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Biz model 4 method of value capture

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These slides summarize a method of value capture for business models as part of a course on business models for hi-tech products

These slides summarize a method of value capture for business models as part of a course on business models for hi-tech products

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  • As if we paid a movie theater for the amount of time we smiled or laughed while watching a comedy
  • What couldmicrosoft done differently?
  • What are the advantages and disadvantages of selling integrated solutions
  • Why is it difficult for individual’s to receive payments with credit card? How many of you own a credit card?
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    • 1. Methods of Value Capture(and some value proposition andscope of activities)A/Prof Jeffrey FunkDivision of Engineering and Technology ManagementNational University of Singapore
    • 2. Business Model Value proposition: what to offer and how todifferentiate Customer selection: whom to serve and not serve Value capture: dominant sources of revenue Scope of activities: what activities to carry out andwhat relationships to have Strategic control: how to sustain profitability (e.g.,how to control architecture and standards)
    • 3. Remember! Consistency Among Elements and anIterative Process are Critical Customer selection: whom to serve and notserve Value proposition: what to offer and how todifferentiate Value capture: how to make money Scope of activities: what activities andrelationships to have Strategic control: how to sustainprofitability
    • 4. For example, Method of ValueCapture and Value Proposition Method of value capture related to needs asis value proposition, customers like to payfor those things that are important to them As noted last week, key dimensions ofperformance change over time, this requireschanges in method of value capture◦ As dimensions of performance change, customersmonitor different dimensions and thus are willingto pay for different things
    • 5. In Other Words In choosing method of value capture, wewant to maximize potential revenues whilemaking all of our customers happy
    • 6. Outline Overview of Value Capture Examples◦ Rolls Royce Jet Engines◦ Transport: Alstom Transport, Electric Vehicles◦ Computers, Software, and Internet◦ Video◦ Mobile Phones and Services Top Ten Business Models of 2010 Conclusions
    • 7. Methods of Value CaptureRevenue Model Basic IdeaCommission Fees levied on transactions where fees arebased on level of transactionAdvertising End users subsidized by advertisingMarkup Value added in salesProduction Value added in productionReferral Fees for referring customers to a businessSubscription Fees for unlimited useFee for Service Fee for metered service
    • 8. Methods of Value Capture (more detailed ones)Dominantrevenue modelBasic idea VariantsCommission Fees levied on transactionsbased on the size of thetransactionBuy / Sell Fulfill ment, Market Exchange,Business Trading Community, BuyerAggregator, Distribution Broker, Virtual Mall,Metmediary, Auction Broker, Reverse Auction,Classifieds, Search Agen t, Bounty Broker,Matchmaker, Peer-to-peer Content ProviderAdvertising End-users subsidized byadvertisingGeneralized Portal, Personalized Portal,Specialized Portal, Attention / IncentiveMarketing, Free Model, InfomediaryRegistration Model, Recommender System,Bargain Discounter, Community ProviderMarkup Value added in sales Virtual Merchant, Catalogue Merchant, Clickand Mortar, Bit VendorProduction Value added in production Manufacturer Direct, Content Producer, E-Procurement, Networked Utilit y Provider, BrandIntegrated ContentReferral Fees for referring customers toa businessLead GeneratorSubscription Fees for unlimited use ISPs/OSPs, Last Mile Operators, ContentCreatorsFee-for-service Fees for metered service Service Provider, B2B Service Provider, ValueChain Service Provider, Value Chain Integrator,Audience Broker, Collaboration PlatformProvider, Application Service ProviderSource: Afuah and Tucci, Internet Business Models and Strategies
    • 9. At What Price? After choosing one of the categories onthe previous slides, an additional issue is:how much to charge for each element ofthe product or service? What level of margins? Higher margins are needed when◦ cost of sales◦ cost of R&D is high◦ maintenance is high and given for free
    • 10. Has to do With Cost Structure What is your cost structure?◦ Cost of delivered product or service Internal costs Materials and outside services◦ R&D◦ Sales◦ Maintenance (if free to user) Fixed costs vs. variable costs◦ High fixed costs make volumes very important◦ But can also provide barrier to entry
    • 11. Gross marginsfor differenttypes of diskdrives andcomputers
    • 12. For Many Electronic Products The cost of assembly is very small,perhaps 5% of total manufacturing costs Components make up 95% ofmanufacturing costs Other costs can be very high◦ Development◦ Distribution◦ Licensing◦ And more
    • 13. Cross Subsidization is Common in ManyIndustries More income from complements than original product◦ blades than razors◦ printer cartridges than printer machines◦ copier toner than copier machine◦ i-pods (MP3 players) than music (iTunes)◦ peripherals than computers (IBM mainframe) More income from after-sale service than from product,particularly when switching costs are high◦ Software, elevators, escalators, nuclear fuel, power generationequipment More income from one customer than another customer
    • 14. Cross Subsidization Between Customers is CommonIndustry Product Dual Customers Discount forReal Estate Property sales Buyer, seller BuyerRentals Renter, owner RenterMedia Newspapers,MagazinesReader, advertiser ReaderNetwork television Viewer, Advertiser ViewerPortals and WebPublicationsWeb surfer,advertiserWeb surferShopping Malls Merchant, shopper ShopperPaymentSystemCharge/debit card Cardholder,merchantcardholder
    • 15. What if Another Firm Begins OfferingComplements for Your Product? Another firm begins offering inexpensive◦ blades for your razors◦ printer cartridges for your printers◦ toner for your copiers◦ MP3 players for your iTunes music site Another firm begins offering inexpensive services foryour hardware◦ Software, elevators, escalators, nuclear fuel, power generationequipment You might lose your key revenue stream and thus yourprofitability
    • 16. Outline Overview of Value Capture Examples of Value Capture Methods◦ Rolls Royce Jet Engines◦ Transport: Alstom Transport, Electric Vehicles◦ Computers, Software, and Internet◦ Video◦ Mobile Phones and Services Top Ten Business Models of 2010 Conclusions
    • 17. Rolls Royce Jet Engines A leader in providing jet engines foraircraft manufacturers Where do its revenues come from, i.e.,what is its method of value capture? Most of its revenues used to come fromsale of engines But over time, things have changed………
    • 18. Rolls Royce Jet Engines Where are revenues?◦ Selling engines or spare parts?◦ Servicing the engines? Investment analysts estimate that someengine suppliers◦ get seven times as much revenue from servicingand selling spare parts as from selling engines◦ Do they sell engines at a loss? hard to know dueto long-term contracts◦ The problem is that these large margins haveattracted independent servicing firms (andengine-makers after each other’s business)Source: Economist, January 8, 2009. Britains lonely high-flier
    • 19. Rolls Royce’s New Method ofValue Capture Instead of selling first engines and then partsand service to airlines, Rolls-Royce◦ receives a fee for every hour that an engine runs◦ promises to maintain it and replace it if it breaksdown “They aren’t selling engines, they are sellinghot air out the back of an engine,” says aninvestment analyst (i.e., new valueproposition) More than half of its engines inservice are covered by such contracts, as areabout 80% of those it is now selling.
    • 20. This New Method of Value CaptureRequires New Capabilities Rolls Royce continuously monitors performance of its3,500 jet engines around the world,◦ raising an almost insurmountable barrier to any rival(method of strategic control) This data enables it to predict when engines are morelikely to fail, letting customers schedule enginechanges◦ fewer emergency repairs and fewer unhappy passengers The data are equally valuable to Rolls-Royce◦ Spotting problems early helps it to design and build morereliable engines or to modify existing ones◦ Aided improvements in fuel efficiency and extended theoperating life of engines tenfold (to about ten years betweenmajor rebuilds)
    • 21. Outline Overview of Value Capture Examples◦ Rolls Royce Jet Engines◦ Transport: Alstom Transport, Electric Vehicles◦ Computers, Software, and Internet◦ Video◦ Mobile Phones and Services Top Ten Business Models of 2010 Conclusions
    • 22. Alstom Transport (1) Alstom is a leading provider of transportequipment and (e.g., rail) solutions in the world Problems with train downtime caused railcompanies to demand and pay for lowerdowntimes London Underground specified in a contract that96 trains be available for service each day This required Alstom to gradually take overcustomer’s operational activities and to redesignthe system for lower downtime Should Alstom charge for time and distance thattrains travel?
    • 23. Alstom Transport (2) Another change Alstom made to supportlower downtime of its transport division wasto create two customer-facing divisions:◦ Alstom Systems provides turnkey solutions fortrains, signaling systems and maintenance services◦ Alstom Services offers operational services, such astrain maintenance, technical support, productupgrades and renovation This change represents a form oforganizational capability. For example,feedback from Alstom Services enablesAlstom’s Systems design better turnkeysystems
    • 24. Similar Examples (1) Many providers of◦ mobile phone infrastructure providers (e.g.,Ericsson)◦ electrical generating equipment◦ nuclear fuel◦ manufacturing equipment are selling services (value proposition)and getting paid (method of valuecapture) for doing services
    • 25. Similar Examples (2) These providers of equipment and serviceknow the equipment and service better thanthe customer – thus they do the service One reason they know the equipment andservice is because they spend a lot on R&D They spend a lot on R&D because they sellsystems to many customers Related to method of strategic control◦ economies of scale in R&D◦ covered a few weeks ago
    • 26. Remember Changes in business models often causethe shares of firms to change…….. Change creates opportunities
    • 27. Exceptions Some providers of services design their own systemsand do their own R&D This is common in Japan◦ NTT DoCoMo in mobile phone services◦ Japan Railways (JR) in train services◦ NTT in Wireline phone services This leads to high R&D costs per sales and thus highcosts for final services One reason they can do this is because of high barriersto entry for foreign firms
    • 28. Outline Overview of Value Capture Examples◦ Rolls Royce Jet Engines◦ Transport: Alstom Transport, Electric Vehicles◦ Computers, Software, and Internet◦ Video◦ Mobile Phones and Services Top Ten Business Models of 2010 Conclusions
    • 29. How About Electric Vehicles? Do potential users want to pay for electricvehicles in same way they pay for regularcars (i.e., internal combustion engines)?◦ Separately pay for cars and for electricitycharging◦ But what if there are no charging stations? Alternative business model◦ What if users mostly pay for use of car, i.e., payfor miles driven?◦ Could do this for rental or ownership◦ Then suppliers have incentive to provide goodcoverage of charging stations (just like mobilephone companies have incentive to providegood coverage of base stations)
    • 30. Two Distinct Choices for Electric VehiclesSell electric vehicles Sell miles drivenCustomerselectionConventional customer Risk averse customerValuePropositionProvide electric vehicle Provide driving withelectric vehicleScope ofActivitiesDesign and makeautomobileManage chargingstationsValue Capture Receive payment forautomobileReceive payment formiles drivenMethod ofStrategic ControlHigh entry cost fordesign/manufacture ofautoHigh entry cost ofcharging stations
    • 31. Outline Why do you think Singapore might be a better placefor the “sell miles driven” business model than doingit in Malaysia, Indonesia, or the U.S.?
    • 32. Outline Overview of Value Capture Examples◦ Rolls Royce Jet Engines◦ Transport: Alstom Transport, Electric Vehicles◦ Computers, Software, and Internet◦ Video◦ Mobile Phones and Services Top Ten Business Models of 2010 Conclusions
    • 33. Computers (1) Most of us buy computers at retail outletsand retail outlets pay the computermanufacturers But this is just the last step in a longprocess of modification◦ firms have modified methods of value capture(and other aspects of biz model) many timesboth to survive and find the most profits Each “discontinuity” has involved a newmethod of value capture◦ Also differences between firms for the samediscontinuity
    • 34. Computers (2) Mainframe suppliers such as IBM used tolease computers and software for amonthly fee◦ this low monthly fee and IBM’s large softwarelibrary created a barrier to entry for othersuppliers Mini-computer suppliers found a niche byselling computers and providingdocumentation for engineers andscientists who developed their ownsoftware
    • 35. Computers (3) PC suppliers took mini-computer method ofvalue capture one step further◦ More documentation in the form of more “opensystem,” which enabled greater choice of softwarefor users◦ Purchased microprocessors, other ICs, softwarefrom other firms, sold computers through retailoutlets◦ Low development costs, no sales people, andhigher volumes enabled them to have lowermargins (see next slide) Software suppliers tried various methods ofvalue capture◦ Microsoft received licensing fee for each PC sold
    • 36. Lower grossmargins formini thanmainframeand evenLower forPCs
    • 37. Computers (4) PC software◦ IBM offered Microsoft a lump sum paymentfor OS◦ Microsoft wanted a licensing fee per PC◦ What are the advantages and disadvantagesof each approach? Now, service revenues are now greaterthan licensing fees (see later slide) forsoftware
    • 38. Software is moving towards services
    • 39. Service/Usage Fees are even more Importantwith Software as a Service (SaaS) Value proposition◦ Provides software for lower price than packaged software Customer selection◦ Small organizations (security software is exception) Scope of activities◦ No installation activities, instead a focus on delivering newproducts/services Value capture: subscription/usage fees as opposed tohigh initial cost of packaged software and installation Utility/Cloud Computing: Complete outsourcing of ITto utilities (similar to electricity)
    • 40. Outline Overview of Value Capture Examples◦ Rolls Royce Jet Engines◦ Transport: Alstom Transport, Electric Vehicles◦ Computers, Software, and Internet◦ Video◦ Mobile Phones and Services Top Ten Business Models of 2010 Conclusions
    • 41. Internet Many Examples of New Methods of Value Capture inInternet Will focus on one here, PayPal, and some others later
    • 42. PayPal (1) Problem addressed by PayPal’s service◦ Difficult for individuals to receive payments with creditcards First method of value capture◦ Although always free to senders, it was initially free toreceivers and PayPal planned to use e-mail as identifierand make money from interest when receivers left moneyin accountsThe PayPal Wars: Battles with eBay, the Media, the Mafia, and the Rest of Planet Earth by Eric M. Jackson
    • 43. PayPal (2) Resulting Problem◦ Receivers quickly removed cash and used credit cards tomake payments◦ PayPal was forced to pay credit card fees (about 2%) sinceusers didn’t have any cash in their accounts Second method of value capture◦ Charge large receivers (>$500 in six months) transactionfees◦ Large receivers must upgrade or cannot receive paymentsvia credit cards
    • 44. Outline Overview of Value Capture Examples◦ Rolls Royce Jet Engines◦ Transport: Alstom Transport, Electric Vehicles◦ Computers, Software, and Internet◦ Video, eBooks◦ Mobile Phones and Services Top Ten Business Models of 2010 Conclusions
    • 45. Producers of Videos/Movies Theater tickets from about 1900 Broadcast television ad revenues from late 1940s Cable (from 50s) & satellite (from 90s) subscriptionfees Rental and sales income from VHS from late 1970s,from DVDs in 1990s◦ Rental stores pay movie companies fixed fee or percentageof rental/sales income◦ Netflix extended this model to mail delivery service andRedbox extended it to rental kiosks in 2000s Internet services◦ Big changes occurring now
    • 46. Internet Services Independent sites control most of the Internetbusinesses, but some of them are owned by contentowners/broadcasters Movies/programs mostly viewed on computers Three methods of value capture◦ Sell digital movies (e.g., Amazon, Apple iTunes)◦ Provide movies/programs for free, make money on ads(Hulu, YouTube, CBS)◦ Subscription services (Netflix, TV Everywhere) Innovations (and new methods of value capture)are also needed in television receivers◦ Google TV◦ Apple TVSource: Netflix, valuing a new business model, HBS Case 9-113-018
    • 47. Outline Overview of Value Capture Examples◦ Rolls Royce Jet Engines◦ Transport: Alstom Transport, Electric Vehicles◦ Computers, Software, and Internet◦ Video, eBooks◦ Mobile Phones and Services Top Ten Business Models of 2010 Conclusions
    • 48. What about e-Books? If you are an online book provider, shouldyou sell files for a specific reader or othertypes of files? Should you sell your own brandedreaders? Should you sell or rent books? What percentage of revenues should youshare with publisher (or author) What should be the price? Who sets price?◦ Online book provider: may sell low and at aloss to promote sales of readers◦ Publisher: may set high price to discourage saleof eBooks
    • 49. What about e-Books? (2) In the long run………. Libraries and stores (i.e., private libraries)can rent out individual books to the publiconline (i.e., anywhere in the world) While it takes a while for users to returnphysical books, a copy of an e-book couldbe returned much faster This would lead to much lower rentalprices (perhaps daily rental fees) and thus◦ a much larger rental market◦ and perhaps a smaller purchase market
    • 50. Outline Overview of Value Capture Examples◦ Rolls Royce Jet Engines◦ Transport: Alstom Transport, Electric Vehicles◦ Computers, Software, and Internet◦ Video◦ Mobile Phones and Services Top Ten Business Models of 2010 Conclusions
    • 51. Phone Manufacturers Until recently, traditional cost plus fee pricing Strategic control: Economies of scale in R&D providedadvantages to large manufacturers such as Nokia Emergence of modular design/vertical disintegration hasreduced cost of R&D and thus enabled new entry(Apple, Google) More importantly, other revenues are emerging andphone manufacturers want some of these revenues◦ Content, Application, Advertising How can phone manufacturers obtain some of these newrevenues?
    • 52. Service Providers Very high fixed costs: Subsidize phones to attract newsubscribers Voice era: combination of subscription & fee for service SMS and roaming: is lucrative market in which prices aremuch higher than are costs Other revenues are emerging and service providers wantand need some of these revenues (think of wirelinetelecom providers)◦ Content, Application, Advertising How can service providers obtain some of these newrevenues?
    • 53. Outline Overview of Value Capture Examples◦ Rolls Royce Jet Engines◦ Transport: Alstom Transport, Electric Vehicles◦ Computers, Software, and Internet◦ Mobile Phones and Services Top Ten Business Models of 2010 Conclusions
    • 54. Conclusions (1) New technologies, new markets, and new levels ofvalue (dis)integration often require new methods ofvalue capture But there are no simple answers to the best methods ofvalue capture Of course you want to maximize revenue, but withoutlosing customers and collaborators One firm’s method of value capture depends on◦ method of value capture by competition, collaborators◦ customer needs
    • 55. Conclusions (2) Contrasting industries and analyzing whether methodsof value capture can be borrowed from other industriesis a good place to start Also look for consistency among different elements(customer selection, method of value capture, valueproposition, scope of activities) of business model
    • 56. For Your Presentations Do not just tell me the sources of revenue for your firm◦ Identifying these revenue streams is just one step in youranalysis Analyze alternative methods of value capture. As statedon previous slide◦ Contrasting industries and analyzing whether methods of valuecapture can be borrowed from other industries is a good placeto start◦ Also look for consistency among different elements (customerselection, method of value capture, value proposition, scope ofactivities) of business model
    • 57.  Appendix
    • 58. Early Years of Mobile Internet(<2004) Japanese service providers◦ Charged subscription fee (5 SGD/month) and feefor service (for data downloaded)◦ Charged monthly fee for content and gave about90% to content providers in micro-paymentservice. Encouraged content providers to modifycontent for mobile phones◦ Offered inexpensive mail services European and U.S. service providers◦ Did not devise micro-payment service◦ Expected content providers to devise own methodof value capture◦ No growth occurred
    • 59. Inexpensive Mail Facilitates Browsing (1) Users subscribe to mail services and click on URLsinside mail to access additional information Many content providers use such mail service to increasethe number of visitors Such mail services are more important for phones thanfor PCs because◦ Phones have inferior user interfaces, particularly in early 2000s Japanese service providers made mail services astandard function on all mobile phones by year 2000 Western service providers did not introduce such mailservices because they did not want to cannibalize theirSMS revenues
    • 60. Inexpensive Mail Facilitates Browsing (2) Example: new Japanese fashion company Xavel (sitename is Girls Walker)◦ Offers “mail magazines” that are written by 3rd parties◦ Xavel does not have to pay to send mail◦ Users pay less than $0.01 to receive mail◦ Links to fashion products in the fashion-related mail magazineshas led to sales of fashion-related products (cosmetics, perfume,vitamins, clothing)◦ <1% of mail magazine readers purchased products in 2004◦ Achieved greater than US$ 40 M in sales and 4M$ in profits infiscal year ending September 2004
    • 61. Responses by U.S. and European ServiceProviders by 2004 Began offering micro-payment system and sharingsome content fees with content providers But differences remained. U.S. and European serviceproviders◦ only shared about 50% of revenues with content providers◦ did not provide inexpensive mail services since they did notwant to cannibalize SMS revenues◦ could not solve many standards-related problems and thuscould not offer sophisticated content and applications. Theseapplications and content had to wait until phones hadprocessing power and memory sufficient for PC Internetstandards
    • 62.  But why Couldn’t NTT DoCoMo Export its i-modeService?
    • 63. NTT DoCoMo’s Efforts to Export i-Mode Attempted to make its i-mode service a globalstandard Needed to but failed to create a critical mass of◦ Service providers◦ Phone manufacturers◦ Content providers◦ Users Only convinced a few small service providers andphone manufacturers to adopt i-mode
    • 64. Key Questions by Western PhoneManufacturers when they Considered i-Mode Will the market be large for i-mode?◦ Will many service providers adopt i-mode? Can we make profits? i.e., method of value capture◦ Doesn’t NTT DoCoMo control everything in Japan?◦ Isn’t this why Japanese phone manufacturers don’t make muchmoney in Japan?◦ Also, aren’t development costs very high for i-mode phones?◦ If costs are high and benefits are low, why should we supporti-mode?
    • 65. NTT DoCoMo’s Mistakes Didn’t hire Western executives before creating globalstrategy Believed that technology (e.g., c-HTML) was thereason for i-mode’s success Underestimated difficulties of creating critical mass ofservice providers and phone manufacturers outside ofJapan Didn’t modify i-mode for outside Japan Didn’t work with Western press well Attempted to be the sole source of information on i-mode and mobile Internet in Japan