YR1TJ19I

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YR1/TJ19/IE module course NEW BUSINESS MODELS
Jussi Puhakainen, Professor (FT) TSE Pasi
Malinen, Professor (FT) TSE
Innovative revenue logics
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This is important

• Check regularly the following web-site
• http//www.nordicict.eu/courses/newbusinessmodels.
  html
• Book
• Open innovation the new imperative for creating
  and profiting from technology, Chesbrough, Henry
  W. (2003), 1-57851-837-7.

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today

• Back to business models (the set that was not
  shown due to technical problems)
• Examples of innovative revenue logics
• Open innovation
• Innovative BMs broken to pieces
• Elements of BM, once again
• NEXT (wed) swedish cases handled in similar
  manner, case people, prepare yourself

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Business model

• A business model (also called a business design)
  is the instrument by which a business intends to
  generate revenue and profits. It is a summary of
  how a company means to serve its customers, and
  involves both strategy (what an business intends
  to do) as well as a implementation (how the
  business will carry out its plans).
• A business model describes how a business
• Selects its customers,
• Defines and differentiates its product offerings,
  
• Creates utility for its customers,
• Acquires and keeps customers,
• Goes to the market (promotion strategy and
  distribution strategy),
• Defines the tasks to be performed,
• Configures its resources, and
• Captures profit.

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Business models (Rappa) on the Web

• Brokerage
• Advertising
• Infomediary
• Merchant
• Manufacturer
• Affiliate
• Community
• Subscription
• Utility

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http//digitalenterprise.org/about.html

• Michael Rappas excellent site for managing
  digital business. Special section for business
  models
• Brokerage model Brokers are market-makers they
  bring buyers and sellers together and facilitate
  transactions. Brokers play a frequent role in
  business-to-business (B2B), business-to-consumer
  (B2C), or consumer-to-consumer (C2C) markets.
  Usually a broker charges a fee or commission for
  each transaction it enables. The formula for fees
  can vary.

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Manufacturer (Direct) Model

• The manufacturer or "direct model", it is
  predicated on the power of the web to allow a
  manufacturer (i.e., a company that creates a
  product or service) to reach buyers directly and
  thereby compress the distribution channel. The
  manufacturer model can be based on efficiency,
  improved customer service, and a better
  understanding of customer preferences. Dell
  Computer

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More - advertising

• The web advertising model is an extension of the
  traditional media broadcast model. The
  broadcaster, in this case, a web site, provides
  content (usually, but not necessarily, for free)
  and services (like email, IM, blogs) mixed with
  advertising messages in the form of banner ads.
  The banner ads may be the major or sole source of
  revenue for the broadcaster. The broadcaster may
  be a content creator or a distributor of content
  created elsewhere. The advertising model works
  best when the volume of viewer traffic is large
  or highly specialized.
• Multiple revenue logics but usually one per BM

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Infomediary Model

• Data about consumers and their consumption habits
  are valuable, especially when that information is
  carefully analyzed and used to target marketing
  campaigns. Independently collected data about
  producers and their products are useful to
  consumers when considering a purchase. Some firms
  function as infomediaries (information
  intermediaries) assisting buyers and/or sellers
  understand a given market.
• Revenue sell services and data for other actors
  (Nielsen etc.)

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Merchant Model

• Wholesalers and retailers of goods and services.
  Sales may be made based on list prices or through
  auction. Virtual Merchant --or e-tailer, is a
  retail merchant that operates solely over the
  web. Amazon.com
• Catalog Merchant -- mail-order business with a
  web-based catalog. Combines mail, telephone and
  online ordering. Lands' End
• Click and Mortar -- traditional brick-and-mortar
  retail establishment with web storefront. Barnes
  Noble
• Bit Vendor -- a merchant that deals strictly in
  digital products and services and, in its purest
  form, conducts both sales and distribution over
  the web. Apple iTunes Music Store

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Affiliate Model

• In contrast to the generalized portal, which
  seeks to drive a high volume of traffic to one
  site, the affiliate model, provides purchase
  opportunities wherever people may be surfing. It
  does this by offering financial incentives (in
  the form of a percentage of revenue) to
  affiliated partner sites. The affiliates provide
  purchase-point click-through to the merchant. It
  is a pay-for-performance model -- if an affiliate
  does not generate sales, it represents no cost to
  the merchant. The affiliate model is inherently
  well-suited to the web, which explains its
  popularity. Variations include, banner exchange,
  pay-per-click, and revenue sharing programs.
  Barnes Noble, Amazon.com
• Banner Exchange -- trades banner placement among
  a network of affiliated sites.
• Pay-per-click -- site that pays affiliates for a
  user click-through.
• Revenue Sharing -- offers a percent-of-sale
  commission based on a user click-through in which
  the user subsequently purchases a product.

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Community Model

• The viability of the community model is based on
  user loyalty. Users have a high investment in
  both time and emotion. Revenue can be based on
  the sale of ancillary products and services or
  voluntary contributions or revenue may be tied
  to contextual advertising and subscriptions for
  premium services. The Internet is inherently
  suited to community business models and today
  this is one of the more fertile areas of
  development, as seen in rise of social
  networking.
• Open Source -- software developed collaboratively
  by a global community of programmers who share
  code openly. Instead of licensing code for a fee,
  open source relies on revenue generated from
  related services like systems integration,
  product support, tutorials and user
  documentation. Red Hat

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Subscription Model

• Users are charged a periodic -- daily, monthly or
  annual -- fee to subscribe to a service. It is
  not uncommon for sites to combine free content
  with "premium" (i.e., subscriber- or member-only)
  content. Subscription fees are incurred
  irrespective of actual usage rates. Subscription
  and advertising models are frequently combined.
  Content Services -- provide text, audio, or video
  content to users who subscribe for a fee to gain
  access to the service. Listen.com, Netflix
• Person-to-Person Networking Services -- are
  conduits for the distribution of user-submitted
  information, such as individuals searching for
  former schoolmates. Classmates

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The utility or "on-demand" model

• The utility or "on-demand" model is based on
  metering usage, or a "pay as you go" approach.
  Unlike subscriber services, metered services are
  based on actual usage rates. Traditionally,
  metering has been used for essential services
  (e.g., electricity water, long-distance telephone
  services). Internet service providers (ISPs) in
  some parts of the world operate as utilities,
  charging customers for connection minutes, as
  opposed to the subscriber model common in the
  U.S.

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While is it interesting

• One must point out that most of these BMs have
  single source of revenue, or one revenue logic
• Innovative BM does not have to have multiple
  revenue streams, but it does help

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Revenue Model

• A part of business model
• In short defines where the money comes from
• May be vastly different, think about
  manufacturing, performing songwriter, a niche
  group in the Internet (http//www.uboat.net)
• Surprisingly, describes the logic of revenue
• If there are multiple sources of revenue, the
  company usually has better strategic position,
  because

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From small streams becomes a

• Lets look at some cases

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World of warcraft

• World of Warcraft at 250 Million in Annual
  Revenue
• The New York Times covered the fantastic growth
  of World of Warcraft. According to the newspaper,
  the game is on track to reach over 200 million
  in subscription revenue this year in addition to
  50 million retail box sales. The game has sold
  over 700,000 copies since launch and regularly
  has over 250,000 players online at the same time
• http//www.firstadopter.com/fa/archives/000648.htm
  l, 2005

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2008

• Blizzard Entertainment, owners of World of
  Warcraft, announced this morning that the game
  now has more than 10 million paying subscribers
  around the world. Online gameplay costs an
  average of 15 USD per month.
• http//www.readwriteweb.com/archives/world_of_warc
  raft_hits_10_mill.php

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And the extras

• The retail box
• The extra dvds add-on scenarios
• Services, see next slide
• And side business generated for others, take a
  holiday and leave your character to a virtual
  kennel, he/she will be developed and trained
  further
• Buy virtual money with real one

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And no, Im not playing it

• But both my sons and their friends are
• Talk about social network and business
• Pasi (prof. Malinen will continue after me with
  youtube, facebook and more niche social networks)

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Open source software

• How can free be business?

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Example http//www.intalio.com/

• Intalio recently moved 80 or so of its offering
  into Open Source. The fully featured product is
  available free as long as it is run on an Open
  Source Database, however, customers have to pay
  an Enterprise Licence if they intend to use it on
  a commercial DB. Services and Training are
  chargeable - so far thats the traditional Open
  Source model, if there is such a thing
• However, Intalio started an innovative experience
  outsourcing their product management to none
  other but their customers.

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cont

• They publish the future product development
  roadmap, along with the estimated timeline and
  cost of features, enhancements.
• Customers then can bid as to how much they are
  willing to pay to reprioritize the plan and get
  their requested features developed sooner.
• To move an item up on the schedule the entire
  cost has to be covered and at least two customers
  have to request it. As the model scales up, the
  requisite minimum vote may move from two to a
  higher number of customers - the more the better,
  the closer they are to a standard core product.
  50 of what customers pay will be made available
  to them as discount towards future Enterprise
  Licence purchases.

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Cont.

• So lets tally it up. If the model scales up,
  Intalio expects most of its development paid for
  by customers - albeit at cost level.
• But when you start from zero development cost,
  zero sales cost (there is no sales organization,
  its all a download-try-buy pull process),
• add revenue from training and services,
• provide incentives for customers to purchase
  licences (the 50) - Id say it looks pretty good
  to me
• http//www.zoliblog.com/2006/05/10/innovative-soft
  ware-business-models/

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But sometimes it is just technology

• Not even remotely innovative revenue-wise but
  still worth mentioning
• http//www.tvkaista.fi/netpvr/Login

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Öh, and then some

• Winning Business Models Innovation vs. Invention
• Invention is the classic way to build a
  successful company. However, invention is much
  harder for a mature company or a mature
  technology. Business model innovation is an
  attractive option in many cases as a way to
  differentiate an offer, improve profitability or
  both. Below are five emerging business models.
• All following from
• http//rubiconconsulting.com/insight/articles/2008
  /01/winning-business-models-innova.html

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1.

• 1Crowd-SourcingThreadless sells t-shirts in
  whole new way. People submit their own shirt
  designs125 per dayand the Threadless community
  votes on which designs get produced. The result
  the winning designs get sold at a premium and
  there are no duds. The winning designers get
  2000 and Threadless gets a low-overhead design
  process. It might take some thinking, but the
  crowd-source concept can apply to nearly any
  consumer product.

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2.

• 2Community Support If you are looking for a way
  to lower support costs while creating good
  influencer buzz, check out McAfee forums. Theyve
  co-opted customers to support each other, and
  sing their praises in the process. McAfee has
  figured out how to use this to reduce their
  support costs and facilitate real-life answers to
  real-life problems. Any doubts about the
  viability of this approach evaporate when you
  look at the number of daily posts, both for
  individuals and in aggregate. One person averages
  17 posts a day.

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3.

• Customer Advocacy Sierra Snowboard is a
  snowboard shop in Sacramento, CA. Theyve created
  a community of outdoor enthusiasts that act as
  online advocates. Think of them as unpaid sales
  associates. What McAfee has done for customer
  support, Sierra Snowboards has done for the sales
  process. A grandmother might post a question
  about what to buy her grandson, and the community
  suggests just the right thing. You dont have to
  make the purchase at Sierra Snowboards, but why
  wouldnt you? The net result is great evangelism
  of products and great brand.

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4.

• Community LocalizationWe all know about open
  source product development, but 37 Signals
  engages volunteers to localize their product into
  100 languages. This is no accident, but a core
  element of the 37 Signals business model. They
  deliberately developed their application so it is
  easy to localize. The result is that a five
  person company was able to generate global reach
  and tons more revenue than for an English-only
  application. They even manage to get their users
  to translate collateral and help create local
  enthusiasts.

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5.

• PlatformThe fundamental idea is to figure out
  how to get a vast ecosystem supporting your
  standard so that ultimately the whole ecosystem
  has to die for you to die. Big companies do this
  all the time think Microsoft Windows, SAP R/3 or
  Intuits Quicken franchise. On a smaller scale,
  Salesforce.com, Shutterfly, Second Life and
  others have built into business models around the
  platform concept.
• Not all of these concepts work for every
  situation, but thats not the point. The point is
  that innovative business models are powerful
  enablers.

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And

• Do you know of an innovative business model I
  should know about?

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The End

• "Essentially, the great question remains Who
  will hold Constantinople?" Napoleon