Business Review Model: August 2009

Sunday, August 30, 2009

Business Models Beyond Profit - Alexander Osterwalder on Social Entrepreneurship

In this presentation Alexander Osterwalder, author of Business Model Generation, expands his business model canvas to include social and environmental costs and benefits, with some really nice examples such as Grameen Bank and Kiva.

Saturday, August 29, 2009

Strategic Alliances - an important part of most business models

A strategic alliance is an agreement between two or more players to share resources or knowledge, to be beneficial to all parties involved. It is as way to supplement internal assets, capabilities and activities, with access to needed resources or processes from outside players such as suppliers, customers, competitors, companies in different industries, brand owners, universities, institutes or divisions of government.

Different forms of Strategic Alliances

Strategic Alliances can take different forms, occur within an industry or between actors in different industries, and can range from simple agreements to mergers or equity joint ventures. There are basically three types of generic strategic alliances: Non-Equity Strategic Alliances, Equity Strategic Alliances, and Joint Venture Strategic Alliances.

Non-Equity Strategic Alliances

Non-Equity Strategic Alliances can range from close working relations with suppliers, outsourcing of activities or licensing of technology and IPRs, to large R&D consortia, industry clusters and innovation networks. Informal alliances without any agreements, or based on "Gentlemen’s agreement", are common among smaller companies and within university research groups. Another form of informal non-equity alliances are geographic clusters where concentrations of interconnected players, industries, universities and government agencies co-exists, increasing local competition and productivity.

Equity Strategic Alliances

In Equity Strategic Alliances agreements are supplemented by equity investments, making the parties shareholders as well as stakeholders in each other. The investments are passive so each firm retains fully its decision power. The cross-shareholding of companies may result in a complex network where company A owns equity in company B that owns equity in C, creating direct and indirect ownership. Intuitively, when firms share profits the incentives for competing are reduced and are often done to enhance control and make takeovers more difficult.

Joint Venture Strategic Alliances

Joint ventures are distinguished from Equity Strategic Alliances in that the participating companies usually form a new and separate legal entity in which they contribute equity and other resources such as brands, technology or intellectual property. The parties agree to share revenues, expenses and control of the created company for one specific project only or a continuing business relationship.

Reasons for entering a Strategic Alliance

Firms entering strategic alliances often have multiple objectives, some of them listed below:

Access to intellectual property rights
Access to knowledge
Access to new technology
Access to new markets
Access to distribution skills
Access to manufacturing capabilities
Access to marketing skills
Access to management skills
Access to capital
Create critical mass
Create common standards
Create new businesses
Create synergies
Diversification
Improve agility
Improve quality
Improve R&D
Improve material flow
Improve speed to market
Influence structural evolution the industry
Inhibit competitors
Reduce administrative costs
Reduce R&D costs
Reduce risk and liability
Reduce cycle time
Utilize by-products

Main risks identified in the literature

There are several risks and limitations using strategic alliances. Failures are often attributed to unrealistic expectations, lack of commitment, cultural differences, strategic goal divergence and insufficient trust. Some of the risks are listed below:

Activities outside scope of original agreement
Hidden costs
Inefficient management
Information leakage
Loss of competencies
Loss of operational control
Partner lock-in
Partner product or service failure
Partner unable or unwilling to supply key resources
Partner's quality performance
Partner take advantage of its position
Partner experiences financial difficulties

Using the Business Model concept

When using the business model concept, listing or visualizing the different parts of the business model, and analyzing what is really core in the business model you often find opportunities for business model innovation using strategic alliances. What if you combine your value proposition with another company? What if you use their brand or they use yours? What if someone else delivers your products or services? What if you use external assets and capabilities to improve or create new value propositions? Could you lower your business model cost structure by using a strategic alliance? Could you create stronger control mechanisms through strategic alliances to protect profit streams from being reduced by competitors, partners or strong customers?

Saturday, August 22, 2009

Is the Advertising Model Dead?

Another interesting panel from The Revenue Bootcamp held on Microsoft campus in Mountain View, California. In this session Bill Reichert, managing director Garage Technology Ventures moderates the discussion about advertising.

Participants:

Samir Arora, Chairman and CEO, Glam Media

Neil Chase, VP Author Services, Federated Media

Tim Kendall, Direcotor Monetization, Facebook

David Kopp, Senior Director, North American Ads, Yahoo!

Xavier Zang, Publisher Partner Management, Microsoft

More videos:

Wednesday, August 19, 2009

IMVU, Tripit, Photobucket, Commission Junction, and ShoeMoney Media in a very interesting panel about online Revenue Models

A very interesting panel moderated by Joyce Chung, Managing Director, Garage Technology Ventures

Participants:

Will Harvey, Co-Founder IMVU

Scott Hintz, Co-Founder, Tripit

Alice Lankester, Former VP Marketing, Photobucket

Kerri Pollard, General Manager, Commission Junction

Jeremy Schoemaker, Founder, ShoeMoney Media.

More videos:

Saturday, August 15, 2009

Selling Virtual Goods - A Popular Revenue Model

Selling virtual goods has become a popular revenue model for games, online services and social networking sites replacing or co-existing with other models such as usage fees, advertising, premium services or sales of user data. Recently Fortune reported that the market in China for virtual goods is larger than the market for online advertising with Tencent, China’s largest IM+Avatar+SNS service, generating 1 billion USD in revenues in 2008, 90% from virtual goods.

What are virtual goods?
Virtual goods are non-physical objects (i.e. rights) that are purchased and exchanged on the Internet represented by pictures, animations or three-dimensional objects inside online platforms, communities and games, controlled by rules. According to Joshua A.T. Fairfield, an expert in the law and regulation of e-commerce and videogames, virtual property are designed to share three legally relevant characteristics with real world property: rivalrousness, persistence, and interconnectivity. Rivalrousness lets the owner exclude other people from using owned objects, persistence protects the investment by ensuring that it lasts and interconnectivity let's other than the owner experience or interact with the objects.

There are three main categories of virtual goods:

Decorative Virtual Goods: Similar to branded physical goods Decorative Virtual Goods are used to express individual personalities, gain status, impress on others, and to give a sense of belonging. Items can be virtual pets or furniture in an online hang-out or clothes, shoes, jewelry or other accessories to dress up an online character in an online game.

Functional Virtual Goods: In online games Functional Virtual Goods can be used to provide new functions, convenience or gameplay options for the player to improve the user experience. The items are functional in the sense that they help the owner to advance in the game and convenient in that users can take shortcuts to save time or lower risk. It can also be to alter the gaming interface, enabling short-cut keys or tools to enhance the visual experience.

Virtual Gifts: Digital flowers or a box of chocolates might not smell as nice or taste as good as real ones, but often the gesture is what matters the most. Virtual Gifts are given away daily at social networking sites and dating services and people are paying as much as $10 to send a virtual flower to the object of their affection. In games, occasions to buy virtual gifts can be extended from birthdays and Valentine’s Day, to include a number of occasions based on the fiction of the game. For virtual items such as flowers that have a physical equivalent, there is also the possibility for the operators to provide real offline gifts.

Virtual goods as advertising
Brand owners and marketers are taking notice of the development and are starting to use virtual goods as a substitute for traditional advertising just as product placements in movies. When the Sex in the City movie was promoted, New Line Cinema gave away free virtual Manolo Blahniks shoes on Facebook. During the first day members gave more than 500 000 shoes to their friends accounting for more than 220 million viewings. Last week Britney Spears announced that she will launch a line of branded virtual goods on Facebook. The gifts that are sold for $2 include virtual birthday cakes, which members can buy for themselves or for friends.

But it's only kids who are buying, right?
According to a recent study by analyst firm Frank N. Magid Associates 12% of Americans Bought Virtual Goods in Past 12 Months. As can be seen in the picture below the largest share is women and in the ages between 25-34, 17% of the women purchased virtual goods in past 12 months.

Why are people buying virtual goods?

In discussions about virtual goods I often get the question why people would spend their hard earned cash on objects that have no tangible substance, a discussion that often ends up in talking about brands, knowledge and money as such, that are all intangible. Why did you buy that expensive Swiss watch when you can get the same design with more functionality for a much lower price?

Basically people buy virtual goods for the same reasons they buy physical goods.

to make an experience more entertaining
to express individual personalities
to have a sense of belonging,
to impress on others
to explore new things
to save time
to lower risk
to have power
to collect items they like
to resell the item and perhaps make a profit
to give it away and make someone else happy

Value Proposition Versioning: Time vs. Money
In online games one basic idea is that some people have all the time in the world while others might have all the money in the world. The first group of players spends hours, days and weeks finding rare in-game items, earning in-game currency and leveling up their characters. The second group might instead use real money to buy in-game items, exchange for in-game currency or get a character that is already leveled up. According to estimates more than 400 000 people worldwide (primarily in low-cost locations) were employed to perform something called Gold Farming, doing mundane actions over and over in order to collect in-game currency and items that are later sold to other players.

There is of course a continuum from players not spending a dime and players buying lots of stuff. What is interesting is that the vast majority is playing for free, subsidized by a few that are paying much more than they would with for example a subscription based revenue model. More about Value Proposition Versioning her e. An example of players buying lots of stuff was mentioned by Adam Caplan at Super Rewards in this video:

"We went back over the last 6 months, looking at the highest monetized individual on the Super Reward platform and we found an individual who spent US$ 30000 across two games in 6 months. You need to have a model that can capture those outliers, and no one can tell me in this room a pay-to-play or a monthly subscription model that can capture US$ 30000 of value from one individual." Adam Caplan, Super Rewards

Digital Product Life Cycle Managemet
In product life cycle management a product's lifetime is sometimes shortened intentionally to encourage customers to make repeated purchases and enable repetitive sales. This can be through quality deterioration or artificially by means of fashion cycles, technology development, new standards etc. For virtual goods there is no technical reason why virtual goods could not last indefinitely, so shortening of product lives is always rather artificial and in some online games items degrade with time or usage, sometimes vanishing completely, sometimes items have expiration dates after which they vanish. Another common method to increase sales of virtual goods is to limit the number of items a person can have at a time, forcing them to either dispose less needed items or purchase additional pockets for more items. In some games, such as Habbo, the operator offers to buy back items from the user for a fraction of the original purchase price.

New opportunities for Business Model Innovation
The opportunities for monetizing virtual goods are growing and providing new possibilities for business model innovation, not only in games and social networks. Virtual item stores are in their infancy but last week I witnessed an exciting live demo of a very realistic virtual 3D shopping centre made by MindArk, that operates, develops and market Entropia Universe.

Who will be the Amazon of virtual goods? Amazon…?

Related Videos:

Friday, August 14, 2009

Ning, Pandora, YouSendit, Pinger & Ngcomo in an extensive panel discussion about different Business Models

An interesting and rather long panel discussion on different business models based on advertising, virtual goods and freemium models, moderated by Chris Anderson.

Participants:

Gina Bianchini, CEO, Ning,

Joe Kennedy, CEO & President, Pandora

Ranjith Kumaran, Founder & CTO, YouSendIt

Joe Sipher, Co-Founder & Chief Product / Marketing Officer, Pinger

Neil Young, CEO, Ngcomo

Related posts:

50 Business Models Built on Free

The Freemium Business Model
How Google makes money

Wednesday, August 12, 2009

Chris Anderson on Freemium: The First Business Model of the 21st Century

A short but content rich presentation about the Freemium Business Model by Chris Anderson, that starts off by quoting five principles from Alan Murray, Deputy Managing Editor of The Wall Street Journal and Executive Editor for the Journal Online:

The best model is a mix of paid and free content
You can't charge for exclusives that will just be repeated elsewhere
Don't charge for the most popular content on your site
Content behind a pay wall should appeal to niches
The narrower the niche, the better

“If you don’t make your exclusives free, other people will report on your exclusives, and they will get all the traffic… To reference my last book, The Long Tail, you get the head of the curve, the most popular stuff, that's best to monetize with advertising, and you got the tail of the curve, the niche stuff, a more narrow interest, that is best to monetize with direct payments… Give away the head, sell the tail”

This is very much in line with the results of the report On the outlook for newspapers in the digital age: Moving into multiple business models, by PricewaterhouseCoopers, summarized here.

Making $1.6 Million in a week for music given away for free

Tim O'Reilly on Open Publishing