Web-based business models, Eduardo Larrain - HEC Paris
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Lecture "Web-based business models" taught by Eduardo Larrain at HEC Paris - MSc in Strategic Management

Lecture "Web-based business models" taught by Eduardo Larrain at HEC Paris - MSc in Strategic Management
http://www.hec.edu/MSc/Programs/MSc-in-Strategic-Management

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Web-based business models, Eduardo Larrain - HEC Paris Web-based business models, Eduardo Larrain - HEC Paris Presentation Transcript

  • Eduardo Larrain - Linkedin - Website WEB-BASED BUSINESS MODELS Slides of class #1 #2 #3 #4 – February 2013 Prof. Eduardo Larrain 1
  • Eduardo Larrain - Linkedin - Website 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 2 This lecture was taught at a French business school by Eduardo Larrain
  • Eduardo Larrain - Linkedin - Website Agenda of the web-based business model lecture 3 1. What’s the web? …………………………………………………………………………………………………………………………………………………….……… 2. What’s a business model? ……………………………………………………………………………………………………………………………………….…….. 3. Why study Internet-based business models? ……………………………………………………………………………………………………….……..… 4. What are the key elements of a business model? • Value proposition and revenue streams ………………………………………………………………………………………………………….….. • Drill-down of key Entertainment markets: music, video games, book publishing ………………………………….………….. • Customer channels, customer relationships, key partners, activities, resources, cost structure …….....….……….….. 5. What are the business models of Internet heavyweights: Facebook, Google, Zynga, Linkedin, Groupon ……….…………… 6. What are the most promising business models among the world’s most valuable companies: Digital 100, Twitter ..…… 7. Conclusion and farewell ………………………………………………………………………………………………………………………………………………… 8. Appendix: group project and individual test ………………………………………………………………………………………………………………..... 4 16 23 40 82 115 130 173 184 185
  • Eduardo Larrain - Linkedin - Website What’s the web 4
  • Eduardo Larrain - Linkedin - Website • Web (or World Wide Web or WWW) is a global set of documents, images and other resources, logically interrelated by hyperlinks. • 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. • 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). Web = HTTP, HTML, CSS, JPEG,… 5 Internet = Web + mail + data transfer Wikipedia e.g. FTP incl. P2P, VoIP, streaming media, video conferencing, mobile apps (not HTML 5 based) ICT = Internet + IT + C ICT Internet Web Definitions What’s the Web?
  • Eduardo Larrain - Linkedin - Website 6 • In the European Union, two-thirds of all businesses have a Web presence (McKinsey, 2011) SEARCH SOCIAL MEDIA EVERYDAY LIFE NEWS PORN TV ECOMMERCE VIDEO PROFESSIONAL BLOGS Category Ranking Unique visitors per month LEGEND • Exhibit - Looking at top 100 French websites: Titiou Lecoq / Diane Lisarelli, Encyclopédie de la Web Culture, January 2011 Is Internet only about Web presence?
  • Eduardo Larrain - Linkedin - Website 7 • 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 Is Internet only about Web presence?
  • Eduardo Larrain - Linkedin - Website 8 • 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 Is Internet only a distribution channel for online retail/ecommerce?
  • Eduardo Larrain - Linkedin - Website 9 Internet is not just a distribution channel or just about Web presence
  • Eduardo Larrain - Linkedin - Website 10 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006 Conglomerate Professional, Scientific, and Technical Services Finance and Insurance Information Health Care and Social Assistance Wholesale Trade Retail Trade Utilities Transportation and Warehousing Manufacturing Telecommunication Manufacturing Automotive Manufacturing Métaux Pétrole Agriculture, Forestry, Fishing and Hunting Chiffre d'affaires des 100 plus grandes sociétés US 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2006 Conglomerate Professional, Scientific, and Technical Services Finance and Insurance Information Health Care and Social Assistance Wholesale Trade Retail Trade Utilities Transportation and Warehousing Manufacturing Telecommunication Manufacturing Automotive Manufacturing Métaux Pétrole Agriculture, Forestry, Fishing and Hunting Profits des 100 plus grandes sociétés US Metal Petroleum Analysis based on Fortune 500, 2007 • 75% of the economic impact of the Internet arises from traditional companies that don’t define themselves as pure Internet players (McKinsey, 2011) • Exhibit - Looking at top 100 US companies through time: Is Internet an Industry?
  • Eduardo Larrain - Linkedin - Website 11 Internet is not just an industry Internet is touching every part of the economy (like electricity)
  • Eduardo Larrain - Linkedin - Website 1. Web activities using Web as a support • Ecommerce, content, online, advertising 2. Tecommunication based on IP communication • Internet service providers 3. Software and services activities linked to the Web • IT consulting, software development 4. Hardware manufacturers, maintenance providers of Web-specific tools • Computers, Smartphones, hardware equipment, servers used for the Internet 12 McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011 Internet is a technology on which are based numerous activities across industries Internet-based activities
  • Eduardo Larrain - Linkedin - Website 13 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 Internet accounts for 3-4% of worldwide GDP Exhibits – Economic impact of the Internet by McKinsey and BCG
  • Eduardo Larrain - Linkedin - Website • 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 14 McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011 Though, the Internet economic impact goes beyond GDP generating consumer surplus when there is not monetary reward Real economic impact of the Internet
  • Eduardo Larrain - Linkedin - Website 15 Question raised at class#1 What’s the issue with mobile apps and HTML5? • HTML5 is a new technology that allows developers to build rich web-based apps that run on any device via a standard web browser • Go to www.audacy.fr or www.webformy.com using your smartphone browser to get a view on what is HTML5 • For mobile applications, choosing a technology can have a large implications on your business model… • Native technologies (iOS, Android, RIM, Symbian, Windows) are great for: • Using the phone features (photo,…) • Using lots of data (offline mode) • Security (harder to crack) • When you need real time data • HTML5 technology is great: • When you want to launch fast and cheap a mobile application • Because you are not reliant on App stores indexation • Other technologies (Adobe AIR,… ) are great for other specific needs • … and those of main Applications Stores: iTunes App Store, Chrome Web Store, Facebook App Center
  • Eduardo Larrain - Linkedin - Website What’s a business model 16
  • Eduardo Larrain - Linkedin - Website • A business model describes the rationale of how an organization creates, delivers, and captures value. 17 • A business model is a coherent way to manage and develop an economic activity. • A business model describes how an enterprise proposes to make money. What’s a business model? Basic definition
  • Eduardo Larrain - Linkedin - Website 18 • 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 Very basic definition What’s a business model? • 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 19 • 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) A Business Model is not a Business Plan What’s a Business Plan?
  • Eduardo Larrain - Linkedin - Website 20 • 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 A Business Model is not Strategy What’s Strategy?
  • Eduardo Larrain - Linkedin - Website 21 Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 A business model describes what makes an company unique looking from the value propositions to cost structure Key elements of a business model
  • Eduardo Larrain - Linkedin - Website 22 Cost-side Value-side A business model is an ecosystem Rationale beyond those key elements Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010
  • Eduardo Larrain - Linkedin - Website Why study Internet-based business models 23 Business Models Internet- based
  • Eduardo Larrain - Linkedin - Website 24 Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 1. Customer Solutions Time Profit Invest to know the customer, create a solution, develop the relationship E.g. GE 0 Profit zone 2. Product Pyramid Time Profit 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 3. Multi-Component Several of the components represent a disproportionate share of the profits E.g. business seminars at hotels, advertising (Google, Yahoo, Facebook)? Basic activity Other components 4. Switchboard 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 5. Time Profit 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 Time F/unité 6. Block Buster profits Revenue realized is so powerful and fast that in a quick swoop the model pays for development and marketing costs E.g. movies, books Project types Project return Adrian Slywotzky and David Morrison, The profit Zone, 1998
  • Eduardo Larrain - Linkedin - Website 25 Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 7. Multiplier Strong customer brand E.g. Disney, Google Different offers Key asset 8. Entrepreneur Profit Hierarchical design with multiple subsidiaries to maintain closeness with the customer E.g. Biotechnologies, Google Basic activity Small teams 9. La spécialisation 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 Specialists Generalists 10. Install Base 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 Margin Complementary products Basic product 11. Defacto Standard The more players who buy that enter in the system, the more valuable the network E.g. Microsoft, Oracle, Skype, Linkedin, spotify, Facebook Market share Margin 12. Brand 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 Brand price Average market price Adrian Slywotzky and David Morrison, The profit Zone, 1998
  • Eduardo Larrain - Linkedin - Website 26 Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 13. Specialty Specialty companies enjoy a higher premium for their products and services until competitors start to imitate E.g. Merck, 3M, Photoshop Marge Nowadays5 years ago Common Leading Common Leading 14. Local Leadership 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 market share Local return 0 15. Transactional Scale Transactions go up but the cost to provide the transaction does not go up as quickly E.g. investment banking, real estate, transportation Transaction size Transaction return 16. Value Chain Specific activities pass through a chain of specialist offering value E.g. softwares, Intel 17. Cycle Profit 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 Capacity / Occupancy Return by unit produced 18. After-Sales Profit The company's profit does not direct come from the sale of hte product, but the after sale financing or services of the product E.g. General Electric, banking Basic offer After-sales offers Adrian Slywotzky and David Morrison, The profit Zone, 1998
  • Eduardo Larrain - Linkedin - Website 27 Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 19. New Product Profit As new products are introduced profit margins are high and growth rapid. As the product mature the profit margins fall Time Diffusion 20. Relative Market Share Profit 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 Relative market share Return 21. Experience Curve Profit Experience drives down the transactional cost Cumulated experience Unit cost 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 28 Why study Internet-based business models? Two reasons i. The technological revolution increased exponentially the number of business models types: • Marginal cost of digital information comes closer to nothing • Long tail enables larger segmentation of customers • Better assets rotation can enable new businesses with low margin ii. After 30 years, we are better at understanding complex business models
  • Eduardo Larrain - Linkedin - Website 29 (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 30 Marginal cost of digital information comes closer to nothing Basic economics • … 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” • In basic economics, price falls to the marginal cost which increases with production… Quantity Supply Demand Price Exhibit – Market supply and demand Quantity Marginal cost Average cost Price Exhibit – Costs of one company
  • Eduardo Larrain - Linkedin - Website 31 • 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 32 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 33 • 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 34 Better assets rotation can enable new businesses with low margin Better assets rotation Formula of Return on Capital Employed (ROCE) ROCE = Net Income (R) / Equity (K) ROCE = (R / K) * (Income / Income) * (Assets / Assets) ROCE = (R / Income) * (Income / Assets) * (Assets / K) ROCE = Gross Margin * Assets rotation * Financial lever • Technological revolution increase assets productivity decreasing the amount of assets immobilized
  • Eduardo Larrain - Linkedin - Website 35 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 vehicule, was designed to be sold at 5 000€ (ultimately 8 000€ in France) Exhibit – Different business positioning with same ROCE Gross Margin Assets rotation
  • Eduardo Larrain - Linkedin - Website 36 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 37 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 Sénégal Egypte Roumanie Côte d'Ivoire Djibouti Maroc Pologne Espagne France Moy. Afrique Pakistan Algérie Tunisie Russie Afrique du Sud Autriche Portugal Royaume-Uni Moy. UE Allemagne Mexique Inde Etats-Unis Canada Chili Chine Colombie Brésil Arménie Belgique Botswana Danemark Finlande Guatemala Guyane Irlande Jamaïque KenyaKirghizstan Lesotho Namibie Nicaragua Ouganda Pays-Bas Suède Tanzanie Vietnam 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Banked population 2008 Mobilepenetration2008
  • Eduardo Larrain - Linkedin - Website Three current trends 38 Other big trends in creating new Internet-based companies • 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
  • Eduardo Larrain - Linkedin - Website 39 (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 40 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 41 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 42 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 43 • Starbucks promise: a “third space” of conviviality between home and work
  • Eduardo Larrain - Linkedin - Website 44 1 - The proposition value Defining a promise helps understanding the proposition value Company promise or tagline • What are the promise of those companies? • Starbucks • Ikea • Easyjet / Ryanair • Toyota • Lego • Danone • Yves Rocher • A “third space” of conviviality between home and work • Functional home furnishing, low price and design • Simple airline flights at low price faster than the car • Auto reliability • Learning though the joy of building • Health through food and beverages to a maximum number of people • Beauty based on plants Denis Dauchy, 7 étapes pour un business model solide, 2010
  • Eduardo Larrain - Linkedin - Website 45 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 Customer 2 Mass-market products or services  Distributor  Consumer Services to corporations (food, transportation,…)  Company  Employees Web-based business models class  Students  Companies (management consulting firms, investment banking,…) Pharmaceutical drugs  Prescriber (dentist, general practitioner GP,…)  Patients, social security Denis Dauchy, 7 étapes pour un business model solide, 2010
  • Eduardo Larrain - Linkedin - Website • 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 47 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 48 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 49 • 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 50 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 51 • 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 DIVERGENCE FOCUS 52 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” W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005
  • Eduardo Larrain - Linkedin - Website 53 • With which industry do Logan compete? • In what do they focus, in what they differ and what are they tagline?
  • Eduardo Larrain - Linkedin - Website 54 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” • 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 Price Spaciousness Garanty Resistance Design Accessories Status Low price new vehicule Used-vehicule Logan DIVERGENCEFOCUS High Low
  • Eduardo Larrain - Linkedin - Website Definition and scope 55 2 – Revenue stream • 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 Ways to generate revenue streams 56 2 – Revenue stream • 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 Pricing mechanisms 57 2 – Revenue stream Each revenue stream might have different pricing mechanisms Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010
  • Eduardo Larrain - Linkedin - Website How do you set a price 58
  • Eduardo Larrain - Linkedin - Website 59 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 Pricing strategy depending of the product life cycle 60 2 – Revenue stream Reminder • 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 How can a product be free 61
  • Eduardo Larrain - Linkedin - Website Definition and scope 62 2 – Revenue stream Introduction to Free • 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 The penny gap theory 63 2 – Revenue stream Introduction to Free • 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 The economics of abundance (vs. scarcity) 64 2 – Revenue stream Introduction to Free • 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 4 revenue streams around: first two been very old but evolving and the last two are emerging with Internet 65 2 – Revenue stream Introduction to Free 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 Definition and scope 66 2 – Revenue stream A – Direct Cross-Subsidies • 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 67 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 Famous examples of direct-cross subsidies 68 2 – Revenue stream A – 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 More examples of direct-cross subsidies 69 2 – Revenue stream A – 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 Definition and scope 70 2 – Revenue stream B – Three-parties or Two-sided markets • 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 Markets with three-parties revenue stream 71 • Three-parties is not limited to advertising Denis Dauchy, 7 étapes pour un business model solide, 2010 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 2 – Revenue stream B – Three-parties or Two-sided markets
  • Eduardo Larrain - Linkedin - Website More examples of three-parties 72 • 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) 2 – Revenue stream B – Three-parties or Two-sided markets Chris Anderson, Free the future of a radical price, 2009
  • Eduardo Larrain - Linkedin - Website Definition and scope 73 2 – Revenue stream C – Freemium • 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 Different kind of limitation of the basic free version 74 2 – Revenue stream C – Freemium • 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 Why go for Freemium business model? 75 2 – Revenue stream C – Freemium • 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 Key success factors (if not, choose another business model) 76 2 – Revenue stream C – Freemium • 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 Examples of freemium 77 • 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 2 – Revenue stream C – Freemium
  • Eduardo Larrain - Linkedin - Website Definition and scope 78 2 – Revenue stream D – Nonmonetary markets • 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 79 • 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 Answers to reCAPTCHA challenges are used to digitize textual documents 80 reCAPTCHA is a free CAPTCHA service that helps to digitize books, newspapers and old time radio shows OCR: Optical Character Recognition programs Example of a CAPTCHA Comparison of the accuracy of standard OCR versus reCAPTCHA transcriptions
  • Eduardo Larrain - Linkedin - Website 81 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 82 • How’s the music industry going?
  • Eduardo Larrain - Linkedin - Website 2 – Revenue stream Looking at the music industry Global recorded music sales are decreasing since end of the 90’s due to digital piracy Exhibit – Global Recorded Music Sales (bn USD, trade value) IFPI, press report, 2012 Synchronization rights: revenues from music acquired for movies, advertisements and music videos
  • Eduardo Larrain - Linkedin - Website 84 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, VirginMega, 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 85 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 86 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 IFPI Svenska Gruppen, press report, 07/2012 • Music revenues are increasing the Swedish music industry market due to digital sales • Streaming is even cannibalizing downloads in Sweden • Music licensing for online videos is a growing market as more and more people watch videos that are accompanied by music
  • Eduardo Larrain - Linkedin - Website 87 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 • 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) 88 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 Floor 64, The Sky Is Rising, 01/2012
  • Eduardo Larrain - Linkedin - Website • 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 89 2 – Revenue stream Looking at the music industry What about musicians revenues? Floor 64, The Sky Is Rising, 01/2012
  • Eduardo Larrain - Linkedin - Website 90 2 – Revenue stream What has the Entertainment industry learned from the Music industry? PwC, Global Entertainment & Media Outlook 2012-2016, 2012 Other Entertainment industries continued to grow in the past years when the Music industry, newspapers and consumer magazine publishing took a hit
  • Eduardo Larrain - Linkedin - Website 91 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 IFPI, press report, 2012 • 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
  • Eduardo Larrain - Linkedin - Website 92 2 – Revenue stream What has the Entertainment industry learned from the Music industry? PwC, Global Entertainment & Media Outlook 2012-2016, 2012 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 )
  • Eduardo Larrain - Linkedin - Website 93 • 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 • How’s the video game industry going?
  • Eduardo Larrain - Linkedin - Website • 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 95 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 Floor 64, The Sky Is Rising, 01/2012
  • Eduardo Larrain - Linkedin - Website • 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 96 2 – Revenue stream Looking at the video game industry Purchases of digital content are growing the video games industry ESA, Essential Facts about the computer and the video game industry, 2012
  • Eduardo Larrain - Linkedin - Website • 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: – 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 97 2 – Revenue stream Looking at the video game industry Looking at the video game download business model 2011 top-selling games at retail ranked by unit sales (VGChartz)
  • Eduardo Larrain - Linkedin - Website • 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 98 2 – Revenue stream Looking at the video game industry Looking at MMO business models Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012
  • Eduardo Larrain - Linkedin - Website • 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 99 2 – Revenue stream Looking at the video game industry Looking at the online casual business model Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012
  • Eduardo Larrain - Linkedin - Website • 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 100 2 – Revenue stream Looking at the video game industry Looking at the mobile video game business model Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012
  • Eduardo Larrain - Linkedin - Website • 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”) 101 2 – Revenue stream Looking at the video game industry Looking at social games Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012
  • Eduardo Larrain - Linkedin - Website 102 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 e- sports market e.g. Twitch has announced a new scholarship of $50,000 to five student gamers
  • Eduardo Larrain - Linkedin - Website • “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 103 2 – Revenue stream Looking at the video game industry What’s next for the game industry?
  • Eduardo Larrain - Linkedin - Website • 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) 104 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
  • Eduardo Larrain - Linkedin - Website • How’s the book publishing industry going?
  • Eduardo Larrain - Linkedin - Website • 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 106 2 – Revenue stream Looking at the book publishing industry Sales of e-books expected to compensate the decline of the physical books PwC, Turning the Page - The Future of eBooks, 2010
  • Eduardo Larrain - Linkedin - Website • 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) 107 2 – Revenue stream Looking at the book publishing industry New revenues streams are emerging and changing current business models PwC, Turning the Page - The Future of eBooks, 2010
  • Eduardo Larrain - Linkedin - Website • 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 108 2 – Revenue stream Looking at the book publishing industry Non-traditional book publishing on the internet is 8X the output of traditional book publishing 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 The traditional business model of book publishing 109 2 – Revenue stream What’s the business model of self-publishing? Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010
  • Eduardo Larrain - Linkedin - Website A new business model by lulu.com 110 2 – Revenue stream What’s the business model of self-publishing? Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010
  • Eduardo Larrain - Linkedin - Website • 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 111 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
  • Eduardo Larrain - Linkedin - Website • 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 112 2 – Revenue stream Short look at the film industry Film industry is growing but new digital-based business models are yet to be found
  • Eduardo Larrain - Linkedin - Website Entrepreneurship tips 113 Question raised at the end of class#2 Is my start-up a good idea and what do you think of the business model? 1. No one can tell you if your Internet-based company will be a success or not (remember Twitter) 2. Go out and meet other entrepreneurs at conferences, start-up dating, La Cantine,… • Top Upcoming Paris Startup Events (Paris StartupDigest newsletter) • February 18 - [cours] Faire parler de sa boîte dans les médias (45€) • February 18 - Master Classe Entrepreneur avec Gilles Babinet (39€) • February 19 - L'importance de l'innovation technologique dans l'entrepreneuriat (gratuit) • February 20 - Cup of Ideas Voice - Session CFO (15€) • February 20 - Conférence Innover Entreprendre (gratuit) • February 26 - Atelier Start'UP #11 : Les clés d'un bon prévisionnel financier (49€) • February 26 - ApéroFounder : Trouver un co-fondateur (gratuit) • February 26 - Startup Calling (gratuit) • February 28 - Formation Business Angels – « De la Lettre d’Intention au Closing » (50€) • February 28 - Pitch My Game (gratuit) • … 3. Learn to pitch your business model and do a great presentation • Like design, presentation performance does matter
  • Eduardo Larrain - Linkedin - Website Entrepreneurship tips 114 Question raised at class#2 Is my start-up a good idea and what do you think of the business model? 4. Find a team since it is the most valuable assets of a start-up • Choose people to complement your skills • An idea has no value so you can talk to people about your projects (though don’t tell industrial secrets i.e. how you can do it) 5. You can start a Internet company without money notably in France: • Though money save time • Though money “is the nerf de la guerre” • The earlier you ask for money, the more diluted you will be • Your company has no value until it has users, revenues, profits or a product / technology
  • Eduardo Larrain - Linkedin - Website Definition and scope 115 3a – Customer segments • 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 Different types of Customer Segments 116 3a – 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 The Three Tiers of Noncustomers 117 3a – Customer segments Noncustomers differ in their relative distance from your market but they all offer big blue ocean opportunities • 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 How to attract each tiers of noncustomers 118 3a – Customer segments • 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 Definition and scope 119 3b – Channels • 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 Type of channels 120 3b – 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 Definition and scope 121 3c – Customer Relationship • 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 Categories of Customer Relationships 122 3c – Customer Relationship • 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 The buyer experience cycle 123 3c – Customer Relationship Great blocks to utility can be identify looking at the buyer experience in order to be removed and unlock exceptional utility • 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 Definition and scope 124 4a – Key ressources • 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 Definition and scope 125 4b – Key activities • 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, consltancies 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 Definition and scope 126 4c – Key partnerships • 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 Motivations for creating partnerships 127 4c – Key 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 Tracking partnerships with the code bar and code packer 128 4c – Key partnerships Exhibit - Code bar Exhibit - Code packer Exhibit – Tracking a partnership for a bean can with Open Food Facts OpenFoodFacts
  • Eduardo Larrain - Linkedin - Website Definition and scope 129 5 – Cost structure • 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 Who are the Internet heavyweights 130
  • Eduardo Larrain - Linkedin - Website Top 10 Internet IPOs 131 Looking at Internet heavyweights… 10 biggest Internet IPOs of the last 10 Years Internet companies IPO year Area Stock price since IPO IPO-February 2013 Facebook 2012 Social media -30% Google 2004 Search and advertising +620% Alibaba 2007 B2B ecommerce Since then delisted from Hong Kong Stock Exchange Yandex 2011 Russian search engine -70% Shanda Games 2009 Online games -70% Zynga 2012 Social games -60% Giant 2007 Online games -70% Renren 2011 Chinese social media -80% Groupon 2011 Discounted gift certificates -80% Linkedin 2011 Professional social media +70%
  • Eduardo Larrain - Linkedin - Website • What is Facebook business model?
  • Eduardo Larrain - Linkedin - Website 133 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 134 What is Facebook’s business model? Its revenue stream is mainly advertising-based Facebook, Facebook Reports Fourth Quarter and Full Year 2012 Results, 30/1/2013 Facebook key operational figures • Fourth Quarter 2012 Operational Highlights: • Monthly active users (MAUs) were 1.06 billion as of December 31, 2012, an increase of 25% year-over-year • Daily active users (DAUs) were 618 million on average for December 2012, an increase of 28% year-over-year • Mobile MAUs were 680 million as of December 31, 2012, an increase of 57% 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 23% of advertising revenue for the fourth quarter of 2012, up from approximately 14% of advertising revenue in the third quarter of 2012 • 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
  • Eduardo Larrain - Linkedin - Website 135 What is Facebook’s business model? Its revenue stream is mainly advertising-based Fabernovel, Facebook, The Perfect Startup, 05/2012 Facebook key financial figures • 5.1 bn in 2012 (up from 3.7 bn USD in 2011) • 83% of revenues coming from advertising • Profit down to 0,05 bn in 2012 (down from 1 bn USD in 2011) mainly due to shares given to the top management Exhibit – Key figures 2011
  • Eduardo Larrain - Linkedin - Website 136 What is Facebook’s business model? Facebook replicated Google’s formula... with relatively less success Fabernovel, Facebook, The Perfect Startup, 05/2012 Facebook advertising model
  • Eduardo Larrain - Linkedin - Website 137 What is Facebook’s business model? Facebook’s main asset is the connections and interactions between users Fabernovel, Facebook, The Perfect Startup, 05/2012 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
  • Eduardo Larrain - Linkedin - Website 138 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 139 What is Facebook’s business model? Facebook vs. MySpace Fabernovel, Facebook, The Perfect Startup, 05/2012 Automated news feed launched in 2006 gave the illusion of a continuous user and personalized activity that MySpace didn’t have
  • Eduardo Larrain - Linkedin - Website 140 What is Facebook’s business model? Similar to Google’s Page Rank, Facebook’s created its Edge Rank based on an algorithm Fabernovel, Facebook, The Perfect Startup, 05/2012 Facebook’s Edge Rank
  • Eduardo Larrain - Linkedin - Website 141 What is Facebook’s business model? Its new Open Graph is expected to leverage its current business model (key partners) Fabernovel, Facebook, The Perfect Startup, 05/2012 Facebook’s new OpenGraph
  • Eduardo Larrain - Linkedin - Website 142 What is Facebook’s business model? Facebook is a social media (not only network) based on advertising Fabernovel, Facebook, The Perfect Startup, 05/2012 Facebook’s like button developed the social graph even further
  • Eduardo Larrain - Linkedin - Website 143 What is Facebook’s business model? Facebook could be squeezed out in the next years by new competing apps Fabernovel, Facebook, The Perfect Startup, 05/2012 On Mobile Facebook lost the central position n the ecosystem which made its success on the web
  • Eduardo Larrain - Linkedin - Website 144 What is Facebook’s business model? If successful, Facebook can become the apps merchandising expert Fabernovel, Facebook, The Perfect Startup, 05/2012 In May 2012, Facebook launched its mobile weapon: the Facebook App Center
  • Eduardo Larrain - Linkedin - Website 145 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 146 • What is Google business model?
  • Eduardo Larrain - Linkedin - Website 147 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 148 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 149 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 150 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 151 What is Google’s business model? Newspaper ad revenue after Google
  • Eduardo Larrain - Linkedin - Website 152 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 153 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 154 What is Google’s business model? Google’s stock quote highly volatile since it is in the advertising business
  • Eduardo Larrain - Linkedin - Website • What is Zynga business model? 155
  • Eduardo Larrain - Linkedin - Website 156 What is Zynga’s business model? Zynga business model key elements Fabernovel, Facebook, The Perfect Startup, 05/2012
  • Eduardo Larrain - Linkedin - Website 157 What is Zynga’s business model? Zynga business model key elements • Value proposition: free-to-play social gaming • Revenue stream: freemium model • F2P for hundred of millions of players • Limited by “Energy”: after a mission, players have to wait for energy to be replenish (can take several hours) • Sell virtual goods like “Energy” (95% of revenues, remaining is advertising) • Players can also take surveys, buy services from Zynga's partners, watch advertising videos in order to obtain game credits • Key partner: Facebook contributed to 94% of Zynga revenue though Zynga contributed “only” to 15% of Facebook’s Revenue • Customer acquisition is key: • Zynga's customer acquisition was largely built on Facebook initially and most of its new users came in through incentivized viral loops • But Facebook prevented applications in 2010 from sending messages to news feeds of friends because of spam concerns: • Many of Zynga's games involve players posting messages to non-players, often for in-game benefits. • Many non-players have notably complained about such communications created by those games that appear to them as "spammy" • Key activities: even if Zynga has plenty of games, revenues come mainly from three games: Farmville, CityVille and MafiaWars
  • Eduardo Larrain - Linkedin - Website 158 What is Zynga’s business model? Zynga relies on "hit" games and so its business will always have an element of cyclicality Zynga users growth
  • Eduardo Larrain - Linkedin - Website 159 What is Zynga’s business model? Zynga business model using the Canvas Citrix Startup Accelerator, Zynga Business Model Canvas, 06/2011
  • Eduardo Larrain - Linkedin - Website 160 • Facebook and Zynga revised their partnership: • Facebook can make its own games, if it chooses • Facebook will no longer be the exclusive social platform for Zynga, allowing it to launch games first on mobile or its own Zynga.com platform
  • Eduardo Larrain - Linkedin - Website 161 What is Zynga’s business model? Growth will have to come from other platforms, particularly Google+ and mobile games Zynga stock quote dropping since the IPO because of stable “bookings” and partnership revision with main partner, Facebook
  • Eduardo Larrain - Linkedin - Website • What is Linkedin business model? 162
  • Eduardo Larrain - Linkedin - Website 163 What is Linkedin’s business model? Linkedin business model key elements • Value proposition: help professionals stay connected with each other by creating and managing a professional identity and building a professional network • Helps getting new businesses, helps changing jobs, helps networking • Revenue stream: freemium model • Free for its network members: Profile and Profile Stats; LinkedIn Connections, Invitations, and Introductions; knowledge and insights using tools such as LinkedIn Groups, Network Updates, News, Answers etc. • Premium offering (50% of revenues): LinkedIn InMails and Profile Stats Pro • 1,5% of user are premium (90,000) • Hiring Solutions and advertising (50% of revenues): recruiters post and manage job opportunities • Competitors: Monster, Cadreemploi,…
  • Eduardo Larrain - Linkedin - Website 164 What is Linkedin’s business model? Linkedin business model using the Canvas Business Model Innovation Matters, Understanding Business Models, 2012
  • Eduardo Larrain - Linkedin - Website 165 • Linkedin acquired Slideshare in 2012 to add presentations to your Linkedin profile (individuals and company) to differentiate from other Hiring solutions showing just a resume with cold data (education, experience and skills) leading to: • A better recruitment search • Higher switching costs for members
  • Eduardo Larrain - Linkedin - Website 166 What is Linkedin’s business model? Recruiting presents the best growth catalyst for Linkedin Linkedin stock quote went up since IPO
  • Eduardo Larrain - Linkedin - Website • What is Groupon business model? 167
  • Eduardo Larrain - Linkedin - Website 168 What is Groupon’s business model? Groupon business model key elements • Value proposition: • Deep discount deals for customers who discover new services and merchandise • Guaranteed revenues and large number of customers for merchants and incremental revenues (Gap Groupon value of 50 USD likely to convert into 75-100 USD spending in the store) • Best suited businesses: those with high fixed costs, high customer acquisition costs and repeat purchases • Revenue stream: • Groupon share of 50% on deals • Negative working capital since payments spread out in 3 installments over lifecycle of a deal • Customer relationships: • Horrible publicity surrounding Groupon • Lack of quality control • Cost structure: • High cost of customer and merchant acquisition (sales people on the ground) • Lack of network effect: each city has to be won separately • Low switching costs for merchants and customers • Competitors: Living Social (Amazon) and DealMap/Dailydeal (Google) • Past competitors: Yelp and Facebook
  • Eduardo Larrain - Linkedin - Website 169 What is Groupon’s business model? Groupon business model using the Canvas Sami Dob, Is Groupon Business Model profitable for Merchants? for Consumers? 2011
  • Eduardo Larrain - Linkedin - Website 170 What is Groupon’s business model? Groupon stock quote went down since IPO
  • Eduardo Larrain - Linkedin - Website 171 What is Groupon’s business model? Groupon growth future remains in its huge customer database of 200 Million Groupon key growth levers • Increase purchasing frequency and repeat buys • Activate dormant customers who have not purchased • Reduce cost structure notably customer costs acquisition • Improve execution and quality control
  • Eduardo Larrain - Linkedin - Website 172 Quizz Top 5 Internet IPOs 1. Network effect? 2. Switching costs? 3. Sales and/or R&D engineers? 4. Revenue not the right KPI? Facebook Google Zynga Groupon Linkedin 1. Which company has network effects? 2. Which company has locked the customer (high switching costs)? 3. Which type of employees work in each company (sales and/or R&D/engineers)? 4. For which company, revenue is not a Key Performance Indicator?
  • Eduardo Larrain - Linkedin - Website Digital 100 (not publicly traded) 173 Looking at the most promising Internet companies… World's most valuable private digital tech companies 1. Alibaba 2. Bloomberg 3. Twitter 4. 360Buy 5. Palantir 6. Dropbox 7. Square 8. MLB.com 9. Softlayer 10. Vente-Privee 11. VANCL 12. Airbnb 13. Pinterest 14. Datapipe 15. Spotify 16. Craigslist 17. Flipkart 18. Ozon Group 19. Wonga 20. Hulu 21. Klarna 22. Kaspersky Lab 23. Rovio 24. Conduit 25. Aricent Group Business Insider, Digital 100, 10/2012 26. Survey Monkey 27. Mu Sigma 28. ZocDoc 29. Just Eat 30. Gilt Groupe 31. Everyday Health 32. Evernote 33. LivingSocial 34. Criteo 35. Zulily 36. Zoosk 37. Coupang 38. Redfin 39. Qualtrics 40. Seamless 41. Media Ocean 42. JustDial 43. 10gen 44. AppNexus 45. GitHub 46. Tumblr 47. Box.net 48. Glam Media 49. Stella & Dot 50. Marketo 51. Etsy 52. One Kings Lane 53. Nasty Gal 54. Klout 55. Automattic 56. Xiu 57. Manta 58. Eventbrite 59. Sugar, Inc 60. Kickstarter 61. Apptio 62. Fresh Direct 63. eHarmony 64. Veracode 65. Wix 66. Turn 67. Quantcast 68. Nest 69. Fab 70. Foursquare 71. Storm8 72. Flipboard 73. Vibrant Media 74. Rubicon Project 75. OpenX 76. Return Path 77. Quora 78. Snapdeal 79. Tremor Video 80. RightScale 81. Whaleshark/RetailM. 82. Break Media 83. Tagged 84. Yext 85. Stripe 86. Rocket Fuel 87. Mind Candy 88. AddThis 89. SoundCloud 90. Xirrus 91. Federated Media 92. Say Media 93. Yodle 94. Coupons.com 95. Path 96. Shazam 97. Plenty of Fish 98. Warby Parker 99. Thrillist 100. Vox Media
  • Eduardo Larrain - Linkedin - Website Popular revenue streams among top Internet companies 174 Executive summary • Freemium: Zynga, Rovio, Linkedin, Spotify, Dropbox, SurveyMonkey, Eventbrite, Tumblr, Evernote, Skype • Advertising: Google, Facebook, Twitter, Craiglist, Criteo, Path • Marketplace: Amazon, Alibaba, Venteprivee, ZocDoc, TaskRabbit, Airbnb • Ecommerce: Groupon, LivingSocial, Foursquare, Hulu • Others: • Premium: The New York Times, Les Echos • Crowdsourcing/Crowdfunding: Kickstarter, Kaggle • Digital money: Starbuck, Paypal … Datamining and big data at the heart of the Data revolution: Shazam, Meilleuragents, Trulia, Zillow, Kel Quartier
  • Eduardo Larrain - Linkedin - Website The data revolution and data buzzwords 175 Short focus on data • Open Data: data from public and private sectors free for anyone to reuse or redistribute for any purpose e.g. data.gouv.fr • Open Governments and companies: • Boost innovation and create jobs • Leverage on local Knowledge e.g. file a report on pothole and monitor the claim (Chicago 311) • Leverage on professionals amateurs and specialized skills e.g. thousands of people can browse data and flag issues • Data visualization: simplify data analytics for end users (visualization = data + design) • Data journalism: a journalist who knows how to use Excel • Finding new stories from dataset, bigger picture by linking datasets, more pairs of eyes to spot patterns, analyzing data beyond the stories, putting stories into context • Analytics and datamining • Data driven pricing and recommendations “today’s recommendation for you”, “campaign recommendations” • Operational intelligence e.g. crime hotspot prediction • Bigdata: collection of data sets so large and complex that it becomes difficult to process using on-hand database management tools or traditional data processing applications • What data to store, with which data to combine, data has value far beyond what you originally anticipate • Infrastructure to handle data growth: Google processes 24 PB data per day using 1 million servers, 90 trillion mails sent per year, Walmart handles 1 M transactions per hour
  • Eduardo Larrain - Linkedin - Website 176 What is the business model of Alibaba.com? …B2B marketplace
  • Eduardo Larrain - Linkedin - Website 177 Focus on ecommerce Major traffic sources of a regular e-commerce website Costs Free (internal) Search Engines • Optimizationof website in order to improve rank of websitein search engine results: – Content production – Net linking – Technical optimization(togo, link, url rewriting) Search Engine optimization (SEO) Search Engine Marketing (SEM paid search) • Purchasing of paying links on searchengine result pages • Optimizationlevers: – Increase/ decrease cost per click – Increase# of keywords to bid on Cost per client (CPC) Partners White Label • Websitehosting other website technologies, product catalogue, searchengine Comparators • Websiteaggregating merchants catalogueand displaying links totheir websites CPC / Cost per acquisition (CPA) CPC / CPA Advertising Display • Advertising throughbanners on largewebsites Affiliation • Platforms aggregatingfreespaceof thousands of small sites & blogs Emailing • Newsletters sent to inhouse database • Newsletters sent to external databases CPM / CPC CPC / CPA CPM / CPC / CPA Nicolas Martin, 2012
  • Eduardo Larrain - Linkedin - Website • What is Twitter business model? 178
  • Eduardo Larrain - Linkedin - Website 179 What is Twitter’s business model? … Advertising Twitter business model key elements • Value proposition: blogging service • Share text messages with a length constraint (social Networking Site / SNS and Micro-blogging platform) • For advertisers, marketers, and media, • Traffic generator (ecommerce, fund-raising,…) • Communication tool (customer service channel, brand awareness, PR,…) • Cheap monitoring on niche subject and tracking the spreading of news • Datamining and data visualization of worldwide data • Competitors: Reuters, survey companies, consulting companies • Revenue stream: advertising (self-serve ad platform) • Companies spending money on Twitter to ensure their messages are seen: promoting Accounts (Cost-Per-Follow / CPF) , Tweets (Cost-Per-Engagement / CPE) and Trends appearing in search results, within the ‘Who to Follow’ and next to a user’s timeline • No ‘Display Ads’ • Twitter’s mobile ad revenue surpassed that of its desktop ads
  • Eduardo Larrain - Linkedin - Website 180 What is Twitter’s business model? Twitter business model key elements • Key partnerships are key since Twitter is a multi-sided platform (like Facebook) • Developers and companies: • APIs for third party apps • Tweet and Follow buttons • Search API and Streaming API provides real-time access to Twitter firehose helping developers with data-intensive needs • Search Vendors: Twitter licenses full feed of public tweets to search engine vendors such as Microsoft (Bing Social), Google (Google Realtime), and Yahoo. This helps in enabling real-time search and discovery. • Device Vendors: Twitter partnered with Apple to enable deep integration of Twitter in iOS5 mobile operating system for iPad, iPhone, and iPod touch. This means users can tweet directly from Apple apps such as Camera, Photos, and Safari, along with third-party apps such as Flipboard, Livingsocial, and Instagram. • Media:Twitter has entered into partnerships with media companies and brands to deliver compelling Twitter integration to their users more easily. This can help media companies capture real-time reactions to the important news • Mobile operators/ Twitter has partnered with Telecom operators across the globe to enable users to send and receive tweets from mobile phones using SMS
  • Eduardo Larrain - Linkedin - Website 181 What is Twitter’s business model? Twitter business model key elements Business Model Innovation Matters, Understanding Business Models, 2012
  • Eduardo Larrain - Linkedin - Website 182 What is the business model of Venteprivee? … Members only ecommerce
  • Eduardo Larrain - Linkedin - Website 183 What is the business model of Craiglist? … Classifieds
  • Eduardo Larrain - Linkedin - Website 184 Conclusion and farewell • Productivity in the service sector is expected to exponentially with the Digital revolution… • … as productivity in the industry sector grew during the Industrial revolution • 6 revolutions that could change the world in the next 5-10 years: 1. Education • New ways to learn e.g. Khan Academy (200 million views) 2. State • 400,000 French elected representatives 3. Crowd • 500 million unique visitors per month (Wikipedia) 4. Health • 1/3 medical treatment are useless (OCDE). 1 out 2 people lie to his doctor • So 80 bn € of the inefficiency cost in France (out of 285 bn €) • Solution: personalized medical file 5. Knowledge • Intelligent object / Quantified-self 6. Robots • 3D Printing • Have fun working in a web-based company or creating your company! • Remember average age within a start-up is 32 (in France) • Failed portfolio of investment funds is huge!
  • Eduardo Larrain - Linkedin - Website This class will be evaluate using an individual test and a group project 185 Notes and evaluation • Short individual test at the beginning of class #3 based on classes (30%) • Group project (70%) • Each group of students will present the business model of an Internet-based company of their own design • 5 minutes presentation: explain and challenge the business model of a company (thus just a few slides) • 5 minutes Q&A • Evaluate by three judges: • Presentation performance (2/3) • Facts and Figures (1/3) • Send me an email to submit the company for your Group project (before 10 February 2013) • Strong advices: • Choose a company which is a leader in what it does (even though it doesn’t necessarily make money on it), not glamorous but with market potential (e.g. B2B) • Don’t choose a really glamorous one (e.g. Google, Facebook, Linkedin) or really small ones • Need help? Look for a company at http://techcrunch.com/ • Attendance is mandatory
  • Eduardo Larrain - Linkedin - Website 186 Individual test (1/2) Internet = Web + mail + data transfer HTML5 technology for fast and cheap mobile apps and Native for more complex apps like those using the phone features BM is a simple expression of the strategy of the company on how to make money without going into too much details. BP is a document which includes BM and other documents (team, financial analysis, roadmap,…) Key activities, resources, partners, customer relationships, customer segments and channels, cost structure Because of better assets rotation Because they “lock the customer for a long period” giving time to sell more profitable products X X X X
  • Eduardo Larrain - Linkedin - Website 187 Individual test (2/2) Non-monetary markets e.g. Wikipedia Industry is expected to be stable in few months bceause it’sfinding new business models such as streaming Music, newspaper and consumer magazine publishing Growing thanks to the Digital revolution “Gamification”: eery part of our lives could eventually be turned into a game Free-to-Play is the freemium name model for games in which you charge for virtual goods