Business Models Mindtrek

Innovation and new business models in video games - learnings from the evolution of the Internet Tommi Pelkonen Strategist S A T A M A Amsterdam October 4, 2007 1

Satama in brief • Leading European interactive agency “We combine talent with • Headquarters in Helsinki, Finland • 400 experts in business development, design and technology technology to make work and • In 2006: 1000 projects delivered in 23 countries customer dialogue simple, fun and • Net revenues 2006: €35.8; Operating proﬁt €0.2 million. proﬁtable.” • In the Netherlands: 68 people, strong growth track Tampere Turku Stockholm SALES AND MOBILE PERFORMANCE Amsterdam Helsinki MARKETING EXPERTISE MARKETING SYSTEMS Düsseldorf Copyright September 30, 07 Satama. All rights reserved. 2

Leading digital services company Turnover by sector in 2006 Net revenues: €35.8 mEUR 3

Innovation and new business models in computer games • Internet - where are we in 2007? • Innovation and business modeling • Towards Blue Oceans • Games as services: threat or opportunity • Conclusions 4

Quick journey to internet growth 5

What is happening? “It’s only just begun” – this is just the 14,463,346 auctions beginning www.ebay.com 21 Nov 2006 200,000,000 blogs •1,1 Billion internet users – and expanding rapidly •Global presence, Almost 5,300,000 articles >100,000,000 videos global opportunity (100 languages) (65,000/day) •New ways of working •New ways of networking 9.8 •Evolution / million Transformation – from information 39 million users (Aug’07) residents to communication Copyright © 2007 Satama Interactive 6

Web 2.0 is rapidly shifting towards true productivity # 5. Copyright September 30, 07 Satama. All Lähde: Gartner, August 2007 rights reserved. 7

New era for media is dawning... The era of building brands namely through mass media advertising is over. We need to ﬁnd ways to get consumers to invite brands into their lives. BusinessWeek 8

Outcome... 9

Innovation and new business models in video games • Internet - where are we in 2007? • Innovation and business modeling • Towards Blue Oceans • Games as services: threat or opportunity • Conclusions 10

What is innovation? 11

What is innovation? 1. the process of making improvements by introducing something new 11

What is innovation? 1. the process of making improvements by introducing something new 2. the act of introducing something new: something newly introduced (The American Heritage Dictionary). 11

What is innovation? 1. the process of making improvements by introducing something new 2. the act of introducing something new: something newly introduced (The American Heritage Dictionary). 3. the process of translating new ideas into tangible societal impact (Krisztina Holly,Vice Provostt, UCSC) 11

What is innovation? 1. the process of making improvements by introducing something new 2. the act of introducing something new: something newly introduced (The American Heritage Dictionary). 3. the process of translating new ideas into tangible societal impact (Krisztina Holly,Vice Provostt, UCSC) 4. the introduction of something new. (Merriam-Webster Online) 11

What is innovation? 1. the process of making improvements by introducing something new 2. the act of introducing something new: something newly introduced (The American Heritage Dictionary). 3. the process of translating new ideas into tangible societal impact (Krisztina Holly,Vice Provostt, UCSC) 4. the introduction of something new. (Merriam-Webster Online) 5. a new idea, method or device. (Merriam-Webster Online) 11

What is innovation? 1. the process of making improvements by introducing something new 2. the act of introducing something new: something newly introduced (The American Heritage Dictionary). 3. the process of translating new ideas into tangible societal impact (Krisztina Holly,Vice Provostt, UCSC) 4. the introduction of something new. (Merriam-Webster Online) 5. a new idea, method or device. (Merriam-Webster Online) 6. the successful exploitation of new ideas (Department of Trade and Industry, UK). 11

What is innovation? 1. the process of making improvements by introducing something new 2. the act of introducing something new: something newly introduced (The American Heritage Dictionary). 3. the process of translating new ideas into tangible societal impact (Krisztina Holly,Vice Provostt, UCSC) 4. the introduction of something new. (Merriam-Webster Online) 5. a new idea, method or device. (Merriam-Webster Online) 6. the successful exploitation of new ideas (Department of Trade and Industry, UK). 7. change that creates a new dimension of performance (Hesselbein, 2002) 11

What is innovation? 1. the process of making improvements by introducing something new 2. the act of introducing something new: something newly introduced (The American Heritage Dictionary). 3. the process of translating new ideas into tangible societal impact (Krisztina Holly,Vice Provostt, UCSC) 4. the introduction of something new. (Merriam-Webster Online) 5. a new idea, method or device. (Merriam-Webster Online) 6. the successful exploitation of new ideas (Department of Trade and Industry, UK). 7. change that creates a new dimension of performance (Hesselbein, 2002) 8. A creative idea that is realized (Harvard Business School Press, 2004) 11

What is innovation? 1. the process of making improvements by introducing something new 2. the act of introducing something new: something newly introduced (The American Heritage Dictionary). 3. the process of translating new ideas into tangible societal impact (Krisztina Holly,Vice Provostt, UCSC) 4. the introduction of something new. (Merriam-Webster Online) 5. a new idea, method or device. (Merriam-Webster Online) 6. the successful exploitation of new ideas (Department of Trade and Industry, UK). 7. change that creates a new dimension of performance (Hesselbein, 2002) 8. A creative idea that is realized (Harvard Business School Press, 2004) 9. quot;The capability of continuously realizing a desired future statequot; (John Kao, The Innovation Manifesto, 2005) 11

What is innovation? 1. the process of making improvements by introducing something new 2. the act of introducing something new: something newly introduced (The American Heritage Dictionary). 3. the process of translating new ideas into tangible societal impact (Krisztina Holly,Vice Provostt, UCSC) 4. the introduction of something new. (Merriam-Webster Online) 5. a new idea, method or device. (Merriam-Webster Online) 6. the successful exploitation of new ideas (Department of Trade and Industry, UK). 7. change that creates a new dimension of performance (Hesselbein, 2002) 8. A creative idea that is realized (Harvard Business School Press, 2004) 9. quot;The capability of continuously realizing a desired future statequot; (John Kao, The Innovation Manifesto, 2005) 10. quot;The staging of value and/or the conservation of value.quot; (Daniel Montano 2006.) 11

think outside-of-the box 12

People assume that everything that is going to be invented must have been invented already. But it hasn’t. think outside-of-the box 12

four areas of innovation product & service innovation process innovation technology innovation business model innovation 13

technology innovation [Osterwalder (2006] 14

process innovation [Osterwalder (2006] 15

product & service innovation [Osterwalder (2006] 16

business model innovation [Osterwalder (2006] 17

E-commerce - process and business model innovation In short, greatest revolution of the internet was to enable direct dialogue between the manufacturer and consumers Source: Laudon & Traver, 2004 18

E-commerce - process and business model innovation Figure 2.3, Page 98 In short, greatest revolution of the internet was to enable direct dialogue between the manufacturer and consumers Source: Laudon & Traver, 2004 18

Business model? a business model describes the value an organization offers to various customers and portrays the capabilities and partners required for creating, marketing, and delivering this value and relationship capital with the goal of generating profitable and sustainable revenue streams 19

Key Ingredients of a Business Model Source: Laudon & Traver, 2004 20

business model framework WHAT INFRASTRUCTURE OFFER CUSTOMER VALUE PROPOSITION [Osterwalder (2004) The Business Model Ontology] 21

business model framework HOW WHAT INFRASTRUCTURE OFFER CUSTOMER PARTNER NETWORK CORE VALUE CAPABILITIES PROPOSITION ACTIVITY CONFIGURATION [Osterwalder (2004) The Business Model Ontology] 21

business model framework HOW WHAT TO WHOM INFRASTRUCTURE OFFER CUSTOMER PARTNER CUSTOMER NETWORK RELATIONSHIPS CORE VALUE CUSTOMER CAPABILITIES PROPOSITION SEGMENTS ACTIVITY DISTRIBUTION CONFIGURATION CHANNELS [Osterwalder (2004) The Business Model Ontology] 21

business model framework HOW WHAT TO WHOM INFRASTRUCTURE OFFER CUSTOMER PARTNER CUSTOMER NETWORK RELATIONSHIPS CORE VALUE CUSTOMER CAPABILITIES PROPOSITION SEGMENTS ACTIVITY DISTRIBUTION CONFIGURATION CHANNELS COST STRUCTURE [Osterwalder (2004) The Business Model Ontology] 21

business model framework HOW WHAT TO WHOM INFRASTRUCTURE OFFER CUSTOMER PARTNER CUSTOMER NETWORK RELATIONSHIPS CORE VALUE CUSTOMER CAPABILITIES PROPOSITION SEGMENTS ACTIVITY DISTRIBUTION CONFIGURATION CHANNELS COST REVENUE STRUCTURE STREAMS [Osterwalder (2004) The Business Model Ontology] 21

business model framework HOW WHAT TO WHOM INFRASTRUCTURE OFFER CUSTOMER PARTNER CUSTOMER NETWORK RELATIONSHIPS CORE VALUE CUSTOMER CAPABILITIES PROPOSITION SEGMENTS ACTIVITY DISTRIBUTION CONFIGURATION CHANNELS COST FINANCE REVENUE STRUCTURE STREAMS HOW MUCH PROFITS [Osterwalder (2004) The Business Model Ontology] 21

Case:Skype HOW WHAT TO WHOM “eBay” website deliver voice & free VoIP & value global video quality added services (non segmented) software internet development software large scale development low margin HOW MUCH PROFITS free voice-over-IP VoIP telephony & value-added services [Osterwalder (2004) The Business Model Ontology] 22

Five Primary Revenue Models Source: Laudon & Traver, 2004 23

Five Primary Revenue Models Table 2.2, Page 66 Source: Laudon & Traver, 2004 23

B2C Business Models Source: Laudon & Traver, 2004 24

B2C Business Models (cont’d) Source: Laudon & Traver, 2004 25

Innovative Business Models Source: Laudon & Traver, 2004 26

Innovative Business Models Table 2.5, Page 88 Source: Laudon & Traver, 2004 26

Operating Margin Growth in Excess of Competitive Peers compound annual growth rate over five years [Source: IBM, CEOs are expanding the innovation horizon: important implications for CIOs] 27

Beneﬁts Cited by Business Model Innovators percent of respondents [Source: IBM, Global CEO Study 2006] 28

reality: everything else than planned [Osterwalder (2006] 29

Here CEOs 10° reality: everything else than planned [Osterwalder (2006] 29

Here Here CEOs 10° Managers 60° reality: everything else than planned [Osterwalder (2006] 29

Ok Here Here CEOs 10° Managers 60° Staff 360° reality: everything else than planned [Osterwalder (2006] 29

MEDIA: Two-Sided Marketplace Production Supply Demand Advertiser Media Audience Demand Supply Attention Euros Middlemen Eyeballs What role can video games play in marketing? 30

From simple model into marketing planning complexity in 2007... R E A N Reach activities Mobile Free external Engage activities Activate=conversion Nurturing existing campaign links customers Targeted SEM Self service SEM Prestudy MSN Landing page 1 Logins Seasonal,etc. Banners O RSS feeds Partner sites Own Store linking to Landing page 2 N online store purchases LI SMS campaign Video Banners N Landing page n CRM Newsletter E Viral Banners marketing Adaptive landing Lead generation pages Program, Seeding Adaptive Subscriptions My Space flash banners Internal Links Other buy page? Podcasting You Tube Amazon etc. Google Indy Online Store Flickr Second Life Seeding purchases Yahoo Community Competition Seeding O F Seeding F Call centers LI On device demos Own Store N purchases E Channel sales Retail screens Indy Store purchases Instore Retail games Advertising, POS materials Partner Store Competition purchases Continuous analysis and metrics 31

Opportunity for video games.. 32

> market boundaries are not given > they are reconstructed by the actions & beliefs of industry players 34

Two worlds … 35

Blue Ocean Logic: The Core Principles Reconstruct Market Boundaries … overcome believes. Reach beyond existing Demand … go for uncontested space. COST Get the strategic VI VI sequence right … value [innovation] first. VALUE 36

Two worlds … Red Ocean Strategy Blue Ocean Strategy Compete in existing market space. Create uncontested market space. Beat the competition. Make the competition irrelevant. Exploit existing demand. Create and capture new demand. Make the value-cost trade-off. Break the value-cost trade-off. Align the whole system of a Align the whole system of a ﬁrm's strategic ﬁrm's activities with its activities in pursuit of choice of differentiation or low differentiation and low cost. cost. VALUE INNOVATION 37

Illustrate options with canvas 38

Innovation and new business models in video games • Internet - where are we in 2007? • Innovation and business modelling • Towards Blue Oceans • Games as services: threat or opportunity • Conclusions 39

Traditional media consuption metrics Media consumption in the US: 2007 (hours/week) Reading newspapers (not online) Reading magazines (not online) Watching TV Watching DVDs or VHS Listening to the radio (not online) Using the Internet for personal purposes 0 10 20 30 40 Early Adopters Mainstream Consumers Sidelined Citizens Source: Forrester Research, 2007 40

Gamer metrics • 69 % of American heads of households play computer and video games. The average adult woman plays games 7.4 hours per week in the US. The average adult man plays 7.6 hours per week. (ESA, 2006). 44 % of they play games online • The average MMORPG gamer (addicted or not) spends 20-25 hours per week MMORPGs, (Kimberly 41

Booming game markets... 42

...yet, business model in challenges 43

Case: Wii and the Blue Ocean 44

Wii: Strategy canvas Source: DFC Intelligence, Sep 2007 45

Wii: Strategy canvas 1. Wii will sell the most hardware units in Japan and could be the overall worldwide winner. However, the PS3 could be a strong second. Furthermore, by 2012 the PS3 may actually lead in software revenue even though the Wii has sold more units. 2. Under DFC's best case scenario for the Xbox 360, the system is in a virtual tie with both the Wii and the PS3. However, unless the Xbox 360 can kick it into gear in the fourth quarter and through 2008, the system will probably finish in a fairly distant third. A big challenge for the Xbox 360 is building a base outside North America. 3. The PS3 is looking to make a strong play for 2009 and beyond. For software revenue, the PlayStation 3 looks to be a solid platform for the 2009-2012 time period. Source: DFC Intelligence, Sep 2007 45

Strategy canvas for video games 10,0 7,5 5,0 2,5 Broadcast Television Internet media usage Ofﬂine video games Online video games Price Availability Portability Rich experience Ease of use 0 Selection Interactivity Community Personalisation 47

Focusing on customers Fitting the user needs  (utility)  Good Experience Bad Experience I tell 4 people I tell 18 people Pleasurable Easy to use experience (usability) (satisfaction) Copyright © 2007 Satama Interactive 49

Elements of a good experience I ﬁnd things where I expect them I like the brand and visual design I got exactly what I needed know It is nice to do things at I feel the service ‘understands’ me this location The Rich I saved a lot of time doing Experience things via the service I am impressed by the service I get things done more efﬁciently than by myself # 49. Copyright September 30, 07 Satama. All rights reserved. 50

Elements of a good experience I ﬁnd things where I expect them I like the brand and visual design I got exactly what I needed know It is nice to do things at I feel the service ‘understands’ me this location The Rich I had fun with this service I saved a lot of time doing Experience things via the service I am impressed by the service I want to recommend my friends I get things done more efﬁciently than by myself to use this service Any form of service / entertainment should lead to a relevant and rich experience # 49. Copyright September 30, 07 Satama. All rights reserved. 50

Video games - innovate and network • Video games industry need to innovate to continue on the growth track and reach new customers • Incremental innovations needs to be supplemented with consumer and rich experience-oriented innovations • The online generation lives online - games should be geared towards leveraging this networking, too. 51

Business Models Mindtrek

by Tommi Pelkonen

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