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WEB-BASED
                  BUSINESS MODELS
                  Slides of class #1 #2 #3 #4 – February 2013
                  Prof. Eduardo Larrain

Eduardo Larrain - Linkedin - Website                            1
This lecture was taught at a French business school by Eduardo Larrain




                           Eduardo Larrain

                           •    HEC 2005 – Strategic Management

                           •    Founder of an Internet start-up called Kel Quartier

                           •    Strategy consultant at Roland Berger Strategy Consultants and Atos – 40 projects




Eduardo Larrain - Linkedin - Website                                                                               2
Agenda of the web-based business model lecture




1. What’s the web? …………………………………………………………………………………………………………………………………………………….………                                            4

2. What’s a business model? ……………………………………………………………………………………………………………………………………….…….. 16

3. Why study Internet-based business models? ……………………………………………………………………………………………………….……..… 23

4. What are the key elements of a business model?

        • Value proposition and revenue streams ………………………………………………………………………………………………………….….. 40

        • Drill-down of key Entertainment markets: music, video games, book publishing ………………………………….………….. 82

        • Customer channels, customer relationships, key partners, activities, resources, cost structure …….....….……….….. 115

5. What are the business models of Internet heavyweights: Facebook, Google, Zynga, Linkedin, Groupon ……….…………… 130

6. What are the most promising business models among the world’s most valuable companies: Digital 100, Twitter ..…… 173

7. Conclusion and farewell ………………………………………………………………………………………………………………………………………………… 184

8. Appendix: group project and individual test ………………………………………………………………………………………………………………..... 185




Eduardo Larrain - Linkedin - Website                                                                                            3
What’s the web




Eduardo Larrain - Linkedin - Website                    4
What’s the Web?                                                                               ICT

                                                                                        Internet

                                                                                     Web
Definitions

• Web (or World Wide Web or WWW) is a global set of documents, images and other resources, logically
  interrelated by hyperlinks.


                                       Web = HTTP, HTML, CSS, JPEG,…


• Internet (or Net) is a global system of interconnected computer networks that use the standard Internet
  protocol suite (TCP/IP) to serve billions of users worldwide. It is a network of networks that carries an
  extensive range of information resources and services, such as the inter-linked hypertext documents of
  the Web and the infrastructure to support email.


                                       Internet = Web + mail + data transfer

                                                                          e.g. FTP incl. P2P, VoIP, streaming
                                                                          media, video conferencing, mobile
                                                                          apps (not HTML 5 based)
• Information and Communication Technology (ICT) is the use of computers and telecommunications
  equipment (IT) which also encompasses other information distribution technologies such as television and
  telephones (C).

                                              ICT = Internet + IT + C

Wikipedia

Eduardo Larrain - Linkedin - Website                                                                            5
Is Internet only about Web presence?


• In the European Union, two-thirds of all businesses have a Web presence (McKinsey, 2011)

• Exhibit - Looking at top 100 French websites:
                                                                                                          NEWS


                                                                                 ECOMMERCE

                                                        SOCIAL
                                                        MEDIA

                                                                     BLOGS



                                                                                                                 PORN


                                                                                                                        TV




                                          SEARCH



                                                                               VIDEO


                                                                                       PROFESSIONAL



                                                                                                      EVERYDAY
                                                                                                        LIFE



        LEGEND

           Category

           Ranking

           Unique
           visitors per
           month




Titiou Lecoq / Diane Lisarelli, Encyclopédie de la Web Culture, January 2011

Eduardo Larrain - Linkedin - Website                                                                                         6
Is Internet only about Web presence?


• Exhibit - Looking at top 100 websites in UK, France, Germany, Italy, Spain, Switzerland, Brazil, US and
  Australia
   Number of unique users, January 2010




BBC, SuperPower: Visualising the internet, January 2010

Eduardo Larrain - Linkedin - Website                                                                        7
Is Internet only a distribution channel for online retail/ecommerce?


• In retail alone, G-20 consumers researched online and then purchased offline (ROPO) more than $1.3
  trillion in goods in 2010




Boston Consulting Group, The Internet Economy in the G-20, March 2011

Eduardo Larrain - Linkedin - Website                                                                   8
Internet is not just a distribution channel or
                                 just about Web presence




Eduardo Larrain - Linkedin - Website                       9
Is Internet an Industry?


• 75% of the economic impact of the Internet arises from traditional companies that don’t define
  themselves as pure Internet players (McKinsey, 2011)
• Exhibit - Looking at top 100 USdes grandes through sociétés US
                 Profits des 100 plus 100 plus grandes time:
                 Chiffre d'affaires companies sociétés US
100%
  100%                                                                                                   Conglomerate
                                                                                                    Conglomerate


                                                                                                    Professional, Scientific, and Technical Services Services
                                                                                                          Professional, Scientific, and Technical
 90%
   90%
                                                                                                          Finance and Insurance
                                                                                                    Finance and Insurance

 80%
   80%                                                                                                    Information
                                                                                                    Information


 70%                                                                                                HealthHealth Care andAssistance
                                                                                                          Care and Social Social Assistance
   70%
                                                                                                    Wholesale Trade Trade
                                                                                                         Wholesale
 60%
   60%
                                                                                                    Retail Trade Trade
                                                                                                           Retail


 50%                                                                                                        Utilities
                                                                                                    Utilities
   50%
                                                                                                          Transportation and Warehousing
                                                                                                    Transportation and Warehousing
 40%
   40%
                                                                                                         Manufacturing Telecommunication
                                                                                                    Manufacturing Telecommunication

 30%
   30%                                                                                                   Manufacturing Automotive
                                                                                                    Manufacturing Automotive

                                                                                                         Manufacturing
                                                                                                    Manufacturing
 20%
   20%
                                                                                                    Metal Métaux
                                                                                                    Métaux
 10%
   10%
                                                                                                    PétrolePétrole
                                                                                                    Petroleum

                                                                                                          Agriculture, Forestry, Fishing and Hunting
  0%
   0%                                                                                               Agriculture, Forestry, Fishing and Hunting
    1955
      1955      1960
                 1960      1965
                            1965      1970
                                      1970   1975
                                             1975    1980
                                                    1980     1985
                                                            1985      1990 1995
                                                                    1990     1995 2000
                                                                                     2000 2006
                                                                                             2006
Analysis based on Fortune 500, 2007

Eduardo Larrain - Linkedin - Website                                                                                                              10
Internet is not just an industry

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




Eduardo Larrain - Linkedin - Website                        11
Internet is a technology on which are based numerous activities across
industries


Internet-based activities


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




McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011

Eduardo Larrain - Linkedin - Website                                                             12
Internet accounts for 3-4% of worldwide GDP



Exhibits – Economic impact of the Internet by McKinsey and BCG




McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011
Boston Consulting Group, The Internet Economy in the G-20, March 2011

Eduardo Larrain - Linkedin - Website                                                             13
Though, the Internet economic impact goes beyond GDP generating
consumer surplus when there is not monetary reward


Real economic impact of the Internet


• Free services value are excluded from GDP:

          • Emails

          • Search

          • Collaborative services (wikis, blogs and social networks)



• Similar to housewife activities excluded from GDP

• E.g.

          • Craigslist has generated consumer value though reducing classified ad revenues of the US
             newspaper industry

          • Facebook has generated consumer value




McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011

Eduardo Larrain - Linkedin - Website                                                                   14
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                                                                         15
What’s a business model




Eduardo Larrain - Linkedin - Website                 16
What’s a business model?



Basic definition




                         • A business model is a coherent way to manage and develop an economic activity.




                        • A business model describes the rationale of how an organization creates, delivers,
                          and captures value.




                         • A business model describes how an enterprise proposes to make money.




Eduardo Larrain - Linkedin - Website                                                                           17
What’s a business model?



Very basic definition


                         • A business model is “show me the money”.
                         • It is a simple expression of the strategy of the company on how to make money
                           without going into too much details




   • In French, we use the english word « business model » rather than translations:
        • Modèle économique
        • Modèle d’activité
        • Modèle d’affaires
        • Modèle de revenus, modèle de profit



Eduardo Larrain - Linkedin - Website                                                                       18
A Business Model is not a Business Plan



What’s a Business Plan?

• A Business plan is a document that describes how a project can be implemented.


• A Business plan usually aims at selling the project because “you can’t have a funding without a Business
  Plan”


• A Business plan usually includes a description of:
        • The team
        • The Business Model
        • A Financial Analysis (e.g. financial spreadsheets)
        • A Business Environment Analysis (e.g. market, competitors and competitive advantage analysis)
        • An Implementation roadmap (e.g. operation plan, milestones)
        • A Risk analysis (e.g. SWOT, Critical Success Factors)




Eduardo Larrain - Linkedin - Website                                                                         19
A Business Model is not Strategy



What’s Strategy?

• Strategy is a plan of action and the allocation of resources necessary for carrying out these goals


• Michael Porter’s view on Strategy:


        • Strategy is a plan to differentiate the company and give it a competitive advantage


        • “Competitive strategy is about being different. It means deliberately choosing a different set of
          activities to deliver a unique mix of value”


        • Then decisions can only be defined as strategic if they involve consciously doing something
          “differently” from competitors and if that difference results in a sustainable advantage
                • e.g. making existing methods more efficient (“operational efficiency”) are not strategic since
                  they can be easily copied by others




Eduardo Larrain - Linkedin - Website                                                                               20
A business model describes what makes an company unique looking from the
value propositions to cost structure


Key elements of a business model




Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010

Eduardo Larrain - Linkedin - Website                                       21
A business model is an ecosystem



Rationale beyond those key elements




                                                Cost-side                 Value-side




Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010

Eduardo Larrain - Linkedin - Website                                                   22
Why study Internet-based business models




                                       Business   Internet-
                                        Models     based




Eduardo Larrain - Linkedin - Website                          23
Business models have been studied for 30 years



Traditional business models: trying to explain success with profit models
 1. Customer Solutions                                         2. Product Pyramid                                             3. Multi-Component
 Invest to know the customer, create a solution, develop the   At the base are products and services that are low price and   Several of the components represent a disproportionate
 relationship                                                  high volume; at the top products and services that are high    share of the profits
 E.g. GE                                                       price and low volume                                           E.g. business seminars at hotels, advertising (Google, Yahoo,
                                                               E.g. Air France Group: Air France for business and long haul   Facebook)?
                                            Profit zone
      Profit                                                   flights, Transavia for leisure and Hop! for local flights
                                                                  Profit




                                                                                                                                            Basic
                                                                                                                                           activity
  0

                                                                                                                                                               Other components
                                                   Time                                                          Time


 4. Switchboard                                                5. Time Profit                                                 6. Block Buster profits
 Multiple sellers communicating with multiple buyers. The      Takes advantage of uniqueness, profit margins erode as         Revenue realized is so powerful and fast that in a quick
 more buyers and sellers join the great the organization       competition seeks to imitate. Time profit companies must       swoop the model pays for development and marketing costs
 builds on itself                                              take the lead and maintain a "two year" lead over their        E.g. movies, books
 E.g. eBay, Alibaba, Amazon, Monster, Seloger                  competitors E.g. Intel, Microsoft
 Or the opposite: desintermediation (Dell)                        F/unité                                                        Project return
       Seller                                    Buyers




                                                                                                                 Time                                                    Project types
Adrian Slywotzky and David Morrison, The profit Zone, 1998

Eduardo Larrain - Linkedin - Website                                                                                                                                            24
Business models have been studied for 30 years



Traditional business models: trying to explain success with profit models
 7. Multiplier                                                      8. Entrepreneur Profit                                       9. La spécialisation
 Strong customer brand                                              Hierarchical design with multiple subsidiaries to maintain   Specialist are several times more profitable than the
 E.g. Disney, Google                                                closeness with the customer                                  generalist. Characterized by lower cost, higher quality,
                                                                    E.g. Biotechnologies, Google                                 stronger reputation, shorter selling cycles, and better price
                                                                                                             Small teams         realization E.g. Home Depot
                         Different offers                                                                                           Return

                                                                                                                                                                     Specialists



                                                                            Basic
                                                                           activity
                                                                                                                                                Generalists


                            Key asset




 10. Install Base                                                   11. Defacto Standard                                         12. Brand
 Initial product sales or profits are slim and profit is realized   The more players who buy that enter in the system, the       The Company expends significant marketing investment in
 on the follow-up products and services                             more valuable the network                                    order to build awareness and is reinforced by customer
 E.g. HP printers and Gillette Razors, Ryanair                      E.g. Microsoft, Oracle, Skype, Linkedin, spotify, Facebook   experience. You know Brand is working when a consumer
                                                                                                                                 says, "I won't change because I trust AT&T". E.g. Google
   Margin                                                              Margin                                                      Price
                                  Complementary
                                     products                                                                                                                       Brand price




              Basic product                                                                                                                    Average
                                                                                                                                              market price




                                                                                                               Market share
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
 13. Specialty                                                     14. Local Leadership                                            15. Transactional Scale
 Specialty companies enjoy a higher premium for their              Many businesses and their company economies are totally         Transactions go up but the cost to provide the transaction
 products and services until competitors start to imitate          local. Risk occurs when these companies fail to recognize       does not go up as quickly
 E.g. Merck, 3M, Photoshop                                         they are a local business model                                 E.g. investment banking, real estate, transportation
                                                                   E.g. Wal-Mart
    Marge                                                             Local return                                                    Transaction return
              5 years ago          Nowadays

                                     Leading

                Leading


                                    Common
                                                                   0
               Common


                                                                                                        Local market share                                                 Transaction size


 16. Value Chain                                                   17. Cycle Profit                                                18. After-Sales Profit
                                                                   Industries characterized by distinct and powerful cycle. The    The company's profit does not direct come from the sale of
 Specific activities pass through a chain of specialist offering   company can not control the cycle, but it works to maximize     hte product, but the after sale financing or services of the
 value                                                             its position within the cycles grip. As capacity tightens the   product
 E.g. softwares, Intel                                             companies lead price increases, as capacity loosens, its lag    E.g. General Electric, banking
                                                                   price declines E.g. Dow Chemical, Toyota
                                                                       Return by unit produced


                                                                                                                                                                  After-sales offers
                                                                                                                                                 Basic
                                                                                                                                                 offer




                                                                                                     Capacity / Occupancy
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
 19. New Product Profit                                          20. Relative Market Share Profit                           21. Experience Curve Profit
 As new products are introduced profit margins are high and      Companies with high market share tend to be more           Experience drives down the transactional cost
 growth rapid. As the product mature the profit margins fall     profitable. Large companies have price advantages due to
                                                                 manufacturing experiences and volume economies, such as
                                                                 purchasing capability and economies of scale
    Diffusion                                                       Return                                                    Unit cost




                                                      Time                                      Relative market share                                       Cumulated experience


 22. Low Cost Business Design
 The company trives on reducing the cost per unit through
 cumulative experience
 E.g. Southwest Air, Dell, Internet as an channel distribution
 (fnac.com,…)
    Unit cost


                Traditional




                                     Low cost




Adrian Slywotzky and David Morrison, The profit Zone, 1998

Eduardo Larrain - Linkedin - Website                                                                                                                                        27
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                                                         28
(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                                                  29
Marginal cost of digital information comes closer to nothing



Basic economics

• In basic economics, price falls to the marginal cost which increases with production…
  Exhibit – Market supply and demand                  Exhibit – Costs of one company
  Price                                               Price                                   Marginal cost
                                             Supply

                                                                                              Average cost




                                             Demand


                                       Quantity                                    Quantity


• … Though with the technological revolution, marginal cost of digital information comes closer to
  nothing
          • Moore law: “number of transistors on a chip doubles every 18 months”




Eduardo Larrain - Linkedin - Website                                                                          30
• 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                                                                                     31
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                                                                                        32
• 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                                                                               33
Better assets rotation can enable new businesses with low margin



Better assets rotation

• Technological revolution increase assets productivity decreasing the amount of assets immobilized




              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




Eduardo Larrain - Linkedin - Website                                                                  34
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                                                                             35
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                                                                       36
Better assets rotation can enable new businesses with low margin



Mobile banking case

• Half population is unbanked worldwide leaving:
                              • People with no official financial service to save or to borrow:
                                      • Unofficial lending rates range between 50% and 400% p.a, microfinance rates are 20-40%
                                      • One day per month is lost in Morocco to pay invoices
                              • Enabling mass tax avoidance from States with low budgets
                              • Raising the cost and complexity for companies t pay their employees
• Though new mobile banking offer are emerging in developing countries. E.g. half public servant in Kenya
  are paid with mobile banking
                               120%
                                                                                                                                                      Portugal                Royaume-Uni
                                                                                                                                                                                           Suède
                                                                                                                                                                 Irlande       Moy. UE
                               110%                                                                                                                                  Autriche    Espagne Finlande
                                                                                                                                                                              Danemark
                                                                                                   Russie                                                                     Allemagne Pays-Bas
                               100%
                                                                                                                                                  Pologne
    Mobile penetration 2008




                                                                                                                                                                                  Belgique
                                90%
                                                          Roumanie
                                80%                                            Chili                                     Afrique du Sud                                                France
                                                                                                                                     Jamaïque                                   Etats-Unis
                                70%
                                                                                        Tunisie
                                                                     Algérie            Colombie
                                60%                                                                                  Botswana
                                              Moy. Afrique                                                                                                                             Canada
                                                                        Mexique                             Brésil
                                                                         Maroc
                                50%                              Guatemala
                                                             Guyane
                                40%           Nicaragua
                                                      Arménie                                           Chine
                                30%                        Pakistan                    Namibie
                                               Sénégal
                                                      Vietnam      Egypte   Côte d'Ivoire
                                20%        Kirghizstan Kenya
                                                                  Lesotho
                                                  Tanzanie                                              Inde
                                10%             Ouganda
                                                                            Djibouti

                                 0%
                                      0%          10%           20%              30%             40%             50%            60%             70%         80%           90%          100%


                                                                                                 Banked population 2008
Eduardo Larrain - Linkedin - Website                                                                                                                                                                37
Other big trends in creating new Internet-based companies



Three current trends


   • Pyramid based strategy: create a business model based on people very low purchasing power



   • Blue ocean strategy: look for a new ocean rethinking differentiation and low-cost and go beyond
      industry boundaries



   • Cloning strategy: clone successful internet sites and replicate them in other countries




Eduardo Larrain - Linkedin - Website                                                                   38
(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                                      39
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                                                                              40
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                                                                              41
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                                                                            42
• Starbucks promise: a “third space” of conviviality between home and work




Eduardo Larrain - Linkedin - Website                                              43
1 - The proposition value
Defining a promise helps understanding the proposition value


Company promise or tagline

• What are the promise of those companies?
         • Starbucks                                    • A “third space” of conviviality between home and work
         • Ikea                                         • Functional home furnishing, low price and design
         • Easyjet / Ryanair                            • Simple airline flights at low price faster than the car
         • Toyota                                       • Auto reliability
         • Lego                                         • Learning though the joy of building
         • Danone                                       • Health through food and beverages to a maximum number of people
         • Yves Rocher                                  • Beauty based on plants




Denis Dauchy, 7 étapes pour un business model solide, 2010

Eduardo Larrain - Linkedin - Website                                                                                        44
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
                                                  Distributor                     Consumer
  Mass-market products
  or services

  Services to                                     Company                         Employees
  corporations (food,
  transportation,…)

                                                  Students                        Companies (management
  Web-based business                                                                consulting firms, investment
  models class                                                                      banking,…)

                                                  Prescriber (dentist, general    Patients, social security
  Pharmaceutical drugs                             practitioner GP,…)




Denis Dauchy, 7 étapes pour un business model solide, 2010

Eduardo Larrain - Linkedin - Website                                                                               45
• 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
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                                                                        47
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                                                                          48
• 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                                                                        49
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                                                                             50
• 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                                           51
1 - The proposition value
Southwest airlines created a new curve offering high-speed transport with
frequent and flexible departures at prices attractive to the mass of buyers

Southwest Airlines canvas and the low-cost model

• Southwest Airlines created a blue ocean by breaking the trade-offs customers had to make between the
  speed of airplanes and the economy and flexibility of car transport
• Southwest emphasizes only three factors (focus) and differentiate on four others factors from the
  industry’s average profile (divergence)
• Southwest promise or tagline: “the speed of a plane at the price of a car… whenever you need it”
                                 DIVERGENCE                  FOCUS




W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005

Eduardo Larrain - Linkedin - Website                                                                     52
• With which industry do Logan compete?
     • In what do they focus, in what they differ and what are they tagline?




Eduardo Larrain - Linkedin - Website                                           53
1 - The proposition value
Logan created a new curve offering a new car for the price of an used-car


Logan canvas

• Logan promise or tagline: “for the price of an used-vehicule, have a new car”

                                FOCUS                             DIVERGENCE
High



                                                                                         Low price new vehicule




                                                                                         Used-vehicule


                                                                                         Logan




Low
       Price     Spaciousness     Garanty   Resistance   Design   Accessories   Status




• Similarly, Amazon launched Marketplace not only to compete with second-hand cultural goods
  marketplace like eBay but to close the gap between new and second items


Eduardo Larrain - Linkedin - Website                                                                              54
2 – Revenue stream



Definition and scope

• Revenue stream is the cash a company generates from each customer segment


• A business model can involve two different types of Revenue streams:
        • Transaction revenues resulting from one-time customer payments
        • Recurring revenues resulting from ongoing payments to either deliver a Value proposition to
          customers or provide post-purchase customer support




Eduardo Larrain - Linkedin - Website                                                                    55
2 – Revenue stream



Ways to generate revenue streams

• Asset sale: selling the ownership rights to a physical product. E.g. Amazon selling a book


• Usage fee: selling the use of particular service. E.g. A telecom operator charging by the minute


• Subscription fee: selling continuous access to a service. E.g. Club Med Gym, WOW/World of Warcraft
  online


• Lending/Renting/Leasing: temporary granting someone the exclusive right to use a particular asset for a
  fixed period in return for a fee. E.g. Autolib


• Licensing: giving permission to use protected intellectual property in exchange of licensing fees. E.g. media
  industry


• Brokerage fees: intermediation services performed on behalf of two or more parties. E.g. credit cart
  providers, real estate agents


• Advertising: fees for advertising a particular product, service or brand.


Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010

Eduardo Larrain - Linkedin - Website                                                                              56
2 – Revenue stream
Each revenue stream might have different pricing mechanisms


Pricing mechanisms




Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010

Eduardo Larrain - Linkedin - Website                                      57
How do you set a price




Eduardo Larrain - Linkedin - Website                       58
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                        59
2 – Revenue stream
Reminder


Pricing strategy depending of the product life cycle

• Product introduction:
          • Market skimming strategy setting up a very high
            price . E.g. Electronic goods, luxury
          • Or Penetration strategy: real low price even below
            cost to gain market share


• Growth: decrease price because of volume


• Maturity: decrease price because of competition


• Decline: special offer because price is the main factor of
  value




Chris Anderson, Free the future of a radical price, 2009
Milton Friedman, There's no such thing as a free lunch,1975

Eduardo Larrain - Linkedin - Website                             60
How can a product be free




Eduardo Larrain - Linkedin - Website                     61
2 – Revenue stream
Introduction to Free


Definition and scope

• Free is giving without a cost… all included


• Free is not to be mistaken with “free” used by advertisers when it’s not really free:
          • Free “buy one get one free” is just another way of saying 50 percent off when you buy two
          • Free gift inside
          • Free shipping


• Basic economics: there's no such thing as a free lunch
          • The "free lunch“ refers to the once-common tradition of saloons in the United States providing a
            "free" lunch to patrons who had purchased at least one drink. All the foods on offer were high in salt
            (e.g. ham, cheese and salted crackers) so those who ate them ended up buying a lot of beer.


• You can make money on free (revenue stream) but also free can lead to fast growth:
          • Before the 2000’s, Dell was known to be the first company to have reached one billion sales after
            been launched in less than 10 years




Chris Anderson, Free the future of a radical price, 2009
Milton Friedman, There's no such thing as a free lunch,1975

Eduardo Larrain - Linkedin - Website                                                                                 62
2 – Revenue stream
Introduction to Free


The penny gap theory


• The penny gap is the difference between cheap and free



• For small payments, there is not a constant elasticity in price

          • Zero is one market and any other price is another market

          • Zero can attract lots of people because from the consumer’s perspective charging even a penny
              makes us think about the choice




Chris Anderson, Free the future of a radical price, 2009

Eduardo Larrain - Linkedin - Website                                                                        63
2 – Revenue stream
Introduction to Free


The economics of abundance (vs. scarcity)

• Digital technologies have become too cheap to meter creating a economy of abundance (e.g. information)


• Digital free theory:
          • “If it’s digital, sooner or later it’s going to be free”
          • “When something halves in price each year, zero is inevitable”
          • “Waste is good”
          • “Every abundance creates a new scarcity” (e.g. time)


• Though, externalities for the consumer still exist: technical process when buying or when recycling, travel
  time,…




Chris Anderson, Free the future of a radical price, 2009

Eduardo Larrain - Linkedin - Website                                                                            64
2 – Revenue stream
Introduction to Free

4 revenue streams around: first two been very old but evolving and the last two are emerging
with Internet

A.      Direct Cross-Subsidies: give a free product that have high probability to make people pay for something
        else



B.      The “three-parties” (or two-sided markets): one customer segment subsidizes another (the most
        common)



C.      Freemium: premium paid version



D.      Non-monetary markets: people choose to give away with no expectation of payment




Chris Anderson, Free the future of a radical price, 2009

Eduardo Larrain - Linkedin - Website                                                                              65
2 – Revenue stream
A – Direct Cross-Subsidies


Definition and scope

• This is the oldest and most familiar model where the cost of one product is shifted into the price of
  another
• Free attracts customer in masses. Then cross-selling or up-selling validate the business model:
          • Give a product (equipment) and sell a service (maintenance) or another product (supplies)
• Key success factor is the increase the equipment rate with products with better profitability
• It has other names: Gillette and razor blades, Equipment and Supplies, Equipment and Maintenance




Chris Anderson, Free the future of a radical price, 2009

Eduardo Larrain - Linkedin - Website                                                                      66
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                          67
2 – Revenue stream
A – Direct Cross-Subsidies


Famous examples of direct-cross subsidies


 Free or far under cost                Where the money comes from        Companies

 Printer                               Ink                               Printer manufacturer

 Coffee machine                        Capsules                          Nespresso

 Razor                                 Razor blades                      Gillette

 Real estate loan, credit card,        Cross-selling because customer    Retail banks
 savings account                       is stuck with the same bank for
                                       20/30 years
 Airline ticket                        Hotel room, rental car, cruise    Go Voyages, airline companies
                                       and vacation package
 Elevator                              Maintenance and security          Elevator companies
                                       upgrades
 Alarms                                Electronic surveillance           Security companies

 Equipement                            Reagent supplies                  Medical biology companies

 Telephone                             Communications                    Carrier



Eduardo Larrain - Linkedin - Website                                                                     68
2 – Revenue stream
A – Direct Cross-Subsidies


More examples of direct-cross subsidies

• Give away services, sell products (Apple Store Genius Bar Tech support)
          • Or Give away products, sell services (free gifts when you open a bank account)
• Give away software, sell hardware (IBM and HP’s linux offerings)
          • Or Give away hardware, sell software (video game console model)
• Give away cell phones, sell minutes of talk time (many carriers)
          • Or Give away talk time, sell cell phones (many of the same carriers, with free nights and weekend
            plans)
• Give away the show, sell the drinks (strip clubs)
          • Or Give away the drinks, sell the show (casinos)
• Free with purchase (retailer “loss leaders” e.g. gas sold in a supermarket)
• Free samples (gift boxes)
• Free trials (magazine subscriptions)
• Free parking (malls, supermarkets)
• Free condiments (restaurants)




Chris Anderson, Free the future of a radical price, 2009

Eduardo Larrain - Linkedin - Website                                                                            69
2 – Revenue stream
B – Three-parties or Two-sided markets


Definition and scope

• A third party pays participate in a market created by a free exchange between the first two parties. Thus
  one customer segment subsidizes another


• The most common of the economies built around free is the three party system


• Advertising is the most famous one where advertisers pay for media to reach consumers:




Chris Anderson, Free the future of a radical price, 2009

Eduardo Larrain - Linkedin - Website                                                                          70
2 – Revenue stream
B – Three-parties or Two-sided markets


Markets with three-parties revenue stream

• Three-parties is not limited to advertising


   Market                                             First-party      Third-party          Second-party
                                                      Consumer                              examples
   Search                                             Internet user    Advertisers          Google, Yahoo!

   Online recruitment                                 Job seeker       Recuiters            Monster, cadreemploi,
                                                                                            keljob
   Free newspapers                                    Readers          Advertisers          Metro, 20 Minutes

   Free softwares                                     Readers          Software publisher   Adobe

   Debit card                                         Card owners      Retail               Banks

   Ecommerce platform                                 Sellers          Buyers               eBay, Amazon
                                                                                            marketplace
   Outdoor advertising                                Municipalities   Advertisers          JC Decaux, Clear Channel




Denis Dauchy, 7 étapes pour un business model solide, 2010

Eduardo Larrain - Linkedin - Website                                                                                   71
2 – Revenue stream
B – Three-parties or Two-sided markets


More examples of three-parties

• Give free voice calling (in the US), charge advertisers (Facebook Messenger app)
• Give away content, sell access to the audience (ad-support media)
• Give woman free admission, charge men (bars)
• Give children free admission, charge adults (museums)
• Give away listings, sell premium search (match.com)
• Sell listings, give away search (craigslist housing)
• Give away travel services, get a cut of rental car and hotel reservations (travelocity)
• Give away house listings, sell mortgages (Zillow)
• Give away content, sell information about the consumers (practice fusion)
• Give away content, sell stuff (Thinkgeek)
• Give away content, charge advertisers to be featured in it (product placement)
• Give away resume listings, charge for power search (Linkedin)




Chris Anderson, Free the future of a radical price, 2009

Eduardo Larrain - Linkedin - Website                                                        72
2 – Revenue stream
C – Freemium


Definition and scope

• Freemium is giving a free basic version to most of people and charging for a premium version to a few
  people
• Freemium or contraction of Free and Premium was invented by Fred Wilson in 2006.
• Freemium is different with direct-cross subsidiaries because the ratio of free to paid is high (e.g. 90%,
  95%) when giving free sample has a low ratio
          • This ratio is enabled by Internet because the cost of serving the basic version is close to zero
          • Si it’s not the same thing as "premium with a free sample.“
• Freemium is one of the most common Internet-based business model even though not every product or
  service can work as freemium




Chris Anderson, Free the future of a radical price, 2009

Eduardo Larrain - Linkedin - Website                                                                           73
2 – Revenue stream
C – Freemium


Different kind of limitation of the basic free version

• Functionnalities
        • e.g. Linkedin, Flickr, Skype, Evernote, WordPress
• Time
        • e.g. legal online streaming
• Capacity
        • e.g. sending large files, DropBox (cloud backup system)
• Storage
        • e.g. webmails
• Others factors
        • e.g.
                 • Spotify and Gmail invitations
                 • Seat limited (first customers get free seats)
                 • Customer type limited: free for small and young companies, universities (licence model)




Eduardo Larrain - Linkedin - Website                                                                         74
2 – Revenue stream
C – Freemium


Why go for Freemium business model?

• Marketing:
         • By definition, having a free product makes it really easy to get customers
         • Even though a free user might not convert, they can invite other free users who might (referral)


• Network effects (like fax):
         • A network effect is what happens when a product or service becomes more valuable the more
           people use it
         • A phone isn't very useful if you can't call anyone else with it. But once everyone you know has a
           phone, it becomes a pretty valuable thing to have
         • If you're in a market that lends itself to network effects you're going to want to have a free basic
           product because if you don't someone else will and will use the network effects to crush you
         • E.g. Skype has 600 million users who make calls for free over the internet and only a small
           percentage of those pay to make calls to landlines




Business Insider, What Is The Freemium Business Model, 04/2011

Eduardo Larrain - Linkedin - Website                                                                              75
2 – Revenue stream
C – Freemium


Key success factors (if not, choose another business model)

• Get lots and lots of free users:
         • Freemium is a numbers game: if only 1% of your users are going to pay you, then you need to have lots and lots of
           free users (millions, typically) to make that 1% enough money
         • If your product is more niche, go for premium instead of freemium
         • If your product is not sticky, go for advertising instead of freemium
• Have a product or service whose value to users increases with time:
         • This is the biggest thing that most people
         • The value of your service needs to increase the more people use it
         • E.g. Spotify: where you create all your playlists and organize your music. Once you've done thatyou're much more
           likely to pay up. The value of Spotify to you has gone up from being just music to music, your playlists and your
           friends' playlists, so paying starts to make sense
• Keep costs low:
         • Freemium works because the marginal cost of each additional user is low, so you need to keep your operating costs
           correspondingly low
• Time:
         • It takes a long time to be profitable because users take longer to convert as the value of the product to them
           increases over time, and because you keep adding (hopefully) new free users, freemium businesses take a long time
           to reach breakeven point
         • As people get older, people migrate into paying customer (premium part of freemium) because they get richer



Business Insider, What Is The Freemium Business Model, 04/2011

Eduardo Larrain - Linkedin - Website                                                                                           76
2 – Revenue stream
C – Freemium


Examples of freemium

• Give away basic information, sell richer information in easier-to-use form (BoxOfficeMojo)
• Give away generic management advice, sell customized management advice (McKinsey)
• Give away Web content, sell printed content (everything from magazines to books)
• Give away online games, charge a subscription to do more in the game (penguins)
• Give away demo software, charge for the full version (most video games)
• Give away computer-to-computer calls, sell computer-to-phone calls (Skype)
• Give away free photo-sharing services, charge for additional storage space (Flickr)
• Give away basic software, sell more features (QuickTime)
• Give away ad-supported service, sell the ability to remove the ads (Ning)
• Give away "snippets" sell books (Google Books)
• Give away virtual tourism, sell virtual land (Second Life)




Chris Anderson, Free the future of a radical price, 2009

Eduardo Larrain - Linkedin - Website                                                           77
2 – Revenue stream
D – Nonmonetary markets


Definition and scope

• People give away content with no expectation of Payment
          • Gift economy is based on the principle that the action of individuals have a global impact
                    • People give for different reasons: to gain reputation e.g. blog writers, altruism e.g. Wikipedia
                      or unintentionally/passively (web content helps Google)
          • Labor exchange: paying something with labor even without knowing it
                    • E.g. free content in exchange of Captcha solving (used by spammer in exchange of free porn
                      but also used by Google Street view to decipher street numbers, names and trafic signs)
                    • E.g. voting on Digg, Yahoo Answers or using Google 411 (phone directory in exchange of
                      speech sound)
          • Piracy: when piracy is so powerful that content producer have accepted that, form them, doing the
            activity is not a moneymaking business
                    • E.g. online music




Chris Anderson, Free the future of a radical price, 2009

Eduardo Larrain - Linkedin - Website                                                                                     78
• 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                                                                         79
reCAPTCHA is a free CAPTCHA service that helps to digitize books,
newspapers and old time radio shows


Answers to reCAPTCHA challenges are used to digitize textual documents
                                              Comparison of the accuracy of standard OCR versus
Example of a CAPTCHA                          reCAPTCHA transcriptions




OCR: Optical Character Recognition programs

Eduardo Larrain - Linkedin - Website                                                              80
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                              81
• How’s the music industry going?




Eduardo Larrain - Linkedin - Website     82
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
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                                                                         84
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                                                                         85
2 – Revenue stream
Looking at the music industry

Music streaming business model is already the largest market in Sweden, a country with a
robust culture of Internet piracy

• Music revenues are increasing the Swedish music industry market due to digital sales


• Streaming is even cannibalizing downloads in Sweden


• Music licensing for online videos is a growing market as more and more people watch videos that are
  accompanied by music




IFPI Svenska Gruppen, press report, 07/2012

Eduardo Larrain - Linkedin - Website                                                                    86
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                                    87
2 – Revenue stream
Looking at the music industry

What about content production and consumption?
The amount of content being produced and consumed in music is believe to be growing

• 11 M song tracks (stock) in 2001, 100 M in 2010 (Gracenote/Sony db > Shazam db)
• Growth of the Gracenote database obviously includes a lot of older music that has only recently been
  indexed and that is been rediscovered
       –     E.g. Oscar Wilde - Los Vidrios Quebrados (1967)




• The trend still looks like the amount of music available to consumers is steadily growing
• At the other side, overall sale of music (including albums, singles, digital tracks,…) exceeded 1.5 billion
  transactions in 2010 (up from 845 million transactions in 2000)



Floor 64, The Sky Is Rising, 01/2012

Eduardo Larrain - Linkedin - Website                                                                            88
2 – Revenue stream
Looking at the music industry


What about musicians revenues?


• Psy with its Gangnam Style song, viewed more than 1 billion times,
  would never had been a success outside South Korea without Youtube
       –     It generated 8 M USD from advertising (50/50 split)


• Ticket prices and merchandise have become major sources of income
  for many popular rock stars like Lady Gaga, Madonna, Bruce
  Springsteen and for bands like U2

• It’s not easy to duplicate the experience of a live show, so concerts
  have become a source of revenue for musicians and aren’t negatively
  affected by the availability of free downloadable music - in fact, free
  music can encourage fans to attend live performances

• There’s actual scarcity for live music

• Other trends:
       –     Algorithms may be replacing humans in some parts of discovering new
             talent (or at least discovering talent more cost-effectively)
       –     Gracenote, Shazam,… are datamining music metadata in order to serve
             better music recommendations to consumers or to predict which artists
             will be popular with target demographic groups

Floor 64, The Sky Is Rising, 01/2012

Eduardo Larrain - Linkedin - Website                                                 89
2 – Revenue stream
What has the Entertainment industry learned from the Music industry?

Other Entertainment industries continued to grow in the past years when the Music industry,
newspapers and consumer magazine publishing took a hit




PwC, Global Entertainment & Media Outlook 2012-2016, 2012

Eduardo Larrain - Linkedin - Website                                                          90
2 – Revenue stream
What has the Entertainment industry learned from the Music industry?

Some Entertainment industries have found new business models successful with the Digital
era, others no… well not yet… thus a business model challenge

• For consumers, today is an age of absolute abundance in entertainment due to the digital era and piracy
• New business models based on Digital sales are emerging in each Entertainement industry to take over
  decreasing physical sales




IFPI, press report, 2012

Eduardo Larrain - Linkedin - Website                                                                        91
2 – Revenue stream
What has the Entertainment industry learned from the Music industry?

Though not all new business models can be based on Advertising since advertising is a
huge but finite market and volatile (reliant on the economic situation )




PwC, Global Entertainment & Media Outlook 2012-2016, 2012

Eduardo Larrain - Linkedin - Website                                                    92
• 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                                                                         93
• How’s the video game industry going?




Eduardo Larrain - Linkedin - Website
2 – Revenue stream
Looking at the video game industry

Video games sales have grown with the digital revolution and cross the barrier of gender and
age limitations

• Globally, the amount that consumers spend on video games - for hardware, software and accessories - has
  grown from about $20 billion in 2000 to approximately $70 billion in 2011




• The demographics of video game players has expanded greatly beyond the traditional core of boys and
  young men:
       –     53% of game players are male and 47% female
       –     Average gamer player age is 30
       –     The amount of time kids are spending on video games has grown from 26 minutes per day in 1999 to 1 hour and 13
             minutes in 2009 due to mobile device that has allow kids to squeeze more playing time into their busy days (Kaiser
             Family Foundation survey)
• Worldwide, the population of gamers has exploded from 250 million in 2008 to 1.5 billion in 2011

Floor 64, The Sky Is Rising, 01/2012

Eduardo Larrain - Linkedin - Website                                                                                              95
2 – Revenue stream
Looking at the video game industry


Purchases of digital content are growing the video games industry


• The traditional console business model, based on the
  installed based per the attach rate (number of games
  per owner), led to an elitist approach to game design
  since price of each game was high (40-60 USD) and
  hardcore gamers wanted a return for their investment



• New video games digital segments have emerged:
       –     Downloads: Steam is to games as iTunes is to music
       –     Massively Multiplayer Online (MMO) e.g. World Of
             Warcraft
       –     Online / Casual
       –     Mobile
       –     Social



• Digital sales (and rental delivery) now generate 40% of
  the industry




ESA, Essential Facts about the computer and the video game industry, 2012

Eduardo Larrain - Linkedin - Website                                        96
2 – Revenue stream
Looking at the video game industry


Looking at the video game download business model


• Piracy of video games has fewer benefits than music                    2011 top-selling games at retail ranked by unit sales (VGChartz)
  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




Eduardo Larrain - Linkedin - Website                                                                                                        97
2 – Revenue stream
Looking at the video game industry


Looking at MMO business models


• Massively Multiplayer Online game are video games in which a large number of players engage
  simultaneously in a persistent world

• Value of an MMO is in the size of the community per life time (retention)

• The hardcore game MMO revenue stream was invented by World of Warcraft:
       –     Average customer lifetime of 18 months
       –     Client box or download (50 USD)
       –     Subscription fees (15 USD/m)
       –     Virtual goods
       –     Average full cost to complete WoW for a gamer is 300 USD

• Few MMO have been able to replicate WoW model so they switch to F2P to lower entry barrier and get a
  sizable community e.g. Habbo Hotel, Kart Rider, Warhammer, Everquest,…
       –     Average customer lifetime of 6 months
       –     Free trial or free game
       –     Subscription optional
       –     Virtual goods for actions items (competition) and personalisation (expression)
               •    Theory of engagement: « the longer a user plays the more chances there are he buys virtual items »
       –     Items payable through micro-payments mainly inside the game (60%) and on an external web site



Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012

Eduardo Larrain - Linkedin - Website                                                                                     98
2 – Revenue stream
Looking at the video game industry


Looking at the online casual business model


• Online casual games are games played online to “kill time, make a pause, relieves from stress”:




• Free-to-Play (F2P) is the main business model (also for social games and some mobile games)

• F2P is a freemium business model that can be based on:
       –     Try-and-buy: limited access (time, levels,…), though games must be really addictive
       –     Advertising with ads display on hosting sites or inside the game
       –     Virtual goods


Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012

Eduardo Larrain - Linkedin - Website                                                                99
2 – Revenue stream
Looking at the video game industry


Looking at the mobile video game business model


• Ten of thousands of mobile games for smartphones and tablets can be download on platforms such as the
  Appel App Store, Android MarketPlaces (Google Play), Amazon, Facebook Mobile and Playstation Suite

• Distribution is bypassing carriers: 30/70 meaning the game app developer get 70% of sales revenue (vs.
  45/55 in cell phone business)
       –     An opportunity for mobile banking?


• Mobile video game revenue stream is based on:
       –     Average customer lifetime of 2 months
       –     Selling the app (e.g. at 0.99 cent or F2P model)
       –     Selling virtual goods
       –     A little of advertising (average of 15%):
               •    Offer walls
               •    Sponsoring




Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012

Eduardo Larrain - Linkedin - Website                                                                       100
2 – Revenue stream
Looking at the video game industry


Looking at social games


• Social games are those games played primarily on social networking sites or games that can be played with
  a person’s real world social graph
       –     E.g. CityVille, FarmVille (Zynga), EA (Sims)




• Social video game revenue stream is based on:
       –     F2P model with a logic of a massive audience
       –     Virtual goods (50%)
       –     Advertising (25%)
       –     Lead-generation offers (25%): virtual currency incentives by marketers to social gamers in exchange of signing up for
             subscriptions, participating in surveys, or buying goods and services
       –     Since virality is a key to success, notifications, invitations, sharing, gifting and other social network tools are used
             extensively to get new customers
       –     Social games must work with a low retention rate (first day retention rate of 30% is a “huge success”)


Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012

Eduardo Larrain - Linkedin - Website                                                                                                    101
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                                                                     102
2 – Revenue stream
Looking at the video game industry


What’s next for the game industry?


• “Gamification” trend meaning that video games are no longer restricted to leisure:
      –    Every part of our lives will eventually be turned into a game

      –    Potentially encourage people to change their behavior to:
             •   Benefit the environment

             •   Perform their jobs better

             •   Lose weight

             •   Buy products

             •   Perform almost any task imaginable




• Games are even encroaching into vocational education




Eduardo Larrain - Linkedin - Website                                                   103
2 – Revenue stream
Short focus at online video services

Purely online video services are not yet collecting revenues at the same scale as the
traditional TV and films industries, but the size of this audience is unquestionnably large


• Two business models:
      –    Based on subscriptions such as Vimeo
             •   150.000 paying subscribers in 2010

      –    Based on advertising such as Youtube
             •   400 M USD of adversitiving revenues in 2010




• Online videos are also a substantial traffic driver to social networking (e.g. Facebook)




Eduardo Larrain - Linkedin - Website                                                          104
• How’s the book publishing industry going?




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


Sales of e-books expected to compensate the decline of the physical books


• Consumer and educational book publishing will increase by 0.6 percent compounded annually to 116 bn
  USD in 2016 from 112 bn in 2011
       –     E-books grow their share of global spending from 5% in 2011 up to 18% in 2016
       –     Print/audio consumer and educational books will continue to decline throughout the forecast period notably
             paperback books (“livres de poche” in French)


• Publishers will need to provide eBooks in addition to paperbacks and the entire value process will be
  changing, from aggregation right to distribution

• Piracy less likely to impact digital sales like in the music industry: demographic groups that are most often
  associated with digital piracy (generally men between 20 and 39 years old) and not the same than those
  associated with high-volume reading of mass market books (in general women age 40 and older)

• New intermediaries are emerging to handle eBooks:
       –     eBook platform (e.g. mass aggregators such as Amazon, Apple, and Google)
       –     Handling of payments
       –     Support for digital conversion
       –     Establishment of a digital content system



PwC, Turning the Page - The Future of eBooks, 2010

Eduardo Larrain - Linkedin - Website                                                                                      106
2 – Revenue stream
Looking at the book publishing industry


New revenues streams are emerging and changing current business models


• Apps and special eBook editions enriched with music and video
       –     Notably for educational and juveniles segment e.g. Byook start-up http://youtu.be/O_pBNPe3s-M
• Sales of individual chapters and sections from books
• Offer additional content such as a blog/forum dedicated to a chapter or sentence, immediate definition of
  a word, links to other content (news/other authors),…
• Easier to sell updates
• Books on demand
• Easier to sell porn and erotic fiction
• Establish basic contracts with university libraries to offer free eBooks for students or offer special editions
  exclusively to students for a discounted price
• Providing online reviews (non-monetary action is posting a review at Amazon website)




PwC, Turning the Page - The Future of eBooks, 2010

Eduardo Larrain - Linkedin - Website                                                                                107
2 – Revenue stream
Looking at the book publishing industry

Non-traditional book publishing on the internet is 8X the output of traditional book
publishing

• In 2010, 4 million new titles were published with 92% of those being “non-traditional” i.e. self-publishing
  and books representing the reuse of content, most of it not covered by copyright
• Non-traditional books are largely on demand titles produced by reprint houses specializing in public
  domain works and by presses catering to self-publishers and micro-niche publications
• Non-traditional titles are marketed primarily on the Web




Bowker, ISBN Output 2002-2011, 2012
Non-traditional numbers are undersestimated since books with no International Standard Book Numbers (ISBN) are not included

Eduardo Larrain - Linkedin - Website                                                                                          108
2 – Revenue stream
What’s the business model of self-publishing?


The traditional business model of book publishing




Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010

Eduardo Larrain - Linkedin - Website                                      109
2 – Revenue stream
What’s the business model of self-publishing?


A new business model by lulu.com




Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010

Eduardo Larrain - Linkedin - Website                                      110
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Web-based business models in 2013

  • 1. WEB-BASED BUSINESS MODELS Slides of class #1 #2 #3 #4 – February 2013 Prof. Eduardo Larrain Eduardo Larrain - Linkedin - Website 1
  • 2. This lecture was taught at a French business school by Eduardo Larrain Eduardo Larrain • HEC 2005 – Strategic Management • Founder of an Internet start-up called Kel Quartier • Strategy consultant at Roland Berger Strategy Consultants and Atos – 40 projects Eduardo Larrain - Linkedin - Website 2
  • 3. Agenda of the web-based business model lecture 1. What’s the web? …………………………………………………………………………………………………………………………………………………….……… 4 2. What’s a business model? ……………………………………………………………………………………………………………………………………….…….. 16 3. Why study Internet-based business models? ……………………………………………………………………………………………………….……..… 23 4. What are the key elements of a business model? • Value proposition and revenue streams ………………………………………………………………………………………………………….….. 40 • Drill-down of key Entertainment markets: music, video games, book publishing ………………………………….………….. 82 • Customer channels, customer relationships, key partners, activities, resources, cost structure …….....….……….….. 115 5. What are the business models of Internet heavyweights: Facebook, Google, Zynga, Linkedin, Groupon ……….…………… 130 6. What are the most promising business models among the world’s most valuable companies: Digital 100, Twitter ..…… 173 7. Conclusion and farewell ………………………………………………………………………………………………………………………………………………… 184 8. Appendix: group project and individual test ………………………………………………………………………………………………………………..... 185 Eduardo Larrain - Linkedin - Website 3
  • 4. What’s the web Eduardo Larrain - Linkedin - Website 4
  • 5. What’s the Web? ICT Internet Web Definitions • Web (or World Wide Web or WWW) is a global set of documents, images and other resources, logically interrelated by hyperlinks. Web = HTTP, HTML, CSS, JPEG,… • Internet (or Net) is a global system of interconnected computer networks that use the standard Internet protocol suite (TCP/IP) to serve billions of users worldwide. It is a network of networks that carries an extensive range of information resources and services, such as the inter-linked hypertext documents of the Web and the infrastructure to support email. Internet = Web + mail + data transfer e.g. FTP incl. P2P, VoIP, streaming media, video conferencing, mobile apps (not HTML 5 based) • Information and Communication Technology (ICT) is the use of computers and telecommunications equipment (IT) which also encompasses other information distribution technologies such as television and telephones (C). ICT = Internet + IT + C Wikipedia Eduardo Larrain - Linkedin - Website 5
  • 6. Is Internet only about Web presence? • In the European Union, two-thirds of all businesses have a Web presence (McKinsey, 2011) • Exhibit - Looking at top 100 French websites: NEWS ECOMMERCE SOCIAL MEDIA BLOGS PORN TV SEARCH VIDEO PROFESSIONAL EVERYDAY LIFE LEGEND Category Ranking Unique visitors per month Titiou Lecoq / Diane Lisarelli, Encyclopédie de la Web Culture, January 2011 Eduardo Larrain - Linkedin - Website 6
  • 7. Is Internet only about Web presence? • Exhibit - Looking at top 100 websites in UK, France, Germany, Italy, Spain, Switzerland, Brazil, US and Australia Number of unique users, January 2010 BBC, SuperPower: Visualising the internet, January 2010 Eduardo Larrain - Linkedin - Website 7
  • 8. Is Internet only a distribution channel for online retail/ecommerce? • In retail alone, G-20 consumers researched online and then purchased offline (ROPO) more than $1.3 trillion in goods in 2010 Boston Consulting Group, The Internet Economy in the G-20, March 2011 Eduardo Larrain - Linkedin - Website 8
  • 9. Internet is not just a distribution channel or just about Web presence Eduardo Larrain - Linkedin - Website 9
  • 10. Is Internet an Industry? • 75% of the economic impact of the Internet arises from traditional companies that don’t define themselves as pure Internet players (McKinsey, 2011) • Exhibit - Looking at top 100 USdes grandes through sociétés US Profits des 100 plus 100 plus grandes time: Chiffre d'affaires companies sociétés US 100% 100% Conglomerate Conglomerate Professional, Scientific, and Technical Services Services Professional, Scientific, and Technical 90% 90% Finance and Insurance Finance and Insurance 80% 80% Information Information 70% HealthHealth Care andAssistance Care and Social Social Assistance 70% Wholesale Trade Trade Wholesale 60% 60% Retail Trade Trade Retail 50% Utilities Utilities 50% Transportation and Warehousing Transportation and Warehousing 40% 40% Manufacturing Telecommunication Manufacturing Telecommunication 30% 30% Manufacturing Automotive Manufacturing Automotive Manufacturing Manufacturing 20% 20% Metal Métaux Métaux 10% 10% PétrolePétrole Petroleum Agriculture, Forestry, Fishing and Hunting 0% 0% Agriculture, Forestry, Fishing and Hunting 1955 1955 1960 1960 1965 1965 1970 1970 1975 1975 1980 1980 1985 1985 1990 1995 1990 1995 2000 2000 2006 2006 Analysis based on Fortune 500, 2007 Eduardo Larrain - Linkedin - Website 10
  • 11. Internet is not just an industry Internet is touching every part of the economy (like electricity) Eduardo Larrain - Linkedin - Website 11
  • 12. Internet is a technology on which are based numerous activities across industries Internet-based activities 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 McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011 Eduardo Larrain - Linkedin - Website 12
  • 13. Internet accounts for 3-4% of worldwide GDP Exhibits – Economic impact of the Internet by McKinsey and BCG McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011 Boston Consulting Group, The Internet Economy in the G-20, March 2011 Eduardo Larrain - Linkedin - Website 13
  • 14. Though, the Internet economic impact goes beyond GDP generating consumer surplus when there is not monetary reward Real economic impact of the Internet • Free services value are excluded from GDP: • Emails • Search • Collaborative services (wikis, blogs and social networks) • Similar to housewife activities excluded from GDP • E.g. • Craigslist has generated consumer value though reducing classified ad revenues of the US newspaper industry • Facebook has generated consumer value McKinsey, Internet matters: The Net’s sweeping impact on growth, jobs and prosperity, May 2011 Eduardo Larrain - Linkedin - Website 14
  • 15. 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 15
  • 16. What’s a business model Eduardo Larrain - Linkedin - Website 16
  • 17. What’s a business model? Basic definition • A business model is a coherent way to manage and develop an economic activity. • A business model describes the rationale of how an organization creates, delivers, and captures value. • A business model describes how an enterprise proposes to make money. Eduardo Larrain - Linkedin - Website 17
  • 18. What’s a business model? Very basic definition • A business model is “show me the money”. • It is a simple expression of the strategy of the company on how to make money without going into too much details • In French, we use the english word « business model » rather than translations: • Modèle économique • Modèle d’activité • Modèle d’affaires • Modèle de revenus, modèle de profit Eduardo Larrain - Linkedin - Website 18
  • 19. A Business Model is not a Business Plan What’s a Business Plan? • A Business plan is a document that describes how a project can be implemented. • A Business plan usually aims at selling the project because “you can’t have a funding without a Business Plan” • A Business plan usually includes a description of: • The team • The Business Model • A Financial Analysis (e.g. financial spreadsheets) • A Business Environment Analysis (e.g. market, competitors and competitive advantage analysis) • An Implementation roadmap (e.g. operation plan, milestones) • A Risk analysis (e.g. SWOT, Critical Success Factors) Eduardo Larrain - Linkedin - Website 19
  • 20. A Business Model is not Strategy What’s Strategy? • Strategy is a plan of action and the allocation of resources necessary for carrying out these goals • Michael Porter’s view on Strategy: • Strategy is a plan to differentiate the company and give it a competitive advantage • “Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value” • Then decisions can only be defined as strategic if they involve consciously doing something “differently” from competitors and if that difference results in a sustainable advantage • e.g. making existing methods more efficient (“operational efficiency”) are not strategic since they can be easily copied by others Eduardo Larrain - Linkedin - Website 20
  • 21. A business model describes what makes an company unique looking from the value propositions to cost structure Key elements of a business model Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 21
  • 22. A business model is an ecosystem Rationale beyond those key elements Cost-side Value-side Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 22
  • 23. Why study Internet-based business models Business Internet- Models based Eduardo Larrain - Linkedin - Website 23
  • 24. Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 1. Customer Solutions 2. Product Pyramid 3. Multi-Component Invest to know the customer, create a solution, develop the At the base are products and services that are low price and Several of the components represent a disproportionate relationship high volume; at the top products and services that are high share of the profits E.g. GE price and low volume E.g. business seminars at hotels, advertising (Google, Yahoo, E.g. Air France Group: Air France for business and long haul Facebook)? Profit zone Profit flights, Transavia for leisure and Hop! for local flights Profit Basic activity 0 Other components Time Time 4. Switchboard 5. Time Profit 6. Block Buster profits Multiple sellers communicating with multiple buyers. The Takes advantage of uniqueness, profit margins erode as Revenue realized is so powerful and fast that in a quick more buyers and sellers join the great the organization competition seeks to imitate. Time profit companies must swoop the model pays for development and marketing costs builds on itself take the lead and maintain a "two year" lead over their E.g. movies, books E.g. eBay, Alibaba, Amazon, Monster, Seloger competitors E.g. Intel, Microsoft Or the opposite: desintermediation (Dell) F/unité Project return Seller Buyers Time Project types Adrian Slywotzky and David Morrison, The profit Zone, 1998 Eduardo Larrain - Linkedin - Website 24
  • 25. Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 7. Multiplier 8. Entrepreneur Profit 9. La spécialisation Strong customer brand Hierarchical design with multiple subsidiaries to maintain Specialist are several times more profitable than the E.g. Disney, Google closeness with the customer generalist. Characterized by lower cost, higher quality, E.g. Biotechnologies, Google stronger reputation, shorter selling cycles, and better price Small teams realization E.g. Home Depot Different offers Return Specialists Basic activity Generalists Key asset 10. Install Base 11. Defacto Standard 12. Brand Initial product sales or profits are slim and profit is realized The more players who buy that enter in the system, the The Company expends significant marketing investment in on the follow-up products and services more valuable the network order to build awareness and is reinforced by customer E.g. HP printers and Gillette Razors, Ryanair E.g. Microsoft, Oracle, Skype, Linkedin, spotify, Facebook experience. You know Brand is working when a consumer says, "I won't change because I trust AT&T". E.g. Google Margin Margin Price Complementary products Brand price Basic product Average market price Market share Adrian Slywotzky and David Morrison, The profit Zone, 1998 Eduardo Larrain - Linkedin - Website 25
  • 26. Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 13. Specialty 14. Local Leadership 15. Transactional Scale Specialty companies enjoy a higher premium for their Many businesses and their company economies are totally Transactions go up but the cost to provide the transaction products and services until competitors start to imitate local. Risk occurs when these companies fail to recognize does not go up as quickly E.g. Merck, 3M, Photoshop they are a local business model E.g. investment banking, real estate, transportation E.g. Wal-Mart Marge Local return Transaction return 5 years ago Nowadays Leading Leading Common 0 Common Local market share Transaction size 16. Value Chain 17. Cycle Profit 18. After-Sales Profit Industries characterized by distinct and powerful cycle. The The company's profit does not direct come from the sale of Specific activities pass through a chain of specialist offering company can not control the cycle, but it works to maximize hte product, but the after sale financing or services of the value its position within the cycles grip. As capacity tightens the product E.g. softwares, Intel companies lead price increases, as capacity loosens, its lag E.g. General Electric, banking price declines E.g. Dow Chemical, Toyota Return by unit produced After-sales offers Basic offer Capacity / Occupancy Adrian Slywotzky and David Morrison, The profit Zone, 1998 Eduardo Larrain - Linkedin - Website 26
  • 27. Business models have been studied for 30 years Traditional business models: trying to explain success with profit models 19. New Product Profit 20. Relative Market Share Profit 21. Experience Curve Profit As new products are introduced profit margins are high and Companies with high market share tend to be more Experience drives down the transactional cost growth rapid. As the product mature the profit margins fall profitable. Large companies have price advantages due to manufacturing experiences and volume economies, such as purchasing capability and economies of scale Diffusion Return Unit cost Time Relative market share Cumulated experience 22. Low Cost Business Design The company trives on reducing the cost per unit through cumulative experience E.g. Southwest Air, Dell, Internet as an channel distribution (fnac.com,…) Unit cost Traditional Low cost Adrian Slywotzky and David Morrison, The profit Zone, 1998 Eduardo Larrain - Linkedin - Website 27
  • 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 28
  • 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 29
  • 30. Marginal cost of digital information comes closer to nothing Basic economics • In basic economics, price falls to the marginal cost which increases with production… Exhibit – Market supply and demand Exhibit – Costs of one company Price Price Marginal cost Supply Average cost Demand Quantity Quantity • … Though with the technological revolution, marginal cost of digital information comes closer to nothing • Moore law: “number of transistors on a chip doubles every 18 months” Eduardo Larrain - Linkedin - Website 30
  • 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 31
  • 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 32
  • 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 33
  • 34. Better assets rotation can enable new businesses with low margin Better assets rotation • Technological revolution increase assets productivity decreasing the amount of assets immobilized 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 Eduardo Larrain - Linkedin - Website 34
  • 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 35
  • 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 36
  • 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 120% Portugal Royaume-Uni Suède Irlande Moy. UE 110% Autriche Espagne Finlande Danemark Russie Allemagne Pays-Bas 100% Pologne Mobile penetration 2008 Belgique 90% Roumanie 80% Chili Afrique du Sud France Jamaïque Etats-Unis 70% Tunisie Algérie Colombie 60% Botswana Moy. Afrique Canada Mexique Brésil Maroc 50% Guatemala Guyane 40% Nicaragua Arménie Chine 30% Pakistan Namibie Sénégal Vietnam Egypte Côte d'Ivoire 20% Kirghizstan Kenya Lesotho Tanzanie Inde 10% Ouganda Djibouti 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Banked population 2008 Eduardo Larrain - Linkedin - Website 37
  • 38. Other big trends in creating new Internet-based companies Three current trends • Pyramid based strategy: create a business model based on people very low purchasing power • Blue ocean strategy: look for a new ocean rethinking differentiation and low-cost and go beyond industry boundaries • Cloning strategy: clone successful internet sites and replicate them in other countries Eduardo Larrain - Linkedin - Website 38
  • 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 39
  • 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 40
  • 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 41
  • 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 42
  • 43. • Starbucks promise: a “third space” of conviviality between home and work Eduardo Larrain - Linkedin - Website 43
  • 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 • A “third space” of conviviality between home and work • Ikea • Functional home furnishing, low price and design • Easyjet / Ryanair • Simple airline flights at low price faster than the car • Toyota • Auto reliability • Lego • Learning though the joy of building • Danone • Health through food and beverages to a maximum number of people • Yves Rocher • Beauty based on plants Denis Dauchy, 7 étapes pour un business model solide, 2010 Eduardo Larrain - Linkedin - Website 44
  • 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  Distributor  Consumer Mass-market products or services Services to  Company  Employees corporations (food, transportation,…)  Students  Companies (management Web-based business consulting firms, investment models class banking,…)  Prescriber (dentist, general  Patients, social security Pharmaceutical drugs practitioner GP,…) Denis Dauchy, 7 étapes pour un business model solide, 2010 Eduardo Larrain - Linkedin - Website 45
  • 46. • 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 47
  • 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 48
  • 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 49
  • 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 50
  • 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 51
  • 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” DIVERGENCE FOCUS W. Chan Kim and Renée Mauborgne, Blue Ocean Strategy, 2005 Eduardo Larrain - Linkedin - Website 52
  • 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 53
  • 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” FOCUS DIVERGENCE High Low price new vehicule Used-vehicule Logan Low Price Spaciousness Garanty Resistance Design Accessories Status • Similarly, Amazon launched Marketplace not only to compete with second-hand cultural goods marketplace like eBay but to close the gap between new and second items Eduardo Larrain - Linkedin - Website 54
  • 55. 2 – Revenue stream Definition and scope • Revenue stream is the cash a company generates from each customer segment • A business model can involve two different types of Revenue streams: • Transaction revenues resulting from one-time customer payments • Recurring revenues resulting from ongoing payments to either deliver a Value proposition to customers or provide post-purchase customer support Eduardo Larrain - Linkedin - Website 55
  • 56. 2 – Revenue stream Ways to generate revenue streams • Asset sale: selling the ownership rights to a physical product. E.g. Amazon selling a book • Usage fee: selling the use of particular service. E.g. A telecom operator charging by the minute • Subscription fee: selling continuous access to a service. E.g. Club Med Gym, WOW/World of Warcraft online • Lending/Renting/Leasing: temporary granting someone the exclusive right to use a particular asset for a fixed period in return for a fee. E.g. Autolib • Licensing: giving permission to use protected intellectual property in exchange of licensing fees. E.g. media industry • Brokerage fees: intermediation services performed on behalf of two or more parties. E.g. credit cart providers, real estate agents • Advertising: fees for advertising a particular product, service or brand. Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 56
  • 57. 2 – Revenue stream Each revenue stream might have different pricing mechanisms Pricing mechanisms Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 57
  • 58. How do you set a price Eduardo Larrain - Linkedin - Website 58
  • 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 59
  • 60. 2 – Revenue stream Reminder Pricing strategy depending of the product life cycle • Product introduction: • Market skimming strategy setting up a very high price . E.g. Electronic goods, luxury • Or Penetration strategy: real low price even below cost to gain market share • Growth: decrease price because of volume • Maturity: decrease price because of competition • Decline: special offer because price is the main factor of value Chris Anderson, Free the future of a radical price, 2009 Milton Friedman, There's no such thing as a free lunch,1975 Eduardo Larrain - Linkedin - Website 60
  • 61. How can a product be free Eduardo Larrain - Linkedin - Website 61
  • 62. 2 – Revenue stream Introduction to Free Definition and scope • Free is giving without a cost… all included • Free is not to be mistaken with “free” used by advertisers when it’s not really free: • Free “buy one get one free” is just another way of saying 50 percent off when you buy two • Free gift inside • Free shipping • Basic economics: there's no such thing as a free lunch • The "free lunch“ refers to the once-common tradition of saloons in the United States providing a "free" lunch to patrons who had purchased at least one drink. All the foods on offer were high in salt (e.g. ham, cheese and salted crackers) so those who ate them ended up buying a lot of beer. • You can make money on free (revenue stream) but also free can lead to fast growth: • Before the 2000’s, Dell was known to be the first company to have reached one billion sales after been launched in less than 10 years Chris Anderson, Free the future of a radical price, 2009 Milton Friedman, There's no such thing as a free lunch,1975 Eduardo Larrain - Linkedin - Website 62
  • 63. 2 – Revenue stream Introduction to Free The penny gap theory • The penny gap is the difference between cheap and free • For small payments, there is not a constant elasticity in price • Zero is one market and any other price is another market • Zero can attract lots of people because from the consumer’s perspective charging even a penny makes us think about the choice Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 63
  • 64. 2 – Revenue stream Introduction to Free The economics of abundance (vs. scarcity) • Digital technologies have become too cheap to meter creating a economy of abundance (e.g. information) • Digital free theory: • “If it’s digital, sooner or later it’s going to be free” • “When something halves in price each year, zero is inevitable” • “Waste is good” • “Every abundance creates a new scarcity” (e.g. time) • Though, externalities for the consumer still exist: technical process when buying or when recycling, travel time,… Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 64
  • 65. 2 – Revenue stream Introduction to Free 4 revenue streams around: first two been very old but evolving and the last two are emerging with Internet A. Direct Cross-Subsidies: give a free product that have high probability to make people pay for something else B. The “three-parties” (or two-sided markets): one customer segment subsidizes another (the most common) C. Freemium: premium paid version D. Non-monetary markets: people choose to give away with no expectation of payment Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 65
  • 66. 2 – Revenue stream A – Direct Cross-Subsidies Definition and scope • This is the oldest and most familiar model where the cost of one product is shifted into the price of another • Free attracts customer in masses. Then cross-selling or up-selling validate the business model: • Give a product (equipment) and sell a service (maintenance) or another product (supplies) • Key success factor is the increase the equipment rate with products with better profitability • It has other names: Gillette and razor blades, Equipment and Supplies, Equipment and Maintenance Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 66
  • 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 67
  • 68. 2 – Revenue stream A – Direct Cross-Subsidies Famous examples of direct-cross subsidies Free or far under cost Where the money comes from Companies Printer Ink Printer manufacturer Coffee machine Capsules Nespresso Razor Razor blades Gillette Real estate loan, credit card, Cross-selling because customer Retail banks savings account is stuck with the same bank for 20/30 years Airline ticket Hotel room, rental car, cruise Go Voyages, airline companies and vacation package Elevator Maintenance and security Elevator companies upgrades Alarms Electronic surveillance Security companies Equipement Reagent supplies Medical biology companies Telephone Communications Carrier Eduardo Larrain - Linkedin - Website 68
  • 69. 2 – Revenue stream A – Direct Cross-Subsidies More examples of direct-cross subsidies • Give away services, sell products (Apple Store Genius Bar Tech support) • Or Give away products, sell services (free gifts when you open a bank account) • Give away software, sell hardware (IBM and HP’s linux offerings) • Or Give away hardware, sell software (video game console model) • Give away cell phones, sell minutes of talk time (many carriers) • Or Give away talk time, sell cell phones (many of the same carriers, with free nights and weekend plans) • Give away the show, sell the drinks (strip clubs) • Or Give away the drinks, sell the show (casinos) • Free with purchase (retailer “loss leaders” e.g. gas sold in a supermarket) • Free samples (gift boxes) • Free trials (magazine subscriptions) • Free parking (malls, supermarkets) • Free condiments (restaurants) Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 69
  • 70. 2 – Revenue stream B – Three-parties or Two-sided markets Definition and scope • A third party pays participate in a market created by a free exchange between the first two parties. Thus one customer segment subsidizes another • The most common of the economies built around free is the three party system • Advertising is the most famous one where advertisers pay for media to reach consumers: Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 70
  • 71. 2 – Revenue stream B – Three-parties or Two-sided markets Markets with three-parties revenue stream • Three-parties is not limited to advertising Market First-party Third-party Second-party Consumer examples Search Internet user Advertisers Google, Yahoo! Online recruitment Job seeker Recuiters Monster, cadreemploi, keljob Free newspapers Readers Advertisers Metro, 20 Minutes Free softwares Readers Software publisher Adobe Debit card Card owners Retail Banks Ecommerce platform Sellers Buyers eBay, Amazon marketplace Outdoor advertising Municipalities Advertisers JC Decaux, Clear Channel Denis Dauchy, 7 étapes pour un business model solide, 2010 Eduardo Larrain - Linkedin - Website 71
  • 72. 2 – Revenue stream B – Three-parties or Two-sided markets More examples of three-parties • Give free voice calling (in the US), charge advertisers (Facebook Messenger app) • Give away content, sell access to the audience (ad-support media) • Give woman free admission, charge men (bars) • Give children free admission, charge adults (museums) • Give away listings, sell premium search (match.com) • Sell listings, give away search (craigslist housing) • Give away travel services, get a cut of rental car and hotel reservations (travelocity) • Give away house listings, sell mortgages (Zillow) • Give away content, sell information about the consumers (practice fusion) • Give away content, sell stuff (Thinkgeek) • Give away content, charge advertisers to be featured in it (product placement) • Give away resume listings, charge for power search (Linkedin) Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 72
  • 73. 2 – Revenue stream C – Freemium Definition and scope • Freemium is giving a free basic version to most of people and charging for a premium version to a few people • Freemium or contraction of Free and Premium was invented by Fred Wilson in 2006. • Freemium is different with direct-cross subsidiaries because the ratio of free to paid is high (e.g. 90%, 95%) when giving free sample has a low ratio • This ratio is enabled by Internet because the cost of serving the basic version is close to zero • Si it’s not the same thing as "premium with a free sample.“ • Freemium is one of the most common Internet-based business model even though not every product or service can work as freemium Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 73
  • 74. 2 – Revenue stream C – Freemium Different kind of limitation of the basic free version • Functionnalities • e.g. Linkedin, Flickr, Skype, Evernote, WordPress • Time • e.g. legal online streaming • Capacity • e.g. sending large files, DropBox (cloud backup system) • Storage • e.g. webmails • Others factors • e.g. • Spotify and Gmail invitations • Seat limited (first customers get free seats) • Customer type limited: free for small and young companies, universities (licence model) Eduardo Larrain - Linkedin - Website 74
  • 75. 2 – Revenue stream C – Freemium Why go for Freemium business model? • Marketing: • By definition, having a free product makes it really easy to get customers • Even though a free user might not convert, they can invite other free users who might (referral) • Network effects (like fax): • A network effect is what happens when a product or service becomes more valuable the more people use it • A phone isn't very useful if you can't call anyone else with it. But once everyone you know has a phone, it becomes a pretty valuable thing to have • If you're in a market that lends itself to network effects you're going to want to have a free basic product because if you don't someone else will and will use the network effects to crush you • E.g. Skype has 600 million users who make calls for free over the internet and only a small percentage of those pay to make calls to landlines Business Insider, What Is The Freemium Business Model, 04/2011 Eduardo Larrain - Linkedin - Website 75
  • 76. 2 – Revenue stream C – Freemium Key success factors (if not, choose another business model) • Get lots and lots of free users: • Freemium is a numbers game: if only 1% of your users are going to pay you, then you need to have lots and lots of free users (millions, typically) to make that 1% enough money • If your product is more niche, go for premium instead of freemium • If your product is not sticky, go for advertising instead of freemium • Have a product or service whose value to users increases with time: • This is the biggest thing that most people • The value of your service needs to increase the more people use it • E.g. Spotify: where you create all your playlists and organize your music. Once you've done thatyou're much more likely to pay up. The value of Spotify to you has gone up from being just music to music, your playlists and your friends' playlists, so paying starts to make sense • Keep costs low: • Freemium works because the marginal cost of each additional user is low, so you need to keep your operating costs correspondingly low • Time: • It takes a long time to be profitable because users take longer to convert as the value of the product to them increases over time, and because you keep adding (hopefully) new free users, freemium businesses take a long time to reach breakeven point • As people get older, people migrate into paying customer (premium part of freemium) because they get richer Business Insider, What Is The Freemium Business Model, 04/2011 Eduardo Larrain - Linkedin - Website 76
  • 77. 2 – Revenue stream C – Freemium Examples of freemium • Give away basic information, sell richer information in easier-to-use form (BoxOfficeMojo) • Give away generic management advice, sell customized management advice (McKinsey) • Give away Web content, sell printed content (everything from magazines to books) • Give away online games, charge a subscription to do more in the game (penguins) • Give away demo software, charge for the full version (most video games) • Give away computer-to-computer calls, sell computer-to-phone calls (Skype) • Give away free photo-sharing services, charge for additional storage space (Flickr) • Give away basic software, sell more features (QuickTime) • Give away ad-supported service, sell the ability to remove the ads (Ning) • Give away "snippets" sell books (Google Books) • Give away virtual tourism, sell virtual land (Second Life) Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 77
  • 78. 2 – Revenue stream D – Nonmonetary markets Definition and scope • People give away content with no expectation of Payment • Gift economy is based on the principle that the action of individuals have a global impact • People give for different reasons: to gain reputation e.g. blog writers, altruism e.g. Wikipedia or unintentionally/passively (web content helps Google) • Labor exchange: paying something with labor even without knowing it • E.g. free content in exchange of Captcha solving (used by spammer in exchange of free porn but also used by Google Street view to decipher street numbers, names and trafic signs) • E.g. voting on Digg, Yahoo Answers or using Google 411 (phone directory in exchange of speech sound) • Piracy: when piracy is so powerful that content producer have accepted that, form them, doing the activity is not a moneymaking business • E.g. online music Chris Anderson, Free the future of a radical price, 2009 Eduardo Larrain - Linkedin - Website 78
  • 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 79
  • 80. reCAPTCHA is a free CAPTCHA service that helps to digitize books, newspapers and old time radio shows Answers to reCAPTCHA challenges are used to digitize textual documents Comparison of the accuracy of standard OCR versus Example of a CAPTCHA reCAPTCHA transcriptions OCR: Optical Character Recognition programs Eduardo Larrain - Linkedin - Website 80
  • 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 81
  • 82. • How’s the music industry going? Eduardo Larrain - Linkedin - Website 82
  • 83. 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 84
  • 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 85
  • 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 • 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 IFPI Svenska Gruppen, press report, 07/2012 Eduardo Larrain - Linkedin - Website 86
  • 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 87
  • 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 • 11 M song tracks (stock) in 2001, 100 M in 2010 (Gracenote/Sony db > Shazam db) • Growth of the Gracenote database obviously includes a lot of older music that has only recently been indexed and that is been rediscovered – E.g. Oscar Wilde - Los Vidrios Quebrados (1967) • The trend still looks like the amount of music available to consumers is steadily growing • At the other side, overall sale of music (including albums, singles, digital tracks,…) exceeded 1.5 billion transactions in 2010 (up from 845 million transactions in 2000) Floor 64, The Sky Is Rising, 01/2012 Eduardo Larrain - Linkedin - Website 88
  • 89. 2 – Revenue stream Looking at the music industry What about musicians revenues? • Psy with its Gangnam Style song, viewed more than 1 billion times, would never had been a success outside South Korea without Youtube – It generated 8 M USD from advertising (50/50 split) • Ticket prices and merchandise have become major sources of income for many popular rock stars like Lady Gaga, Madonna, Bruce Springsteen and for bands like U2 • It’s not easy to duplicate the experience of a live show, so concerts have become a source of revenue for musicians and aren’t negatively affected by the availability of free downloadable music - in fact, free music can encourage fans to attend live performances • There’s actual scarcity for live music • Other trends: – Algorithms may be replacing humans in some parts of discovering new talent (or at least discovering talent more cost-effectively) – Gracenote, Shazam,… are datamining music metadata in order to serve better music recommendations to consumers or to predict which artists will be popular with target demographic groups Floor 64, The Sky Is Rising, 01/2012 Eduardo Larrain - Linkedin - Website 89
  • 90. 2 – Revenue stream What has the Entertainment industry learned from the Music industry? Other Entertainment industries continued to grow in the past years when the Music industry, newspapers and consumer magazine publishing took a hit PwC, Global Entertainment & Media Outlook 2012-2016, 2012 Eduardo Larrain - Linkedin - Website 90
  • 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 • For consumers, today is an age of absolute abundance in entertainment due to the digital era and piracy • New business models based on Digital sales are emerging in each Entertainement industry to take over decreasing physical sales IFPI, press report, 2012 Eduardo Larrain - Linkedin - Website 91
  • 92. 2 – Revenue stream What has the Entertainment industry learned from the Music industry? Though not all new business models can be based on Advertising since advertising is a huge but finite market and volatile (reliant on the economic situation ) PwC, Global Entertainment & Media Outlook 2012-2016, 2012 Eduardo Larrain - Linkedin - Website 92
  • 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 93
  • 94. • How’s the video game industry going? Eduardo Larrain - Linkedin - Website
  • 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 • Globally, the amount that consumers spend on video games - for hardware, software and accessories - has grown from about $20 billion in 2000 to approximately $70 billion in 2011 • The demographics of video game players has expanded greatly beyond the traditional core of boys and young men: – 53% of game players are male and 47% female – Average gamer player age is 30 – The amount of time kids are spending on video games has grown from 26 minutes per day in 1999 to 1 hour and 13 minutes in 2009 due to mobile device that has allow kids to squeeze more playing time into their busy days (Kaiser Family Foundation survey) • Worldwide, the population of gamers has exploded from 250 million in 2008 to 1.5 billion in 2011 Floor 64, The Sky Is Rising, 01/2012 Eduardo Larrain - Linkedin - Website 95
  • 96. 2 – Revenue stream Looking at the video game industry Purchases of digital content are growing the video games industry • The traditional console business model, based on the installed based per the attach rate (number of games per owner), led to an elitist approach to game design since price of each game was high (40-60 USD) and hardcore gamers wanted a return for their investment • New video games digital segments have emerged: – Downloads: Steam is to games as iTunes is to music – Massively Multiplayer Online (MMO) e.g. World Of Warcraft – Online / Casual – Mobile – Social • Digital sales (and rental delivery) now generate 40% of the industry ESA, Essential Facts about the computer and the video game industry, 2012 Eduardo Larrain - Linkedin - Website 96
  • 97. 2 – Revenue stream Looking at the video game industry Looking at the video game download business model • Piracy of video games has fewer benefits than music 2011 top-selling games at retail ranked by unit sales (VGChartz) 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 Eduardo Larrain - Linkedin - Website 97
  • 98. 2 – Revenue stream Looking at the video game industry Looking at MMO business models • Massively Multiplayer Online game are video games in which a large number of players engage simultaneously in a persistent world • Value of an MMO is in the size of the community per life time (retention) • The hardcore game MMO revenue stream was invented by World of Warcraft: – Average customer lifetime of 18 months – Client box or download (50 USD) – Subscription fees (15 USD/m) – Virtual goods – Average full cost to complete WoW for a gamer is 300 USD • Few MMO have been able to replicate WoW model so they switch to F2P to lower entry barrier and get a sizable community e.g. Habbo Hotel, Kart Rider, Warhammer, Everquest,… – Average customer lifetime of 6 months – Free trial or free game – Subscription optional – Virtual goods for actions items (competition) and personalisation (expression) • Theory of engagement: « the longer a user plays the more chances there are he buys virtual items » – Items payable through micro-payments mainly inside the game (60%) and on an external web site Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012 Eduardo Larrain - Linkedin - Website 98
  • 99. 2 – Revenue stream Looking at the video game industry Looking at the online casual business model • Online casual games are games played online to “kill time, make a pause, relieves from stress”: • Free-to-Play (F2P) is the main business model (also for social games and some mobile games) • F2P is a freemium business model that can be based on: – Try-and-buy: limited access (time, levels,…), though games must be really addictive – Advertising with ads display on hosting sites or inside the game – Virtual goods Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012 Eduardo Larrain - Linkedin - Website 99
  • 100. 2 – Revenue stream Looking at the video game industry Looking at the mobile video game business model • Ten of thousands of mobile games for smartphones and tablets can be download on platforms such as the Appel App Store, Android MarketPlaces (Google Play), Amazon, Facebook Mobile and Playstation Suite • Distribution is bypassing carriers: 30/70 meaning the game app developer get 70% of sales revenue (vs. 45/55 in cell phone business) – An opportunity for mobile banking? • Mobile video game revenue stream is based on: – Average customer lifetime of 2 months – Selling the app (e.g. at 0.99 cent or F2P model) – Selling virtual goods – A little of advertising (average of 15%): • Offer walls • Sponsoring Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012 Eduardo Larrain - Linkedin - Website 100
  • 101. 2 – Revenue stream Looking at the video game industry Looking at social games • Social games are those games played primarily on social networking sites or games that can be played with a person’s real world social graph – E.g. CityVille, FarmVille (Zynga), EA (Sims) • Social video game revenue stream is based on: – F2P model with a logic of a massive audience – Virtual goods (50%) – Advertising (25%) – Lead-generation offers (25%): virtual currency incentives by marketers to social gamers in exchange of signing up for subscriptions, participating in surveys, or buying goods and services – Since virality is a key to success, notifications, invitations, sharing, gifting and other social network tools are used extensively to get new customers – Social games must work with a low retention rate (first day retention rate of 30% is a “huge success”) Luc Bourcier, Game in progress new business models for the videogame industry, 04/2012 Eduardo Larrain - Linkedin - Website 101
  • 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 102
  • 103. 2 – Revenue stream Looking at the video game industry What’s next for the game industry? • “Gamification” trend meaning that video games are no longer restricted to leisure: – Every part of our lives will eventually be turned into a game – Potentially encourage people to change their behavior to: • Benefit the environment • Perform their jobs better • Lose weight • Buy products • Perform almost any task imaginable • Games are even encroaching into vocational education Eduardo Larrain - Linkedin - Website 103
  • 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 • Two business models: – Based on subscriptions such as Vimeo • 150.000 paying subscribers in 2010 – Based on advertising such as Youtube • 400 M USD of adversitiving revenues in 2010 • Online videos are also a substantial traffic driver to social networking (e.g. Facebook) Eduardo Larrain - Linkedin - Website 104
  • 105. • How’s the book publishing industry going? Eduardo Larrain - Linkedin - Website
  • 106. 2 – Revenue stream Looking at the book publishing industry Sales of e-books expected to compensate the decline of the physical books • Consumer and educational book publishing will increase by 0.6 percent compounded annually to 116 bn USD in 2016 from 112 bn in 2011 – E-books grow their share of global spending from 5% in 2011 up to 18% in 2016 – Print/audio consumer and educational books will continue to decline throughout the forecast period notably paperback books (“livres de poche” in French) • Publishers will need to provide eBooks in addition to paperbacks and the entire value process will be changing, from aggregation right to distribution • Piracy less likely to impact digital sales like in the music industry: demographic groups that are most often associated with digital piracy (generally men between 20 and 39 years old) and not the same than those associated with high-volume reading of mass market books (in general women age 40 and older) • New intermediaries are emerging to handle eBooks: – eBook platform (e.g. mass aggregators such as Amazon, Apple, and Google) – Handling of payments – Support for digital conversion – Establishment of a digital content system PwC, Turning the Page - The Future of eBooks, 2010 Eduardo Larrain - Linkedin - Website 106
  • 107. 2 – Revenue stream Looking at the book publishing industry New revenues streams are emerging and changing current business models • Apps and special eBook editions enriched with music and video – Notably for educational and juveniles segment e.g. Byook start-up http://youtu.be/O_pBNPe3s-M • Sales of individual chapters and sections from books • Offer additional content such as a blog/forum dedicated to a chapter or sentence, immediate definition of a word, links to other content (news/other authors),… • Easier to sell updates • Books on demand • Easier to sell porn and erotic fiction • Establish basic contracts with university libraries to offer free eBooks for students or offer special editions exclusively to students for a discounted price • Providing online reviews (non-monetary action is posting a review at Amazon website) PwC, Turning the Page - The Future of eBooks, 2010 Eduardo Larrain - Linkedin - Website 107
  • 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 • In 2010, 4 million new titles were published with 92% of those being “non-traditional” i.e. self-publishing and books representing the reuse of content, most of it not covered by copyright • Non-traditional books are largely on demand titles produced by reprint houses specializing in public domain works and by presses catering to self-publishers and micro-niche publications • Non-traditional titles are marketed primarily on the Web Bowker, ISBN Output 2002-2011, 2012 Non-traditional numbers are undersestimated since books with no International Standard Book Numbers (ISBN) are not included Eduardo Larrain - Linkedin - Website 108
  • 109. 2 – Revenue stream What’s the business model of self-publishing? The traditional business model of book publishing Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 109
  • 110. 2 – Revenue stream What’s the business model of self-publishing? A new business model by lulu.com Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010 Eduardo Larrain - Linkedin - Website 110