My presentation at Mindtrek 2007 in Tampere. Thanks to many contributors here, especially great thanks to Austria. Amazing how professionals can connect via their slides and thinking through these.

1. 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

2. 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

3. 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

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

5. 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

6. Quick journey to internet growth
5

7. Quick journey to internet growth
5

8. Quick journey to internet growth
5

9. Quick journey to internet growth
5

10. Quick journey to internet growth
5

11. Quick journey to internet growth
5

12. Quick journey to internet growth
5

13. 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

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

15. 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

16. 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

17. Outcome...
9

18. Outcome...
9

19. Outcome...
9

20. 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

21. What is innovation?
11

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

23. 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

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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

30. 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

31. 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

32. think outside-of-the box
12

33. 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

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

35. technology innovation
[Osterwalder (2006]
14

36. process innovation
[Osterwalder (2006]
15

37. product & service
innovation
[Osterwalder (2006]
16

38. business model innovation
[Osterwalder (2006]
17

39. 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

40. 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

41. 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

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

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

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

45. 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

46. 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

47. 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

48. 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

49. 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

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

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

52. B2C Business Models
Source: Laudon & Traver, 2004
24

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

54. Innovative Business Models
Source: Laudon & Traver, 2004
26

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

56. 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

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

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

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

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

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

62. 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

63. 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

64. Opportunity for video games..
32

65. Opportunity for video games..
32

66. Opportunity for video games..
32

67. Opportunity for video games..
32

68. Opportunity for video games..
32

69. Opportunity for video games..
32

70. Opportunity for video games..
32

71. Opportunity for video games..
32

72. 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
33

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

74. Two worlds …
35

75. 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

76. 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

77. 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

78. 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

79. 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

80. 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

81. 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

82. Illustrate options with canvas
38

83. 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

84. 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

85. 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

86. Booming game markets...
42

87. Booming game markets...
42

88. Booming game markets...
42

89. Booming game markets...
42

90. Booming game markets...
42

91. Booming game markets...
42

92. Booming game markets...
42

93. Booming game markets...
42

94. Booming game markets...
42

95. Booming game markets...
42

96. ...yet, business model in challenges
43

97. ...yet, business model in challenges
43

98. ...yet, business model in challenges
43

99. ...yet, business model in challenges
43

100. Case: Wii and the Blue Ocean
44

101. Case: Wii and the Blue Ocean
44

102. Case: Wii and the Blue Ocean
44

103. Case: Wii and the Blue Ocean
44

104. Case: Wii and the Blue Ocean
44

105. Case: Wii and the Blue Ocean
44

106. Case: Wii and the Blue Ocean
44

107. Case: Wii and the Blue Ocean
44

108. Case: Wii and the Blue Ocean
44

109. Case: Wii and the Blue Ocean
44

110. Case: Wii and the Blue Ocean
44

111. Case: Wii and the Blue Ocean
44

112. Case: Wii and the Blue Ocean
44

113. Case: Wii and the Blue Ocean
44

114. Case: Wii and the Blue Ocean
44

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

116. 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

117. 46

118. 46

119. 46

120. 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

121. 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

122. 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

123. 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

124. 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

125. 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

126. 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

127. 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

128. 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
48

129. Focusing on customers
Fitting the user needs
(utility)
Pleasurable Easy to use
experience (usability)
(satisfaction)
Copyright © 2007 Satama Interactive
49

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

131. 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

132. Elements of a good experience
The
Rich
Experience
# 49. Copyright September 30, 07 Satama. All
rights reserved.
50

133. 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

134. 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

135. 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

136. Tommi Pelkonen
tommi.pelkonen@satama.com
tommi.pelkonen@gmail.com
Copyright © 2007 Satama Interactive
52