least one drink. All the foods on offer were high in salt (e.g. ham, cheese and salted crackers) so those who ate them ended up buying a lot of beer. • You can make money on free (revenue stream) but also free can lead to fast growth: • Before the 2000’s, Dell was known to be the first company to have reached one billion sales after been launched in less than 10 years Chris Anderson, Free the future of a radical price, 2009 Milton Friedman, There's no such thing as a free lunch,1975 Eduardo Larrain - Linkedin - Website 70
  71. 71. 2 – Revenue stream Introduction to Free The penny gap theory • The penny gap is the difference between cheap and free • For small payments, there is not a constant elasticity in price • Zero is one market and any other price is another market • Zero can attract lots of people because from the consumer’s perspective charging even a penny makes us think about the choice Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 71
  72. 72. 2 – Revenue stream Introduction to Free The economics of abundance (vs. scarcity) • Digital technologies have become too cheap to meter creating a economy of abundance (e.g. information) • Digital free theory: • “If it’s digital, sooner or later it’s going to be free” • “When something halves in price each year, zero is inevitable” • “Waste is good” • “Every abundance creates a new scarcity” (e.g. time) • Though, externalities for the consumer still exist: technical process when buying or when recycling, travel time,… Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 72
  73. 73. 2 – Revenue stream Introduction to Free 4 revenue streams around: first two been very old but evolving and the last two are emerging with Internet A. Direct Cross-Subsidies: give a free product that have high probability to make people pay for something else B. The “three-parties” (or two-sided markets): one customer segment subsidizes another (the most common) C. Freemium: premium paid version D. Non-monetary markets: people choose to give away with no expectation of payment Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 73
  74. 74. 2 – Revenue stream A – Direct Cross-Subsidies Definition and scope • This is the oldest and most familiar model where the cost of one product is shifted into the price of another • Free attracts customer in masses. Then cross-selling or up-selling validate the business model: • Give a product (equipment) and sell a service (maintenance) or another product (supplies) • Key success factor is the increase the equipment rate with products with better profitability • It has other names: Gillette and razor blades, Equipment and Supplies, Equipment and Maintenance Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 74
  75. 75. 2 – Revenue stream A – Direct Cross-Subsidies How can you sell airlines tickets far under cost? « People pay attention on ticket price not on the extra’s » Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 75
  76. 76. 2 – Revenue stream A – Direct Cross-Subsidies Famous examples of direct-cross subsidies Free or far under cost Where the money comes from Companies Printer Ink Printer manufacturer Coffee machine Capsules Nespresso Razor Razor blades Gillette Real estate loan, credit card, savings account Cross-selling because customer is stuck with the same bank for 20/30 years Retail banks Airline ticket Hotel room, rental car, cruise and vacation package Go Voyages, airline companies Elevator Maintenance and security upgrades Elevator companies Alarms Electronic surveillance Security companies Equipement Reagent supplies Medical biology companies Telephone Communications Carrier Eduardo Larrain - Linkedin - Website 76
  77. 77. 2 – Revenue stream A – Direct Cross-Subsidies More examples of direct-cross subsidies • Give away services, sell products (Apple Store Genius Bar Tech support) • Or Give away products, sell services (free gifts when you open a bank account) • Give away software, sell hardware (IBM and HP’s linux offerings) • Or Give away hardware, sell software (video game console model) • Give away cell phones, sell minutes of talk time (many carriers) • Or Give away talk time, sell cell phones (many of the same carriers, with free nights and weekend plans) • Give away the show, sell the drinks (strip clubs) • Or Give away the drinks, sell the show (casinos) • Free with purchase (retailer “loss leaders” e.g. gas sold in a supermarket) • Free samples (gift boxes) • Free trials (magazine subscriptions) • Free parking (malls, supermarkets) • Free condiments (restaurants) Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 77
  78. 78. 2 – Revenue stream B – Three-parties or Two-sided markets Definition and scope • A third party pays participate in a market created by a free exchange between the first two parties. Thus one customer segment subsidizes another • The most common of the economies built around free is the three party system • Advertising is the most famous one where advertisers pay for media to reach consumers: Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 78
  79. 79. 2 – Revenue stream B – Three-parties or Two-sided markets Markets with three-parties revenue stream • Three-parties is not limited to advertising Market First-party Consumer Third-party Second-party examples Search Internet user Advertisers Google, Yahoo! Online recruitment Job seeker Recuiters Monster, cadreemploi, keljob Free newspapers Readers Advertisers Metro, 20 Minutes Free softwares Readers Software publisher Adobe Debit card Card owners Retail Banks Ecommerce platform Sellers Buyers eBay, Amazon marketplace Outdoor advertising Municipalities Advertisers JC Decaux, Clear Channel Denis Dauchy, 7 étapes pour un business model solide, 2010 Eduardo Larrain - Linkedin - Website 79
  80. 80. 2 – Revenue stream B – Three-parties or Two-sided markets More examples of three-parties • Give free voice calling (in the US), charge advertisers (Facebook Messenger app) • Give away content, sell access to the audience (ad-support media) • Give woman free admission, charge men (bars) • Give children free admission, charge adults (museums) • Give away listings, sell premium search (match.com) • Sell listings, give away search (craigslist housing) • Give away travel services, get a cut of rental car and hotel reservations (travelocity) • Give away house listings, sell mortgages (Zillow) • Give away content, sell information about the consumers (practice fusion) • Give away content, sell stuff (Thinkgeek) • Give away content, charge advertisers to be featured in it (product placement) • Give away resume listings, charge for power search (Linkedin) Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 80
  81. 81. 2 – Revenue stream C – Freemium Definition and scope • Freemium is giving a free basic version to most of people and charging for a premium version to a few people • Freemium or contraction of Free and Premium was invented by Fred Wilson in 2006. • Freemium is different with direct-cross subsidiaries because the ratio of free to paid is high (e.g. 90%, 95%) when giving free sample has a low ratio • This ratio is enabled by Internet because the cost of serving the basic version is close to zero • Si it’s not the same thing as "premium with a free sample.“ • Freemium is one of the most common Internet-based business model even though not every product or service can work as freemium Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 81
  82. 82. 2 – Revenue stream C – Freemium Different kind of limitation of the basic free version • Functionnalities • e.g. Linkedin, Flickr, Skype, Evernote, WordPress • Time • e.g. legal online streaming • Capacity • e.g. sending large files, DropBox (cloud backup system) • Storage • e.g. webmails • Others factors • e.g. • Spotify and Gmail invitations • Seat limited (first customers get free seats) • Customer type limited: free for small and young companies, universities (licence model) Eduardo Larrain - Linkedin - Website 82
  83. 83. 2 – Revenue stream C – Freemium Why go for Freemium business model? • Marketing: • By definition, having a free product makes it really easy to get customers • Even though a free user might not convert, they can invite other free users who might (referral) • Network effects (like fax): • A network effect is what happens when a product or service becomes more valuable the more people use it • A phone isn't very useful if you can't call anyone else with it. But once everyone you know has a phone, it becomes a pretty valuable thing to have • If you're in a market that lends itself to network effects you're going to want to have a free basic product because if you don't someone else will and will use the network effects to crush you • E.g. Skype has 600 million users who make calls for free over the internet and only a small percentage of those pay to make calls to landlines Business Insider, What Is The Freemium Business Model, 04/2011 Eduardo Larrain - Linkedin - Website 83
  84. 84. 2 – Revenue stream C – Freemium Key success factors (if not, choose another business model) • Get lots and lots of free users: • Freemium is a numbers game: if only 1% of your users are going to pay you, then you need to have lots and lots of free users (millions, typically) to make that 1% enough money • If your product is more niche, go for premium instead of freemium • If your product is not sticky, go for advertising instead of freemium • Have a product or service whose value to users increases with time: • This is the biggest thing that most people • The value of your service needs to increase the more people use it • E.g. Spotify: where you create all your playlists and organize your music. Once you've done thatyou're much more likely to pay up. The value of Spotify to you has gone up from being just music to music, your playlists and your friends' playlists, so paying starts to make sense • Keep costs low: • Freemium works because the marginal cost of each additional user is low, so you need to keep your operating costs correspondingly low • Time: • It takes a long time to be profitable because users take longer to convert as the value of the product to them increases over time, and because you keep adding (hopefully) new free users, freemium businesses take a long time to reach breakeven point • As people get older, people migrate into paying customer (premium part of freemium) because they get richer Business Insider, What Is The Freemium Business Model, 04/2011 Eduardo Larrain - Linkedin - Website 84
  85. 85. 2 – Revenue stream C – Freemium Examples of freemium • Give away basic information, sell richer information in easier-to-use form (BoxOfficeMojo) • Give away generic management advice, sell customized management advice (McKinsey) • Give away Web content, sell printed content (everything from magazines to books) • Give away online games, charge a subscription to do more in the game (penguins) • Give away demo software, charge for the full version (most video games) • Give away computer-to-computer calls, sell computer-to-phone calls (Skype) • Give away free photo-sharing services, charge for additional storage space (Flickr) • Give away basic software, sell more features (QuickTime) • Give away ad-supported service, sell the ability to remove the ads (Ning) • Give away "snippets" sell books (Google Books) • Give away virtual tourism, sell virtual land (Second Life) Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 85
  86. 86. 2 – Revenue stream D – Nonmonetary markets Definition and scope • People give away content with no expectation of Payment • Gift economy is based on the principle that the action of individuals have a global impact • People give for different reasons: to gain reputation e.g. blog writers, altruism e.g. Wikipedia or unintentionally/passively (web content helps Google) • Labor exchange: paying something with labor even without knowing it • E.g. free content in exchange of Captcha solving (used by spammer in exchange of free porn but also used by Google Street view to decipher street numbers, names and trafic signs) • E.g. voting on Digg, Yahoo Answers or using Google 411 (phone directory in exchange of speech sound) • Piracy: when piracy is so powerful that content producer have accepted that, form them, doing the activity is not a moneymaking business • E.g. online music Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 86
  87. 87. • Google is getting the public to identify house numbers and signs from Street View photos as part of its reCAPTCHA anti-spam technology and feeding the data into its online mapping service Eduardo Larrain - Linkedin - Website 87
  88. 88. reCAPTCHA is a free CAPTCHA service that helps to digitize books, newspapers and old time radio shows Answers to reCAPTCHA challenges are used to digitize textual documents Example of a CAPTCHA Comparison of the accuracy of standard OCR versus reCAPTCHA transcriptions OCR: Optical Character Recognition programs Eduardo Larrain - Linkedin - Website 88
  89. 89. Features with poor usability can be an opportunity for revenues CAPTCHA can also be used for advertising and generate revenues Adyoulike Eduardo Larrain - Linkedin - Website 89
  90. 90. • How’s the music industry going? Eduardo Larrain - Linkedin - Website 90
  91. 91. 2 – Revenue stream Looking at the music industry Global recorded music sales were decreasing since end of the 90’s due to digital piracy but now global sales are increasing since 2012 Exhibit – Global Recorded Music Sales (bn USD, trade value) 2012: +0.3% up to US$16.5 billion IFPI, press report, 2012 Synchronization rights: revenues from music acquired for movies, advertisements and music videos Eduardo Larrain - Linkedin - Website
  92. 92. 2 – Revenue stream Looking at the music industry Music downloads still accounts for 80 per cent of digital music revenues but the market is maturing • Piracy has made difficult of charging a price for listening songs or albums • Though consumers still find value in downloads from iTunes Music Store, FnacMusic and others because of the sacrifices of the free music downloaded illegally (quality, security, complexity, accessibility…) • Even if downloads of music from iTunes Store and others still account for 80 per cent of digital music revenues, this market is maturing and spending is flattening in all key territories Eduardo Larrain - Linkedin - Website 92
  93. 93. 2 – Revenue stream Looking at the music industry Streaming and downloads make the digital proposition value • Consumers are finding great value in: • Having access to millions of songs (sellouts are impossible) • Creating and sharing playlists • Listening to music in on all devices everywhere (accessibility = cloud storage, remember Philipp comment on the “head” part of the long tail) • Listening to music even offline • Sharing his songs and getting recommendation on social networks • Fremium streaming music services such as Spotify will be the key growth drivers over the next years as usage and spending grow rapidly: • Spotify Open: free but limited in number of songs and number of hours • Spotify Unlimited: a monthly fee limited on a laptop • Spotify Premium: a monthly fee for listening to music in on all devices and even offline • All Spotify offers enable users to share easily on social networks such as Facebook: Eduardo Larrain - Linkedin - Website 93
  94. 94. 2 – Revenue stream Looking at the music industry Music streaming business model is already the largest market in Sweden, a country with a robust culture of Internet piracy • Music revenues are increasing the Swedish music industry market due to digital sales • Streaming is even cannibalizing downloads in Sweden that only represent 7% of digital sales • Music licensing for online videos is a growing market as more and more people watch videos that are accompanied by music IFPI Svenska Gruppen, press report, 07/2013 Eduardo Larrain - Linkedin - Website 94
  95. 95. 2 – Revenue stream Looking at the music industry Digital recorded music is expected to overtake physical sales in 2015 PwC, Global Entertainment & Media Outlook, 2012 Eduardo Larrain - Linkedin - Website 95
  96. 96. 2 – Revenue stream Looking at the music industry What about content production and consumption? The amount of content being produced and consumed in music is believe to be growing • 11 M song tracks (stock) in 2001, 100 M in 2010 (Gracenote/Sony db > Shazam db) • Growth of the Gracenote database obviously includes a lot of older music that has only recently been indexed and that is been rediscovered – E.g. Oscar Wilde - Los Vidrios Quebrados (1967) • The trend still looks like the amount of music available to consumers is steadily growing • At the other side, overall sale of music (including albums, singles, digital tracks,…) exceeded 1.5 billion transactions in 2010 (up from 845 million transactions in 2000) Floor 64, The Sky Is Rising, 01/2012 Eduardo Larrain - Linkedin - Website 96
  97. 97. 2 – Revenue stream Looking at the music industry What about musicians revenues? • Psy with its Gangnam Style song, viewed more than 1 billion times, would never had been a success outside South Korea without Youtube – It generated 8 M USD from advertising (50/50 split) • Ticket prices and merchandise have become major sources of income for many popular rock stars like Lady Gaga, Madonna, Bruce Springsteen and for bands like U2 • It’s not easy to duplicate the experience of a live show, so concerts have become a source of revenue for musicians and aren’t negatively affected by the availability of free downloadable music - in fact, free music can encourage fans to attend live performances • There’s actual scarcity for live music • Other trends: – – Algorithms may be replacing humans in some parts of discovering new talent (or at least discovering talent more cost-effectively) Gracenote, Shazam,… are datamining music metadata in order to serve better music recommendations to consumers or to predict which artists will be popular with target demographic groups Floor 64, The Sky Is Rising, 01/2012 Eduardo Larrain - Linkedin - Website 97
  98. 98. 2 – Revenue stream What has the Entertainment industry learned from the Music industry? Other Entertainment industries continued to grow in the past years when the Music industry, newspapers and consumer magazine publishing took a hit PwC, Global Entertainment & Media Outlook 2012-2016, 2012 Eduardo Larrain - Linkedin - Website 98
  99. 99. 2 – Revenue stream What has the Entertainment industry learned from the Music industry? Some Entertainment industries have found new business models successful with the Digital era, others no… well not yet… thus a business model challenge • For consumers, today is an age of absolute abundance in entertainment due to the digital era and piracy • New business models based on Digital sales are emerging in each Entertainement industry to take over decreasing physical sales IFPI, press report, 2012 Eduardo Larrain - Linkedin - Website 99
  100. 100. 2 – Revenue stream What has the Entertainment industry learned from the Music industry? Though not all new business models can be based on Advertising since advertising is a huge but finite market and volatile (reliant on the economic situation ) PwC, Global Entertainment & Media Outlook 2012-2016, 2012 Eduardo Larrain - Linkedin - Website 100
  101. 101. • Has the internet decimated the entertainment industry, or are we living in a new gold age for both content creators and consumers? • Entertainment spending per households as a function of income is increasing from 4.9% in 2000 to 5.6% in 2008 (US) • The amount of content being produced in music, movies, books and video games is believe to be growing: • 1/4 M new books were available in 2002, 3 M in 2010 • 1.700 new movies p.a. in 1995, 7.000 in 2009 • 11 M song tracks (stock) in 2001, 100 M in 2010 (Gracenote db) • The Entertainment industry is growing though the value chain is being totally redesigned Floor 64, The Sky Is Rising, 01/2012 Eduardo Larrain - Linkedin - Website 101
  102. 102. • How’s the video game industry going? Eduardo Larrain - Linkedin - Website
  103. 103. 2 – Revenue stream Looking at the video game industry Video games sales have grown with the digital revolution and cross the barrier of gender and age limitations • Globally, the amount that consumers spend on video games - for hardware, software and accessories - has grown from about $20 billion in 2000 to approximately $70 billion in 2011 • The demographics of video game players has expanded greatly beyond the traditional core of boys and young men: – – – 53% of game players are male and 47% female Average gamer player age is 30 The amount of time kids are spending on video games has grown from 26 minutes per day in 1999 to 1 hour and 13 minutes in 2009 due to mobile device that has allow kids to squeeze more playing time into their busy days (Kaiser Family Foundation survey) • Worldwide, the population of gamers has exploded from 250 million in 2008 to 1.5 billion in 2011 Floor 64, The Sky Is Rising, 01/2012 Eduardo Larrain - Linkedin - Website 103
  104. 104. 2 – Revenue stream Looking at the video game industry Purchases of digital content are growing the video games industry • The traditional console business model, based on the installed based per the attach rate (number of games per owner), led to an elitist approach to game design since price of each game was high (40-60 USD) and hardcore gamers wanted a return for their investment • New video games digital segments have emerged: – – – – – Downloads: Steam is to games as iTunes is to music Massively Multiplayer Online (MMO) e.g. World Of Warcraft Online / Casual Mobile Social • Digital sales (and rental delivery) now generate 40% of the industry ESA, Essential Facts about the computer and the video game industry, 2012 Eduardo Larrain - Linkedin - Website 104
  105. 105. 2 – Revenue stream Looking at the video game industry Looking at the video game download business model • Piracy of video games has fewer benefits than music and movie piracy: Piracy is an issue for single-player mode though the primary reason people buy games retail is for the multiplayer modes: – 2011 top-selling games at retail ranked by unit sales (VGChartz) Most pirated games do not allow for multiplayer as the game often has to connect to an official server where its legitimacy can easily be verified by some sort of authentication service • Steam is to games as iTunes is to music: – – – – Steam is a digital distribution, digital rights management, multiplayer and communications platform Steam has an estimated 70% share of the digital distribution market for video games (competitor: EA’s Origin) One PC game out of three is downloaded (average price not much lower than retail: -7%) Steam is developed by Valve Corporation best known for a number of popular entertainment franchises such as Counter-Strike, Half-Life, Left 4 Dead Eduardo Larrain - Linkedin - Website 105
  106. 106. 2 – Revenue stream Looking at the video game industry Looking at MMO business models • Massively Multiplayer Online game are video games in which a large number of players engage simultaneously in a persistent world • Value of an MMO is in the size of the community per life time (retention) • The hardcore game MMO revenue stream was invented by World of Warcraft: – – – – – Average customer lifetime of 18 months Client box or download (50 USD) Subscription fees (15 USD/m) Virtual goods Average full cost to complete WoW for a gamer is 300 USD • Few MMO have been able to replicate WoW model so they switch to F2P to lower entry barrier and get a sizable community e.g. Habbo Hotel, Kart Rider, Warhammer, Everquest,… – – – – Average customer lifetime of 6 months Free trial or free game Subscription optional Virtual goods for actions items (competition) and personalisation (expression) • – Theory of engagement: « the longer a user plays the more chances there are he buys virtual items » Items payable through micro-payments mainly inside the game (60%) and on an external web site Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012 Eduardo Larrain - Linkedin - Website 106
  107. 107. 2 – Revenue stream Looking at the video game industry Looking at the online casual business model • Online casual games are games played online to “kill time, make a pause, relieves from stress”: • Free-to-Play (F2P) is the main business model (also for social games and some mobile games) • F2P is a freemium business model that can be based on: – – – Try-and-buy: limited access (time, levels,…), though games must be really addictive Advertising with ads display on hosting sites or inside the game Virtual goods Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012 Eduardo Larrain - Linkedin - Website 107
  108. 108. 2 – Revenue stream Looking at the video game industry Looking at the mobile video game business model • Ten of thousands of mobile games for smartphones and tablets can be download on platforms such as the Appel App Store, Android MarketPlaces (Google Play), Amazon, Facebook Mobile and Playstation Suite • Distribution is bypassing carriers: 30/70 meaning the game app developer get 70% of sales revenue (vs. 45/55 in cell phone business) – An opportunity for mobile banking? • Mobile video game revenue stream is based on: – – – – Average customer lifetime of 2 months Selling the app (e.g. at 0.99 cent or F2P model) Selling virtual goods A little of advertising (average of 15%): • • Offer walls Sponsoring Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012 Eduardo Larrain - Linkedin - Website 108
  109. 109. 2 – Revenue stream Looking at the video game industry Looking at social games • Social games are those games played primarily on social networking sites or games that can be played with a person’s real world social graph – E.g. CityVille, FarmVille (Zynga), EA (Sims) • Social video game revenue stream is based on: – – – – – – F2P model with a logic of a massive audience Virtual goods (50%) Advertising (25%) Lead-generation offers (25%): virtual currency incentives by marketers to social gamers in exchange of signing up for subscriptions, participating in surveys, or buying goods and services Since virality is a key to success, notifications, invitations, sharing, gifting and other social network tools are used extensively to get new customers Social games must work with a low retention rate (first day retention rate of 30% is a “huge success”) Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012 Eduardo Larrain - Linkedin - Website 109
  110. 110. 2 – Revenue stream Looking at the video game industry Looking at the e-sports business model • Twitch launched 18 months ago borne out of Justin.tv, the largest online community to live streaming service to enable streaming video service embedded into popular games • Twitch provide instant broadcasting of user gameplay: 23 million unique viewers per month, viewers watched 6 billion minutes viewed in December 2012, average session time of 1.5 hours • Twitch is getting embedded in games such as Call Of Duty: Black Ops 2 • Twitch business model is based on sharing advertising revenue with broadcaster and in growing the esports market e.g. Twitch has announced a new scholarship of $50,000 to five student gamers Eduardo Larrain - Linkedin - Website 110
  111. 111. 2 – Revenue stream Looking at the video game industry What’s next for the game industry? • “Gamification” trend meaning that video games are no longer restricted to leisure: – Every part of our lives will eventually be turned into a game – Potentially encourage people to change their behavior to: • Benefit the environment • Perform their jobs better • Lose weight • Buy products • Perform almost any task imaginable • Games are even encroaching into vocational education Eduardo Larrain - Linkedin - Website 111
  112. 112. 2 – Revenue stream Short focus at online video services Purely online video services are not yet collecting revenues at the same scale as the traditional TV and films industries, but the size of this audience is unquestionnably large • Two business models: – Based on subscriptions such as Vimeo • – 150.000 paying subscribers in 2010 Based on advertising such as Youtube • 400 M USD of adversitiving revenues in 2010 • Online videos are also a substantial traffic driver to social networking (e.g. Facebook) Eduardo Larrain - Linkedin - Website 112
  113. 113. • How’s the book publishing industry going? Eduardo Larrain - Linkedin - Website
  114. 114. 2 – Revenue stream Looking at the book publishing industry Sales of e-books expected to compensate the decline of the physical books • Consumer and educational book publishing will increase by 0.6 percent compounded annually to 116 bn USD in 2016 from 112 bn in 2011 – – E-books grow their share of global spending from 5% in 2011 up to 18% in 2016 Print/audio consumer and educational books will continue to decline throughout the forecast period notably paperback books (“livres de poche” in French) • Publishers will need to provide eBooks in addition to paperbacks and the entire value process will be changing, from aggregation right to distribution • Piracy less likely to impact digital sales like in the music industry: demographic groups that are most often associated with digital piracy (generally men between 20 and 39 years old) and not the same than those associated with high-volume reading of mass market books (in general women age 40 and older) • New intermediaries are emerging to handle eBooks: – – – – eBook platform (e.g. mass aggregators such as Amazon, Apple, and Google) Handling of payments Support for digital conversion Establishment of a digital content system PwC, Turning the Page - The Future of eBooks, 2010 Eduardo Larrain - Linkedin - Website 114
  115. 115. 2 – Revenue stream Looking at the book publishing industry New revenues streams are emerging and changing current business models • Apps and special eBook editions enriched with music and video – Notably for educational and juveniles segment e.g. Byook start-up http://youtu.be/O_pBNPe3s-M • Sales of individual chapters and sections from books • Offer additional content such as a blog/forum dedicated to a chapter or sentence, immediate definition of a word, links to other content (news/other authors),… • Easier to sell updates • Books on demand • Easier to sell porn and erotic fiction • Establish basic contracts with university libraries to offer free eBooks for students or offer special editions exclusively to students for a discounted price • Providing online reviews (non-monetary action is posting a review at Amazon website) PwC, Turning the Page - The Future of eBooks, 2010 Eduardo Larrain - Linkedin - Website 115
  116. 116. 2 – Revenue stream Looking at the book publishing industry Non-traditional book publishing on the internet is 8X the output of traditional book publishing • In 2010, 4 million new titles were published with 92% of those being “non-traditional” i.e. self-publishing and books representing the reuse of content, most of it not covered by copyright • Non-traditional books are largely on demand titles produced by reprint houses specializing in public domain works and by presses catering to self-publishers and micro-niche publications • Non-traditional titles are marketed primarily on the Web Bowker, ISBN Output 2002-2011, 2012 Non-traditional numbers are undersestimated since books with no International Standard Book Numbers (ISBN) are not included Eduardo Larrain - Linkedin - Website 116
  117. 117. 2 – Revenue stream What’s the business model of self-publishing? The traditional business model of book publishing Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 117
  118. 118. 2 – Revenue stream What’s the business model of self-publishing? A new business model by lulu.com Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 118
  119. 119. 2 – Revenue stream Looking at the book publishing industry The best opportunity for the book publishing market is volume enabled by lowering costs of digital distribution • World population continues to grow • Literacy rates are increasing • Developing nations are taking advantage of the lower infrastructural costs of ebooks • Number of books per inhabitant is low in developing countries because books are much more expensive than in France and hardcover book piracy is high Eduardo Larrain - Linkedin - Website 119
  120. 120. 2 – Revenue stream Short look at the film industry Film industry is growing but new digital-based business models are yet to be found • Filmed Entertainment has grown worldwide from 26 bn USD to 37 and is expected to reach 46 in 2015 (PwC) • Film piracy includes Internet piracy and Hard-good piracy – Though piracy apologists have long argued that online piracy was good for business (similar to freemium theory) • New business model are aimed at decreasing demand for illegal pirated downloads: – – – Worldwide releases Day-and-date digital releases (releasing in theaters and VOD the same day) Ultra release (releasing on VOD before a theatrical release) can also create a buzz and increase the number of people going to theaters • Current digital business models includes: – – – VOD (Video-On-Demand) Over-the-top online movie providers such as Hulu and Google TV Steaming such as Amazon and Netflix Eduardo Larrain - Linkedin - Website 120
  121. 121. 3a – Customer segments Definition and scope • Customer segments are the different groups of people or organizations an enterprise aims to reach and serve • In order to better satisfy customers, a company may group them into distinct segments with common needs, common behaviors or other attributes. • An organization must take a conscious decision about which segments to serve and which to ignore (like facebook) Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 121
  122. 122. 3a – Customer segments Different types of Customer Segments • Mass market: e.g. consumer electronic sector • Niche market: such business models are often found in supplier-buyer relationships, e.g. car part manufacturers (e.g. Faurecia in France) • Segmented: a company serve several different industries with the same needs or segment customers to provide a different proposition value: • e.g. in the banking industry individuals customers can be segmented in wealth Management (>1M€ financial assets), High Net Worth (>0,1M€) and large public • Diversified: a company serve unrelated customers segments with different needs e.g. Amazon sell “cloud computing” services • In fact, there are usually always two type of customers with different needs: B2B and B2C • Multi-sided markets: e.g. a credit card company need a large base of credit card holders and a large base of merchants who accept those credit cards Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 122
  123. 123. 3a – Customer segments Noncustomers differ in their relative distance from your market but they all offer big blue ocean opportunities The Three Tiers of Noncustomers • First-tier: buyers who minimally purchase an industry’s offering out of necessity and they are waiting to jump ship and leave the industry • Second-tier: people who refuse to buy your industry’s offerings • Third-tier: people who have never thought of your market’s offerings as an option W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005 Eduardo Larrain - Linkedin - Website 123
  124. 124. 3a – Customer segments How to attract each tiers of noncustomers • First-tier: Pret targeted UK workers who used not to go to a restaurant for healthy and time-consuming reasons with fast-food and fresh meal • Second-tier: JC Decaux targeted refusing municipalities and corporations by putting advertising in the street furniture instead on city outskirts • Third-tier: defense department has usually sold military technology to the private sector • Companies should go for the biggest catchment at the time although there could be overlapping commonalities across all three tiers of noncustomers W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005 Eduardo Larrain - Linkedin - Website 124
  125. 125. 3b – Channels Definition and scope • Channels are the way how a company communicates with and reaches its customer segments to deliver a value Proposition • Communication, distribution and sales Channels comprise a company’s interface with customers Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 125
  126. 126. 3b – Channels Type of channels • Distribution channels can be owned (sales force, web sales, own stores) or done with partners (partners stores and wholesaler) • Partners channels lead to lower margins but they allow an organization to expand its reach and benefit from partner strengths McDonald’s 2008 Restaurants Income bn USD Income growth Owned 6,502 16.5 0% Franchise 25,465 6.9 13% Eduardo Larrain - Linkedin - Website 126
  127. 127. 3c – Customer Relationship Definition and scope • Customer Relationships are the type of relationships a company establishes with specific customers segments • A company should clarify the type of relationship it wants to establish with each customer segment (customer acquisition, customer retention, boosting sales/upselling) W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005 Eduardo Larrain - Linkedin - Website 127
  128. 128. 3c – Customer Relationship Categories of Customer Relationships • Personal assistance: relationship based on human interaction. E.g. point of sales (pos), call-centers. • Dedicated personal assistance: dedicating a customer representative specifically to an individual client. It represents the deepest and most intimate type of relationship and normally develops over a long-period of time. E.g. key account managers, HWN individuals consultant • Self-service: no direct relationship with customers • Automated services: more sophisticated form of customer self-service with automated process. E.g. offering a book or movie recommendations • Communities: deploy user communities to become more involved with customers/prospects and facilitate connections between community members • Co-creation: go beyond the traditional customer-vendor relationship and co-create value with customers. E.g. Youtube, Amazon invites customers to write reviews and thus create value for other book lovers Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 128
  129. 129. 3c – Customer Relationship Great blocks to utility can be identify looking at the buyer experience in order to be removed and unlock exceptional utility The buyer experience cycle • A each stage of the buyer experience, managers can ask a set of questions to gauge the quality of buyers’ experience and thus unlock utility for buyers • The following questions can help you identify the most compelling hot spots to unlock exceptional utility: W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005 Eduardo Larrain - Linkedin - Website 129
  130. 130. 4a – Key ressources Definition and scope • Key resources are the most important assets required to make a business model work • Key resources can be: • Human • Physical assets: manufacturing facilities, buildings, vehicles, machines, systems, point-of-sales systems and distribution networks • Financial resources / guarantees: cash, lines of credit, or a stock option pool for hiring key employees. • E.g. distributors (B2C) have usually a low or negative working capital as for producers (B2B), they usually have positive working capital • Intellectual: brands, proprietary knowledge, patents and copyrights, partnerships and customer databases Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 130
  131. 131. 4b – Key activities Definition and scope • Key activities are the most important things a company must do to make its business model work • There is several types of key activities: • Production: designing, making and delivering a product. E.g. Manufacturing • Problem solving: coming up with new solutions to individual customer problems. E.g. hospitals, consultancies and services organizations • Platform/Network: networks, platforms, software and brands. E.g. eBay, Visa Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 131
  132. 132. 4c – Key partnerships Definition and scope • Key partnerships are the network of suppliers and partners that make the business model work • There is four types of partnerships: • Buyer-supplier relationships to assure reliable supplies • Strategic alliances between non-competitors • Coopetition: strategic partnerships between competitors • Joint ventures to develop new businesses Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 132
  133. 133. 4c – Key partnerships Motivations for creating partnerships • Optimization and economy of scale: optimize the allocation of resources and activities since it would be illogical for a company to own all resources or perform every activities by itself • E.g. 100,000 people will have contributed to build your iphone 5.0, limitation for 3D printers • Reduction of risk and uncertainty: it is not unusual for competitors to form a strategic alliance in one area while competing in another. E.g. Blu-ray • Acquisition of particular resources and activities: such partnerships can be motivated to acquire knowledge, licenses or access to customers Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 133
  134. 134. 4c – Key partnerships Tracking partnerships with the code bar and code packer Exhibit - Code bar Exhibit - Code packer Exhibit – Tracking a partnership for a bean can with Open Food Facts OpenFoodFacts Eduardo Larrain - Linkedin - Website 134
  135. 135. 5 – Cost structure Definition and scope • Cost structure is all costs incurred to operate a business model • Naturally enough, costs should be minimized in every business model but we have already see that some business models are more cost-driven than others (design to cost, pyramid base): • Cost-driven: focus on minimizing costs wherever possible maintaining the leanest possible cost structure • Value driven: focus on value creation rather than the cost implications Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 135
  136. 136. Use a business canvas just to be sure you have covered all key elements of a business model One Business Model Canvas Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 136
  137. 137. 2 – Revenue stream Looking at the book publishing industry Non-traditional book publishing on the internet is 8X the output of traditional book publishing • In 2010, 4 million new titles were published with 92% of those being “non-traditional” i.e. self-publishing and books representing the reuse of content, most of it not covered by copyright • Non-traditional books are largely on demand titles produced by reprint houses specializing in public domain works and by presses catering to self-publishers and micro-niche publications • Non-traditional titles are marketed primarily on the Web Bowker, ISBN Output 2002-2011, 2012 Non-traditional numbers are undersestimated since books with no International Standard Book Numbers (ISBN) are not included Eduardo Larrain - Linkedin - Website 137
  138. 138. 2 – Revenue stream What’s the business model of self-publishing? The traditional business model of book publishing Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 138
  139. 139. 2 – Revenue stream What’s the business model of self-publishing? A new business model by lulu.com Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 139
  140. 140. 2 – Revenue stream Looking at the book publishing industry The best opportunity for the book publishing market is volume enabled by lowering costs of digital distribution • World population continues to grow • Literacy rates are increasing • Developing nations are taking advantage of the lower infrastructural costs of ebooks • Number of books per inhabitant is low in developing countries because books are much more expensive than in France and hardcover book piracy is high Eduardo Larrain - Linkedin - Website 140
  141. 141. 2 – Revenue stream Short look at the film industry Film industry is growing but new digital-based business models are yet to be found • Filmed Entertainment has grown worldwide from 26 bn USD to 37 and is expected to reach 46 in 2015 (PwC) • Film piracy includes Internet piracy and Hard-good piracy – Though piracy apologists have long argued that online piracy was good for business (similar to freemium theory) • New business model are aimed at decreasing demand for illegal pirated downloads: – – – Worldwide releases Day-and-date digital releases (releasing in theaters and VOD the same day) Ultra release (releasing on VOD before a theatrical release) can also create a buzz and increase the number of people going to theaters • Current digital business models includes: – – – VOD (Video-On-Demand) Over-the-top online movie providers such as Hulu and Google TV Steaming such as Amazon and Netflix Eduardo Larrain - Linkedin - Website 141
  142. 142. Who are the Internet heavyweights Eduardo Larrain - Linkedin - Website 142
  143. 143. Looking at Internet heavyweights… Biggest Internet IPOs of the last 10 Years Top Internet IPOs Internet companies IPO year Area Google 2004 Search and advertising Facebook 2012 Social media +50% Zynga 2012 Social games -60% Twitter 2013 Microblogging service +40% Linkedin 2011 Professional social media +140% Groupon 2011 Discounted gift certificates Alibaba 2007 B2B ecommerce Yandex 2011 Russian search engine +10% Shanda Games 2009 Online games -40% Giant 2007 Online games -40% Renren 2011 Chinese social media -80% Eduardo Larrain - Linkedin - Website Stock price since IPO IPO-January 2014 +1 000% -60% Since then delisted from Hong Kong Stock Exchange 143
  144. 144. • What is Google business model? Eduardo Larrain - Linkedin - Website 144
  145. 145. What is Google’s business model? Google value proposition Google value proposition Organize the world’s information and make it universally accessible and useful… … for better quality leads Eduardo Larrain - Linkedin - Website 145
  146. 146. What is Google’s business model? Google has changed the ad industry by giving products away to end users for free (in return for advertising), as well as reducing the advertising costs for brand Google revolution on advertising • Google opened up the market to SMEs and extended the reach of larger corporations • A great search algorithm is important though real advantage comes from the massive investments in Google platform which means tiny marginal costs, so Google give Free products to end users Illustration – Advertising market by company size Eduardo Larrain - Linkedin - Website 146
  147. 147. What is Google’s business model? Google revenue stream comes from Google AdWords and Google AdSense Google revenue stream Traffic acquisition costs (TAC) comprises of money paid to the Google Network websites under the Adsense program and to the distribution partners who distribute Google Toolbar and other products or drive traffic to the Google websites. Eduardo Larrain - Linkedin - Website 147
  148. 148. What is Google’s business model? Two-thirds of Google revenues come from AdWords and remaining from AdSense Google quarterly revenues Google, Q3 2012Quarterly EarningsSummary, 2012 Eduardo Larrain - Linkedin - Website 148
  149. 149. What is Google’s business model? Newspaper ad revenue after Google Eduardo Larrain - Linkedin - Website 149
  150. 150. What is Google’s business model? Google give products away in return for advertising (two-sided market) and Google reduce the advertising costs for brand Google business model using the Canvas Business Model Innovation Matters, Understanding Business Models, 2012 Eduardo Larrain - Linkedin - Website 150
  151. 151. What is Google’s business model? Google is trying to remain central in the Mobile experience Google strategy on mobile • Mobile advertising is still in relative infancy, though the mobile device is quickly becoming the world’s newest gateway to information • Google dominate the mobile ad market which is mainly based on search • Google is trying to remain central in the Mobile experience controlling the hardware, as well as the software: • On the software side, • Android was created to be a free, fully open source mobile software platform that any developer could use to create applications for mobile devices and any handset manufacturer can install on a device • Android include the Google Mobile App • On the hardware, Google acquired Motorola Mobility in 2012 (12,5 bn USD) in order to acquire Motorola’s patent portfolio and remain central in the mobile experience like Apple has demonstrated with its popular iPhone Eduardo Larrain - Linkedin - Website 151
  152. 152. What is Google’s business model? Google’s stock quote highly volatile since it is in the advertising business Eduardo Larrain - Linkedin - Website 152
  153. 153. • What is Facebook business model? Eduardo Larrain - Linkedin - Website
  154. 154. What is Facebook’s business model? Facebook value proposition Facebook value proposition • Facebook helps Internet users stay connected with their friends, families, and colleagues • Facebook provides a number of products, free of charge, to its users: • • Timeline, News Feed, Photos and Videos, Messages (Email, Chat, Text Messaging), Groups, Lists, Events, Places, Subscribe, Ticker, Notifications, and Facebook Pages Facebook have a “long tail” of customers (not dependent upon any single customer for their revenues) Business Model Innovation Matters, Understanding Business Models, 2012 Eduardo Larrain - Linkedin - Website 154
  155. 155. What is Facebook’s business model? Its revenue stream is mainly advertising-based Facebook key operational figures • Fourth Quarter 2012 Operational Highlights: • • Daily active users (DAUs) were 728 million on average as of September 30, 2013, an increase of 25% year-over-year • Mobile MAUs were 874 million as of December 31, 2012, an increase of 45% year-over-year • • Monthly active users (MAUs) were 1.19 billion as of September 30, 2013, an increase of 18% year-over-year Mobile DAUs exceeded web DAUs for the first time in the fourth quarter of 2012 Recent Business Highlights • Mobile revenue represented approximately 49% of advertising revenue for the third quarter of 2013 (that was the main business model question of 2013) • Facebook launched Graph Search Beta, a structured search tool that enables users for the first time to find people, places, photos and other content that has been shared on Facebook • Launched Facebook for Android 2.0, completely rebuilt to deliver improved stability and faster performance and opened Facebook Messenger to anyone with a telephone number Facebook, Facebook Reports Third Quarter 2013 Results, 30/10/2013 Eduardo Larrain - Linkedin - Website 155
  156. 156. What is Facebook’s business model? Its revenue stream is mainly advertising-based Facebook key financial figures • 5.1 bn in 2012 (up from 3.7 bn USD in 2011) • 83% of revenues coming from advertising • Exhibit – Key figures 2011 Profit down to 0,05 bn in 2012 (down from 1 bn USD in 2011) mainly due to shares given to the top management Fabernovel, Facebook, The Perfect Startup, 05/2012 Eduardo Larrain - Linkedin - Website 156
  157. 157. What is Facebook’s business model? Facebook replicated Google’s formula... with relatively less success Facebook advertising model Fabernovel, Facebook, The Perfect Startup, 05/2012 Eduardo Larrain - Linkedin - Website 157
  158. 158. What is Facebook’s business model? Facebook’s main asset is the connections and interactions between users Facebook’s Social Graph • 100 billion friendships, 250 million photos uploaded every day and 2.7 billion Likes and Comments per day • « User engagement » is key for Facebook success Fabernovel, Facebook, The Perfect Startup, 05/2012 Eduardo Larrain - Linkedin - Website 158
  159. 159. What is Facebook’s business model? Looking at the Canvas Facebook business model using the Canvas Business Model Innovation Matters, Understanding Business Models, 2012 Eduardo Larrain - Linkedin - Website 159
  160. 160. What is Facebook’s business model? Facebook’s stock quote highly volatile since the company is still growing fast and it is in the advertising business Eduardo Larrain - Linkedin - Website 160
  161. 161. Facebook validated its business model assumptions on Mobile ads even though mobile is considered “a horrible ad medium” • In mid-2013, Facebook noted that mobile ads accounted for 49 percent of its advertising revenue, up from 41 percent in the second quarter. Facebook said prices for mobile ads remained high, and users were clicking on them in their news feeds more frequently. • Potential to open up new inventory via Instagram as well as the announcement to include video ads in the newsfeed Eduardo Larrain - Linkedin - Website 161
  162. 162. What is Facebook’s business model? Facebook vs. MySpace Automated news feed launched in 2006 gave the illusion of a continuous user and personalized activity that MySpace didn’t have – “oh that’s cool” said customers Fabernovel, Facebook, The Perfect Startup, 05/2012 Eduardo Larrain - Linkedin - Website 162
  163. 163. What is Facebook’s business model? Similar to Google’s Page Rank, Facebook’s created its Edge Rank based on an algorithm Facebook’s Edge Rank Fabernovel, Facebook, The Perfect Startup, 05/2012 Eduardo Larrain - Linkedin - Website 163
  164. 164. What is Facebook’s business model? Its new Open Graph is expected to leverage its current business model (key partners) Facebook’s new OpenGraph Fabernovel, Facebook, The Perfect Startup, 05/2012 Eduardo Larrain - Linkedin - Website 164
  165. 165. What is Facebook’s business model? Facebook is a social media (not only network) based on advertising Facebook’s like button developed the social graph even further Fabernovel, Facebook, The Perfect Startup, 05/2012 Eduardo Larrain - Linkedin - Website 165
  166. 166. • What is Zynga business model? Eduardo Larrain - Linkedin - Website 166
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