Web-based business models in 2014

WEB-BASED BUSINESS MODELS
Class #1 #2 #3 #4 and #5 – February 2014
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


2

Agenda of the web-based business model lecture

1. Let’s all talk the same language!
• What’s the web? …………………………………………………………………………………………………………………………………………………. 4
• What’s a startup? ……………………………………………………………………………………………………….……..……………………………….. 15
• What’s a business model? ……………………………………………………………………………………………………………………….…………. 20
• Why study Internet-based business models? ..………………………………………………………………………………………….……..… 28
2. What are the key elements of a business model? .……………………………………………………………………………………………………….. 45
• Value proposition and revenue streams ………………………………………………………………………………………………………….….. 82
• How’s the music, video games and book publishing industries going? …………………..………………..………………….……. 115

• Customer channels, customer relationships, key partners, activities, resources, cost structure …….....….……….….. 130
3. What are the business models of Internet heavyweights publicly traded? ..………………………………………………………………….. 142
• Google (143), Facebook (153), Zynga (166), Twitter (174), Linkedin (180), Groupon (185)
4. What are the most promising business models among non-publicly traded Internet companies? ……………..…………...…… 192
• ZocDoc (198), SnapChat (200), Airbnb, UberPop, Feastly (202)
5. Conclusion and farewell ………………………………………………………………………………………………………………………………………………… 204
• Appendix: group project and individual test (205)

3

What’s the web


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


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


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


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


8

Internet is not just a distribution channel or
just about Web presence


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)
Profits des 100 plus 100 plus grandes time:
• Exhibit - Looking at top 100 USdes grandes through sociétés US
Chiffre d'affaires companies sociétés US
100%
100%

Conglomerate
Conglomerate
Professional, Scientific, and Technical
Professional, Scientific, and Technical Services Services

90%
90%

Finance and Insurance
Finance and Insurance

80%
80%

Information
Information

HealthHealth Care andAssistance
Care and Social Social Assistance

70%
70%

Wholesale
Wholesale Trade Trade

60%
60%

Retail
Retail Trade Trade
Utilities
Utilities

50%
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%
0%
0%
1955
1955

Pétrole
Petroleum
Pétrole
Agriculture, Forestry, Fishing and Hunting
Agriculture, Forestry, Fishing and Hunting

1960
1960

1965
1965

1970
1970

1975
1975

1980
1980

1985
1985

1990 1995
1995 2000
2000 2006
2006
1990

Analysis based on Fortune 500, 2007


10

Internet is not just an industry

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


11

Internet is a technology on which are based numerous activities across
industries

Internet-based activities
1.

Web activities using Web as a support
•

2.

Telecommunication based on IP communication
•

3.

Internet service providers

Software and services activities linked to the Web
•

4.

Ecommerce, content, online, advertising

IT consulting, software development

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


12

Internet accounts for 3-4% of worldwide GDP

Exhibits – Economic impact of the Internet by McKinsey and BCG

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


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



14

What’s a business model


15

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.


16

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


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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)


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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


19

What’s a startup


20

What’s a startup?

Basic definition

• A startup is a company, a partnership or temporary organization designed to
search for a repeatable and scalable business model

• A startup is a human institution designed to create a new product or service under
conditions of extreme uncertainty


21

The problem of business plans for startups

• For young companies with predictable revenues (like opening a new bakery), a business plan will be
necessary to get a bank loan

• For startups, “a good plan, a solid strategy, and thorough market research may not work leading to startup
failures
• In a startup's earliest days there is not enough data to make an informed guess about what the
quantitative financial model might look like
• You have to confirm that your leap-of-faith questions of your business model are based in reality to do a
business plan for a startup:
• Did we build a product that people want (value creation hypothesis)?
• What is the growth model (growth hypothesis)?
• The role of strategy is to help figure out the right questions to ask
• Followers ot the just-do-it school of entrepreneurship are impatient to get started. They start building
immediately, often after just a few cursory customer conversations. Unfortunately, because customers
don't really know what they want, it's easy for those entrepreneurs to delude themselves that they are on
the right path
Eric Ries, The Lean Startup, 2012


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The lean startup methodology

How to build a product that people want?

• Developing a new product should resemble simultaneously driving a car (testing your product), tuning the
engine (continuously improving the product) and steering (adapting your business model when needed)
• Startups need to conduct experiments that help determine what techniques will work in their unique
circumstances
• Startup need extensive contact with potential customers to understand them so get out of the building
and start learning
• Metrics are people too. At the end of the day, customers are breathing, thinking, buying individuals.
• You should talk to early adopters not mainstream customers.



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Why early adopters are so important?

• Early adopters accept-in fact prefer an 80 percent solution; you don't need a perfect solution to capture
their interest. Early adopters use their imagination to fill in what a product is missing
• This is hard truth for many entrepreneurs to accept. After all, the vision entrepreneurs keep in their heads
is of a high-quality mainstream product that will change the world, not one used by a small niche of
people who are willing to give it a shot before it's ready
• First products aren't meant to be perfect. Most of the time, you are going to be rejected if you go to
mainstream customers because most people are not early adopters and will not sign up for a new service
sight unseen



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The importance of MVP: build-measure-learn feedback loop

• A minimum viable product (MVP) helps entrepreneurs start the process of learning as quickly as possible.
It is not necessarily the smallest product imaginable, though; it is simply the fasted way to get through the
Build-Measure-Learn feedback loop with the minimum amount of effort. Contrary to traditional product
development that strives for product perfection, the goal of the MVP is to begin the process of learning,
not to end it
• Unlike a prototype or concept test, an MVP is designed not just to answer product design or technical
questions but to test fundamental business hypothesis
• Several types of MVPs: problem exploration, product pitch (e.g. video mvp), concierge
• Once the MVP is established, a startup can work on tuning the engine. This will involve measurement and
learning and must include actionable metrics that can demonstrate cause and effect question
• Always test first your riskiest assumptions



25


The Concierge MVP: have your customers design the first version of your product

• Wait for the first customer before developing anything, solve one customer's problem
• Each week you are learning more and more about what is required to make the product a success. After
weeks you are ready for another customer. Each customer you bring on make it easier to get the next one.
Only when you have a lot of customers, start to invest in automation in the form of product development
• So you are focused on scaling something that is working rather than trying to invent something that
might work for the future. As a result development efforts involves far less waste that is typical.
• In a concierge MVP this personalized service is not the product but a learning activity designed to test the
leap-of-faith assumptions in the company's growth model



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Principles

theleanstartup.com, 2014


27

Why study Internet-based business models

Business
Models


Internetbased

28

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
relationship
E.g. GE

At the base are products and services that are low price and
high volume; at the top products and services that are high
price and low volume
E.g. Air France Group: Air France for business and long haul
flights, Transavia for leisure and Hop! for local flights

Several of the components represent a disproportionate
share of the profits
E.g. business seminars at hotels, advertising (Google, Yahoo,
Facebook)?

Profit

Profit zone

Profit

Basic
activity

0

Other components
Time

Time

4. Switchboard

5. Time Profit

6. Block Buster profits

Multiple sellers communicating with multiple buyers. The
more buyers and sellers join the great the organization
builds on itself
E.g. eBay, Alibaba, Amazon, Monster, Seloger
Or the opposite: desintermediation (Dell)
Seller
Buyers

Takes advantage of uniqueness, profit margins erode as
competition seeks to imitate. Time profit companies must
take the lead and maintain a "two year" lead over their
competitors E.g. Intel, Microsoft
F/unité

Revenue realized is so powerful and fast that in a quick
swoop the model pays for development and marketing costs
E.g. movies, books

Time

Project return

Project types

Adrian Slywotzky and David Morrison, The profit Zone, 1998


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7. Multiplier

8. Entrepreneur Profit

9. La spécialisation

Strong customer brand
E.g. Disney, Google

Hierarchical design with multiple subsidiaries to maintain
closeness with the customer
E.g. Biotechnologies, Google
Small teams

Specialist are several times more profitable than the
generalist. Characterized by lower cost, higher quality,
stronger reputation, shorter selling cycles, and better price
realization E.g. Home Depot
Return

Different offers

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
on the follow-up products and services
E.g. HP printers and Gillette Razors, Ryanair

The more players who buy that enter in the system, the
more valuable the network
E.g. Microsoft, Oracle, Skype, Linkedin, spotify, Facebook

The Company expends significant marketing investment in
order to build awareness and is reinforced by customer
experience. You know Brand is working when a consumer
says, "I won't change because I trust AT&T". E.g. Google
Price

Margin

Margin
Complementary
products

Brand price

Basic product

Average
market price

Market share


30


13. Specialty

14. Local Leadership

15. Transactional Scale

Specialty companies enjoy a higher premium for their
products and services until competitors start to imitate
E.g. Merck, 3M, Photoshop

Many businesses and their company economies are totally
local. Risk occurs when these companies fail to recognize
they are a local business model
E.g. Wal-Mart
Local return

Transactions go up but the cost to provide the transaction
does not go up as quickly
E.g. investment banking, real estate, transportation

Marge
5 years ago

Transaction return

Nowadays
Leading

Leading

Common

0

Common
Local market share

Transaction size

16. Value Chain

17. Cycle Profit

18. After-Sales Profit

Specific activities pass through a chain of specialist offering
value
E.g. softwares, Intel

Industries characterized by distinct and powerful cycle. The
company can not control the cycle, but it works to maximize
its position within the cycles grip. As capacity tightens the
companies lead price increases, as capacity loosens, its lag
price declines E.g. Dow Chemical, Toyota
Return by unit produced

The company's profit does not direct come from the sale of
the product, but the after sale financing or services of the
product
E.g. General Electric, banking

After-sales offers

Basic
offer



Capacity / Occupancy

31


19. New Product Profit

20. Relative Market Share Profit

21. Experience Curve Profit

As new products are introduced profit margins are high and
growth rapid. As the product mature the profit margins fall

Companies with high market share tend to be more
profitable. Large companies have price advantages due to
manufacturing experiences and volume economies, such as
purchasing capability and economies of scale
Return

Experience drives down the transactional cost

Diffusion

Time

Relative market share

Unit cost

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



32

Why study Internet-based business models?

Two reasons

i.

The technological revolution increased exponentially the number of business models

types:
•
•

Long tail enables larger segmentation of customers

•

ii.

Marginal cost of digital information comes closer to nothing

Better assets rotation can enable new businesses with low margin

After 30 years, we are better at understanding complex business models


33

(i)The technological revolution (IT, Internet, biotechnologies, nanotechnologies,…)

Ray Kurzweil video on TED, 2005
The accelerating power of technology
14’00-19’10


34

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

Supply

Marginal cost

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”


35

• 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


36

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


37

• 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


38


The only formula you need to know in this class!
• Technological revolution increase assets productivity decreasing the amount of assets immobilized

Formula of Return on Equity
ROE = Net Income (R) / Equity (K)
ROE = (R / K) * (Income / Income) * (Assets / Assets)
ROE = (R / Income) * (Income / Assets) * (Assets / K)

ROE = Gross Margin * Assets rotation * Financial lever


39


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 vehicle, was designed to be sold at 5 000€ (ultimately 8 000€ in
France)
Exhibit – Different business positioning with same ROE
Gross
Margin

Assets rotation


40


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


41


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

110%
Russie

Mobile penetration 2008

100%

Royaume-Uni
Suède
Irlande
Moy. UE
Espagne Finlande
Autriche
Danemark
Allemagne Pays-Bas

Pologne
Belgique

90%
Roumanie

80%

Chili

France

Afrique du Sud
Jamaïque

Etats-Unis

70%
Tunisie
Colombie

Algérie

60%

Moy. Afrique

50%
40%

Botswana
Mexique
Maroc
Guatemala
Guyane

Nicaragua
Arménie
Pakistan
Sénégal
Egypte
Vietnam
Kirghizstan Kenya
Lesotho
Tanzanie

30%
20%
10%

Ouganda

Canada

Brésil

Chine
Namibie
Côte d'Ivoire
Inde
Djibouti

0%
0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Banked population 2008


42

Other big trends in creating new Internet-based companies

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

• Lean startup strategy: helps you build a product that people want eliminating waste


43

(ii) We are better at understanding business models

One Business Model Canvas

Alexander Osterwalder and Yves Pigneur, Business Model Generation, 2010


44

What are the key elements
of a business model


45

A business model describes what makes an company unique looking from the
value propositions to cost structure

Key elements of a business model



46

A business model is an ecosystem

Rationale beyond those key elements

Cost-side

Value-side



47

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



48


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.



49

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


50

• Starbucks promise: a “third space” of conviviality between home and work


51

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


52

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
Mass-market products
or services
Services to
corporations (food,
transportation,…)

Web-based business
models class

Pharmaceutical drugs

Customer 2

 Distributor

 Final consumer

 Company

 Employees

 Students (you!)

 Companies (management
consulting firms, investment
banking,…)

 Prescriber (dentist, general
practitioner GP,…)

 Patients, social security



53

• 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


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


55

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)



56

• 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?


57

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”



58

• With which industry do Southwest airlines compete?
• In what do they focus, in what they differ and what are they tagline?


59

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



60

• With which industry do Logan compete?
• In what do they focus, in what they differ and what are they tagline?


61

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


62

2 – Revenue stream

• 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


63


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.



64

Each revenue stream might have different pricing mechanisms

Pricing mechanisms



65

How do you set a price


66

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


67

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


68

How can a product be free


69

Introduction to Free

• 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

Milton Friedman, There's no such thing as a free lunch,1975


70


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



71


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,…



72

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



73

A – Direct Cross-Subsidies

• 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



74

How can you sell airlines tickets far under cost?
« People pay attention on ticket price not on the extra’s »



75


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,
savings account

Cross-selling because customer
is stuck with the same bank for
20/30 years

Retail banks

Airline ticket

Hotel room, rental car, cruise
and vacation package

Go Voyages, airline companies

Elevator

Maintenance and security
upgrades

Elevator companies

Alarms

Electronic surveillance

Security companies

Equipement

Reagent supplies

Medical biology companies

Telephone

Communications

Carrier


76


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)



77

B – Three-parties or Two-sided markets

• 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:



78


Markets with three-parties revenue stream
• Three-parties is not limited to advertising

Market

First-party
Consumer

Third-party

Second-party
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



79


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)



80

C – Freemium

• 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



81

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)


82

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


83

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


84

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)



85

D – Nonmonetary markets

• 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



86

• 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


87

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
Example of a CAPTCHA

Comparison of the accuracy of standard OCR versus
reCAPTCHA transcriptions

OCR: Optical Character Recognition programs


88

Features with poor usability can be an opportunity for revenues

CAPTCHA can also be used for advertising and generate revenues

Adyoulike


89

• How’s the music industry going?


90

Looking at the music industry
Global recorded music sales were decreasing since end of the 90’s due to digital piracy but
now global sales are increasing since 2012

Exhibit – Global Recorded Music Sales (bn USD, trade value)

2012: +0.3% up to
US$16.5 billion

IFPI, press report, 2012
Synchronization rights: revenues from music acquired for movies, advertisements and music videos


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, 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


92


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:


93

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 that only represent 7% of digital sales
• 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, 07/2013


94


Digital recorded music is expected to overtake physical sales in 2015

PwC, Global Entertainment & Media Outlook, 2012


95

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


96


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



97

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


98

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


99

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


100

• 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



101

• How’s the video game industry going?


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


103


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


104


Looking at the video game download business model

• Piracy of video games has fewer benefits than music
and movie piracy: Piracy is an issue for single-player
mode though the primary reason people buy games
retail is for the multiplayer modes:
–

2011 top-selling games at retail ranked by unit sales (VGChartz)

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


105


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,…
–
–
–
–

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


106


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



107


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:
–
–
–
–

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



108


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”)



109


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 esports market e.g. Twitch has announced a new scholarship of $50,000 to five student gamers


110

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


111

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)


112

• How’s the book publishing industry going?


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


114


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


115

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


116

What’s the business model of self-publishing?

The traditional business model of book publishing



117


A new business model by lulu.com



118

The best opportunity for the book publishing market is volume enabled by lowering costs of
digital distribution

• World population continues to grow
• Literacy rates are increasing
• Developing nations are taking advantage of the lower infrastructural costs of ebooks
• Number of books per inhabitant is low in developing countries because books are much more expensive
than in France and hardcover book piracy is high


119

Short look at the film industry

Film industry is growing but new digital-based business models are yet to be found

• Filmed Entertainment has grown worldwide from 26 bn USD to 37 and is expected to reach 46 in 2015
(PwC)
• Film piracy includes Internet piracy and Hard-good piracy
–

Though piracy apologists have long argued that online piracy was good for business (similar to freemium theory)

• New business model are aimed at decreasing demand for illegal pirated downloads:
–
–
–

Worldwide releases
Day-and-date digital releases (releasing in theaters and VOD the same day)
Ultra release (releasing on VOD before a theatrical release) can also create a buzz and increase the number of people
going to theaters

• Current digital business models includes:
–
–
–

VOD (Video-On-Demand)
Over-the-top online movie providers such as Hulu and Google TV
Steaming such as Amazon and Netflix


120

3a – Customer segments

• Customer segments are the different groups of people or organizations an enterprise aims to reach and
serve
• In order to better satisfy customers, a company may group them into distinct segments with common
needs, common behaviors or other attributes.

• An organization must take a conscious decision about which segments to serve and which to ignore (like
facebook)



121


Different types of Customer Segments
• Mass market: e.g. consumer electronic sector
• Niche market: such business models are often found in supplier-buyer relationships, e.g. car part
manufacturers (e.g. Faurecia in France)
• Segmented: a company serve several different industries with the same needs or segment customers to
provide a different proposition value:
• e.g. in the banking industry individuals customers can be segmented in wealth Management (>1M€
financial assets), High Net Worth (>0,1M€) and large public
• Diversified: a company serve unrelated customers segments with different needs e.g. Amazon sell “cloud
computing” services
• In fact, there are usually always two type of customers with different needs: B2B and B2C
• Multi-sided markets: e.g. a credit card company need a large base of credit card holders and a large base
of merchants who accept those credit cards



122

Noncustomers differ in their relative distance from your market but they all
offer big blue ocean opportunities
The Three Tiers of Noncustomers
• First-tier: buyers who minimally purchase an industry’s offering out of necessity and they are waiting to
jump ship and leave the industry
• Second-tier: people who refuse to buy your industry’s offerings
• Third-tier: people who have never thought of your market’s offerings as an option



123


How to attract each tiers of noncustomers
• First-tier: Pret targeted UK workers who used not to go to a restaurant for healthy and time-consuming
reasons with fast-food and fresh meal
• Second-tier: JC Decaux targeted refusing municipalities and corporations by putting advertising in the
street furniture instead on city outskirts

• Third-tier: defense department has usually sold military technology to the private sector
• Companies should go for the biggest catchment at the time although there could be overlapping
commonalities across all three tiers of noncustomers



124

3b – Channels

• Channels are the way how a company communicates with and reaches its customer segments to deliver a
value Proposition
• Communication, distribution and sales Channels comprise a company’s interface with customers



125

3b – Channels

Type of channels
• Distribution channels can be owned (sales force, web sales, own stores) or done with partners (partners
stores and wholesaler)
• Partners channels lead to lower margins but they allow an organization to expand its reach and benefit
from partner strengths

McDonald’s 2008

Restaurants

Income
bn USD

Income growth

Owned

6,502

16.5

0%

Franchise

25,465

6.9

13%


126

3c – Customer Relationship

• Customer Relationships are the type of relationships a company establishes with specific customers
segments
• A company should clarify the type of relationship it wants to establish with each customer segment
(customer acquisition, customer retention, boosting sales/upselling)



127


Categories of Customer Relationships
• Personal assistance: relationship based on human interaction. E.g. point of sales (pos), call-centers.
• Dedicated personal assistance: dedicating a customer representative specifically to an individual client. It
represents the deepest and most intimate type of relationship and normally develops over a long-period
of time. E.g. key account managers, HWN individuals consultant

• Self-service: no direct relationship with customers
• Automated services: more sophisticated form of customer self-service with automated process. E.g.
offering a book or movie recommendations
• Communities: deploy user communities to become more involved with customers/prospects and facilitate
connections between community members
• Co-creation: go beyond the traditional customer-vendor relationship and co-create value with customers.
E.g. Youtube, Amazon invites customers to write reviews and thus create value for other book lovers



128

Great blocks to utility can be identify looking at the buyer experience in order
to be removed and unlock exceptional utility
The buyer experience cycle
• A each stage of the buyer experience, managers can ask a set of questions to gauge the quality of buyers’
experience and thus unlock utility for buyers

• The following questions can help you identify the most compelling hot spots to unlock exceptional utility:



129

4a – Key ressources

• Key resources are the most important assets required to make a business model work
• Key resources can be:
• Human
• Physical assets: manufacturing facilities, buildings, vehicles, machines, systems, point-of-sales
systems and distribution networks
• Financial resources / guarantees: cash, lines of credit, or a stock option pool for hiring key
employees.
• E.g. distributors (B2C) have usually a low or negative working capital as for producers (B2B),
they usually have positive working capital
• Intellectual: brands, proprietary knowledge, patents and copyrights, partnerships and customer
databases



130

4b – Key activities

• Key activities are the most important things a company must do to make its business model work
• There is several types of key activities:
• Production: designing, making and delivering a product. E.g. Manufacturing
• Problem solving: coming up with new solutions to individual customer problems. E.g. hospitals,
consultancies and services organizations
• Platform/Network: networks, platforms, software and brands. E.g. eBay, Visa



131

4c – Key partnerships

• Key partnerships are the network of suppliers and partners that make the business model work
• There is four types of partnerships:
• Buyer-supplier relationships to assure reliable supplies
• Strategic alliances between non-competitors

• Coopetition: strategic partnerships between competitors
• Joint ventures to develop new businesses



132


Motivations for creating partnerships
• Optimization and economy of scale: optimize the allocation of resources and activities since it would be
illogical for a company to own all resources or perform every activities by itself
• E.g. 100,000 people will have contributed to build your iphone 5.0, limitation for 3D printers
• Reduction of risk and uncertainty: it is not unusual for competitors to form a strategic alliance in one area
while competing in another. E.g. Blu-ray
• Acquisition of particular resources and activities: such partnerships can be motivated to acquire
knowledge, licenses or access to customers



133


Tracking partnerships with the code bar and code packer
Exhibit - Code bar

Exhibit - Code packer

Exhibit – Tracking a partnership for a bean can with Open Food Facts

OpenFoodFacts


134

5 – Cost structure

• Cost structure is all costs incurred to operate a business model
• Naturally enough, costs should be minimized in every business model but we have already see that some
business models are more cost-driven than others (design to cost, pyramid base):
• Cost-driven: focus on minimizing costs wherever possible maintaining the leanest possible cost
structure

• Value driven: focus on value creation rather than the cost implications



135

Use a business canvas just to be sure you have covered all key elements of a
business model

One Business Model Canvas



136

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


137


The traditional business model of book publishing



138


A new business model by lulu.com



139

The best opportunity for the book publishing market is volume enabled by lowering costs of
digital distribution

• World population continues to grow
• Literacy rates are increasing
• Developing nations are taking advantage of the lower infrastructural costs of ebooks
• Number of books per inhabitant is low in developing countries because books are much more expensive
than in France and hardcover book piracy is high


140

Short look at the film industry

Film industry is growing but new digital-based business models are yet to be found

• Filmed Entertainment has grown worldwide from 26 bn USD to 37 and is expected to reach 46 in 2015
(PwC)
• Film piracy includes Internet piracy and Hard-good piracy
–

Though piracy apologists have long argued that online piracy was good for business (similar to freemium theory)

• New business model are aimed at decreasing demand for illegal pirated downloads:
–
–
–

Worldwide releases
Day-and-date digital releases (releasing in theaters and VOD the same day)
Ultra release (releasing on VOD before a theatrical release) can also create a buzz and increase the number of people
going to theaters

• Current digital business models includes:
–
–
–

VOD (Video-On-Demand)
Over-the-top online movie providers such as Hulu and Google TV
Steaming such as Amazon and Netflix


141

Who are the Internet heavyweights


142

Looking at Internet heavyweights…
Biggest Internet IPOs of the last 10 Years

Top Internet IPOs
Internet companies

IPO
year

Area

Google

2004

Search and advertising

Facebook

2012

Social media

+50%

Zynga

2012

Social games

-60%

Twitter

2013

Microblogging service

+40%

Linkedin

2011

Professional social media

+140%

Groupon

2011

Discounted gift certificates

Alibaba

2007

B2B ecommerce

Yandex

2011

Russian search engine

+10%

Shanda Games

2009

Online games

-40%

Giant

2007

Online games

-40%

Renren

2011

Chinese social media

-80%


Stock price since IPO
IPO-January 2014
+1 000%

-60%
Since then delisted from
Hong Kong Stock Exchange

143

• What is Google business model?


144

What is Google’s business model?
Google value proposition

Google value proposition
Organize the world’s information and make it universally accessible and useful…
… for better quality leads


145

Google has changed the ad industry by giving products away to end users for free
(in return for advertising), as well as reducing the advertising costs for brand
Google revolution on advertising
• Google opened up the market to SMEs and extended the reach of larger corporations
• A great search algorithm is important though real advantage comes from the massive investments in
Google platform which means tiny marginal costs, so Google give Free products to end users
Illustration – Advertising market by company size


146

Google revenue stream comes from Google AdWords and Google AdSense

Google revenue stream

Traffic acquisition costs (TAC) comprises of money paid to the Google Network websites under the Adsense program and to the distribution partners who distribute Google
Toolbar and other products or drive traffic to the Google websites.


147

Two-thirds of Google revenues come from AdWords and remaining from AdSense

Google quarterly revenues

Google, Q3 2012Quarterly EarningsSummary, 2012


148

Newspaper ad revenue after Google


149

Google give products away in return for advertising (two-sided market) and
Google reduce the advertising costs for brand
Google business model using the Canvas

Business Model Innovation Matters, Understanding Business Models, 2012


150

Google is trying to remain central in the Mobile experience

Google strategy on mobile
• Mobile advertising is still in relative infancy, though the mobile device is quickly becoming the world’s newest gateway to
information
• Google dominate the mobile ad market which is mainly based on search

• Google is trying to remain central in the Mobile experience controlling the hardware, as well as the software:
• On the software side,
• Android was created to be a free, fully open source mobile software platform that any developer could use to
create applications for mobile devices and any handset manufacturer can install on a device

• Android include the Google Mobile App
• On the hardware, Google acquired Motorola Mobility in 2012 (12,5 bn USD) in order to acquire Motorola’s patent
portfolio and remain central in the mobile experience like Apple has demonstrated with its popular iPhone


151


Google’s stock quote highly volatile since it is in the advertising business


152

• What is Facebook business model?


What is Facebook’s business model?
Facebook value proposition

Facebook value proposition
•

Facebook helps Internet users stay connected with their friends, families, and colleagues

•

Facebook provides a number of products, free of charge, to its users:
•

•

Timeline, News Feed, Photos and Videos, Messages (Email, Chat, Text Messaging), Groups,
Lists, Events, Places, Subscribe, Ticker, Notifications, and Facebook Pages

Facebook have a “long tail” of customers (not dependent upon any single customer for their
revenues)



154

Its revenue stream is mainly advertising-based

Facebook key operational figures
•

Fourth Quarter 2012 Operational Highlights:
•
•

Daily active users (DAUs) were 728 million on average as of September 30, 2013, an increase of
25% year-over-year

•

Mobile MAUs were 874 million as of December 31, 2012, an increase of 45% year-over-year

•
•

Monthly active users (MAUs) were 1.19 billion as of September 30, 2013, an increase of 18%
year-over-year

Mobile DAUs exceeded web DAUs for the first time in the fourth quarter of 2012

Recent Business Highlights
•

Mobile revenue represented approximately 49% of advertising revenue for the third quarter of
2013 (that was the main business model question of 2013)

•

Facebook launched Graph Search Beta, a structured search tool that enables users for the first
time to find people, places, photos and other content that has been shared on Facebook

•

Launched Facebook for Android 2.0, completely rebuilt to deliver improved stability and faster
performance and opened Facebook Messenger to anyone with a telephone number

Facebook, Facebook Reports Third Quarter 2013 Results, 30/10/2013


155

Its revenue stream is mainly advertising-based

Facebook key financial figures
•

5.1 bn in 2012 (up from 3.7 bn USD in
2011)

•

83% of revenues coming from advertising

•

Exhibit – Key figures 2011

Profit down to 0,05 bn in 2012 (down from
1 bn USD in 2011) mainly due to shares
given to the top management

Fabernovel, Facebook, The Perfect Startup, 05/2012


156

Facebook replicated Google’s formula... with relatively less success

Facebook advertising model



157

Facebook’s main asset is the connections and interactions between users
Facebook’s Social Graph
•

100 billion friendships, 250 million photos uploaded every day and 2.7 billion Likes and Comments per day

•

« User engagement » is key for Facebook success



158

Looking at the Canvas

Facebook business model using the Canvas



159


Facebook’s stock quote highly volatile since the company is still growing fast and it is in the
advertising business


160

Facebook validated its business model assumptions on Mobile ads even
though mobile is considered “a horrible ad medium”

•

In mid-2013, Facebook noted that mobile ads accounted for 49 percent of its advertising revenue, up from
41 percent in the second quarter. Facebook said prices for mobile ads remained high, and users were
clicking on them in their news feeds more frequently.

•

Potential to open up new inventory via Instagram as well as the announcement to include video ads in the
newsfeed


161

Facebook vs. MySpace
Automated news feed launched in 2006 gave the illusion of a continuous user and
personalized activity that MySpace didn’t have – “oh that’s cool” said customers



162

Similar to Google’s Page Rank, Facebook’s created its Edge Rank based on
an algorithm
Facebook’s Edge Rank



163

Its new Open Graph is expected to leverage its current business model (key
partners)
Facebook’s new OpenGraph



164

Facebook is a social media (not only network) based on advertising
Facebook’s like button developed the social graph even further



165

• What is Zynga business model?


166

Web-based business models in 2014

Web-based business models in 2014

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