Business Model Stretching as a Response to Changes in the Industry Value Chain – Evidence from the Games Industry
Martin Kamprath1* Leonid Glukhovskiy2 *corresponding author 1 2
[email protected] [email protected]
Chair for Innovation Management and Entrepreneurship, University of Potsdam, August-Bebel-Str. 89, D-14482 Potsdam , Germany. Citation note: This is the translated manuscript of the book chapter “Kamprath, M., Glukhovskiy, L. (2014) Geschäftsmodell-Stretching als Reaktion auf Veränderung der Branchenwertschöpfungskette in der GamesIndustrie, In: Schallmo, D. (eds.) Kompendium Geschäftsmodell-Innovation: Grundlagen, aktuelle Ansätze und Fallbeispiele zur erfolgreichen Geschäftsmodell-Innovation, Springer Gabler, pp. 349-383.
Abstract: The interrelation and dependencies between the business model and its environmental context has until now rarely been the object of systematic and empirical study. By means of a case study, we analyze a disruptively changed industry value chain and its effect on the business model of non-trivial products (technological, aesthetic and entertainment components). Therefore, we examine the business model changes of an established games developer in a transition phase. The games industry is an interesting example, because there is no other industry that has emancipated itself over such a short period of time from a niche market with the cliché of producing only products for teenagers and "nerds" into a mass market which itself has become a crucial direct or indirect success factor for the largest IT companies in the world. The technological and non-technological innovations as a result of the digitalization have led to an explosion of new business model types in the games market, which in turn led to new user behavior, new devices, new tastes and new target groups - and no end to this (r)evolution is yet to be seen. We identify the new industry value chain in the games sector and describe the interaction of industry and business model changes in order to develop the concept of business model stretching. The analysis will outline how sectoral changes from a company’s perspective effect its operations, and how to gradually adapt the business model through expansion (stretching) to new levels of the industry value chain.
Table of Contents 1.
Introduction ..................................................................................................................................... 2
2.
Background ..................................................................................................................................... 3
3.
4.
5.
2.1
Definition of the term "business model" ................................................................................... 3
2.2
Dynamic business models and their environmental impact .................................................... 4
The games industry ........................................................................................................................ 5 3.1
Definitions ................................................................................................................................ 5
3.2
Game components .................................................................................................................. 6
3.3
Characterization of the games industry ................................................................................... 7
3.4
Industry value chain in the games industry ............................................................................. 8
3.5
Conclusion and research design ........................................................................................... 10
Case study of a game developer .................................................................................................. 10 4.1
The choice of a case study as a research approach ............................................................. 10
4.2
Expiration of the case study .................................................................................................. 10
Results – Adapting the game developer’s business model to the new environment ................... 12 5.1
Customer segments .............................................................................................................. 12
5.2
Value proposition ................................................................................................................... 12
5.3
Distribution channels ............................................................................................................. 13
5.4
Customer relationships .......................................................................................................... 14
5.5
Key resources ........................................................................................................................ 14
5.6
Key activity ............................................................................................................................. 15
5.7
Value network ........................................................................................................................ 15
5.8
Revenue streams................................................................................................................... 16
5.9
Cost structure ........................................................................................................................ 16
6.
Analyzing the change in industry value chain and business model stretching ............................. 17
7.
Summary and Conclusion ............................................................................................................. 23
8.
Literature ....................................................................................................................................... 24
1. Introduction Some radical changes only appear disruptive in retrospect, because they arise from a multitude of small, parallel developments. Only after a certain time is it clear that this small-sum game has unleashed such enormous forces that the pre-existing elements are forced to submit to multiple pressures. This can be the case in technological innovation systems if many incremental changes together lead to a leap in performance, but also if business models that operate in niches or respond to mini-trends suddenly happen to become mainstream. Driven by digitalization, the use of information and communication technologies and applications based on them has penetrated almost every area of life. Companies are exposed to entirely new requirements that must be addressed and customer needs that must be met. There is hardly an industry that is not subject to changes that initially began incrementally through digitalization and the spread of the Internet around the year 2000, today leading or having already led to transformations of entire sectors – and an end to this trend is not yet in sight.
In practice and research, the business model concept as the framework of analysis has become a fruitful perspective to analyze value creation and capturing activities in such dynamic environments. The advantage of the business model concept lies not only in the perspective that considers technologies, products and services to be central to the question of how a company can be successful. It has become more important how the company's actual customer value – which is "transported" by the technologies/products/services - is created and developed with respect to the customer segments, and through which mechanisms and actors profit can be generated. The business model perspective can help to break away from the dominant industry logics (Sabatier et al., 2012), to demonstrate new opportunities in the industry value chain, and to respond to industrial transformations in an unconventional way. This interplay of changing industries, which is also reflected in the industry value chains (or supply chains) in connection with a company’s business models are the focus of this research. We investigate how a medium-sized production company in the games industry adapts to the disruptive changes in the sector. The games industry has so far not received much attention in scientific studies, although it is precisely here that new business models have actually revolutionized the industry. Moreover, compared to other mostly well-studied media industries, the games industry is seen as the fastest growing sub-market in the media. Today, hundreds of millions play games, and whole generations are affected by these products. By now, the production costs of blockbuster games reach those of Hollywood films because there is the potential for games companies to create billions in turnover. For example, the game GTA V (production costs about 250 million dollars) brought its developer record sales of 800 million dollars within 24 hours (Nayak, 2013). Due to new platforms (PC, consoles, mobile and online games) and new end and input devices with more and more features and novel interfaces, the user base of players has increased explosively in the last decade. In contrast to the newspaper and publishing industry, the games industry has managed to get users to spend money on or in games. The described transformation has led to a change in the industry value chain, with new actors and the integration and disintegration of value creation phases. Our goal is to show how companies respond to changing industry value chains through new business models, how they do it, and what implications we may draw from that to understand the old business model. We use and extend the findings of the existing business model literature to address the presently scanty literature linking the business model level and the industry level. We conceptualize a dynamic business model perspective called business model stretching to illustrate a discovery-driven approach of business model innovation based on temporary expansion and experimentation with new business model mechanisms. We believe that the results are transferable to other business sectors in which the industry value chain is changing or has changed significantly.
2. Background 2.1
Definition of the term "business model"
The growing interest in the business model approach - both in research and practice - is reflected in a multifaceted understanding of the term. Although the term has become mainstream since the year 2000, it is still used rather inconsistently, especially among practitioners. However, in academia, since the Special Issue of the Journal of Long Range Planning in 2010, a more consistent understanding prevails as some articles are now considered basic literature on business models (Teece, 2010; Zott et al., 2011; Baden-Fuller & Morgan, 2010; Shafer et al., 2005). Although in literature the variety of definitions is emphasized as an argument for the theoretical weakness of business models, this circumstance also applies to other theories and concepts of management theory. In fact, there will never be a generally accepted definition. In general, comparisons of business model definitions refer to a large overlap with different emphases (Shafer et al., 2005). Differences have mainly been found in the understanding of the business model concept by practitioners (George & Bock, 2011). For this work, a business model is understood as an active and therefore dynamic activity system (Zott & Amit, 2010) which is characterized by components and the connections between these components.
As this chapter lays the focus on the interaction between the business model and the business model environment in terms of the industry value chain, we marginally extend the definition of Teece, defining a business model as follows: “A business model articulates the logic, the data, the environmental influences and other evidence that support a value proposition for the customer, and a viable structure of revenues and costs for the enterprise delivering that value” (see Teece, 2010 p. 179 italics added). We use the business model concept as an analytical framework that we project onto an object to be examined. The analytical framework is reflected in the above-mentioned understanding of the system and relies on business model ontologies or frameworks (BMFs) that exists in literature and is used for the operationalization and description of business models. BMFs in general represent unified templates that are based on various components (also called functions, attributes or pillars) (Pateli & Giaglis, 2004) describing business models. Although there are a number of BMFs in the literature (for an overview see Rusnjak, 2011; Kamprath, 2012), the best-known BMF is probably the Business Model Canvas from Osterwalder & Pigneur (2009). Comparing the different BMFs in the number and levels of components, some large differences in number, degree of abstraction and description can be identified. Concerning the link between the business model and its environment, most authors only mention the integration of the environment in the form of the external value creation network or partners in their concepts. Only Chesbrough & Rosenbloom (2002) extend the perspective onto competitors, but only implicitly as a component of the competitive strategy in their BMF. According to the analysis carried out and the comparison of the approaches based on the selected criteria, it can be ascertained that several differences in the approaches exist, and possibly also differences in their application. Therefore, the selection of an appropriate concept should be based on the research question and the objectives set. To investigate and describe changes in the business model of a company, as well as the influence factors on the business model and the products, one has to find a balance between the two criteria of practicality and a suitable framework structure. The best-suited appears to be the concept from Osterwalder & Pigneur (2009) for this purpose. The advantage of this approach is a balanced and pragmatic composition of single components on the company level. Furthermore, this approach is frequently applied in practice and has contributed significantly to the establishment and standardization of the business model concept. The Business Model Canvas is made up of nine modules that cover the four main divisions of a company: value proposition, customers (customer segments, customer relationships and channels), infrastructure (key partnerships, activities and resources) and financial aspects (cost structure and revenue streams)1. The canvas will be used in the later stages as an analytical tool for the business model of the empirical case study.
2.2
Dynamic business models and their environmental impact
As open systems, business models communicate with their environment in a variety of dynamic relationships (Zollenkop, 2006 p. 141 f.; Schallmo, 2013 p. 33 ff.). Since the conditions are constantly changing, adaptation to the business model environment is required. To account for this, a few perspectives have developed on how to map external influences on business models in a dynamic way. Firstly, there are dynamic approaches that consider the business model as a morphing and liquid object (see Casadesus-Masanell & Ricart, 2010). Demil & Lecocq (2010) describe in their RCOV-approach how, due to changing conditions, the value proposition and organizational aspects change, which in turn influence the available resources. They speak of a ‘permanent disequilibrium’ that must be constantly balanced by the managers in the business model. Another possibility to observe business model change is the observation of two different states of a business model over time in order to make business model changes visible (e.g. Sosna et al., 2010). Since the Business Model Canvas has already gained much attention, we refrain from a detailed description of the components here.
1
We opt for the latter approach, since the RCOV-approach with its few components is structured quite coarsely and assumes an anticipated causality of changes in a certain direction. It is more suitable for a longitudinal study over a longer period of time. For our purposes, the comparison of two static states is better suited, as a more detailed ex-post analysis is possible; the major changes can be further investigated and their influence known in retrospect. For many authors (Chesbrough & Rosenbloom, 2002; Osterwalder & Pigneur, 2009; Teece, 2010), the environment is considered to be a major determinant for the design of a business model. Moreover, in organizational and strategic management the context of the business environment is discussed in more detail (Porter, 1980; Duncan, 1972; Dess & Beard, 1984). However, in the business model literature, the environment and its link to the business model are relatively rare and focus rather on a conceptual point of view (Schallmo, 2013). Changes in environmental conditions are often discussed at the micro-level in the empirical business model literature. Here, the business models of companies are analyzed in relation to their corporate network, ecosystem or even competitors (van der Borgh et al., 2012; Adner & Kapoor, 2010). The mutual influence of industry upheaval on business models as a significant gap is highlighted in the research of Zott et al. (2011). Empiracally, the ratio between the micro- and macro-levels came in focus only recently (e.g. Dobusch & Schüßler, 2013; Günzel & Holm, 2013; Sabatier et al., 2012). An approach to operationalize the changing business environment is to use the industry value chain as a concept connected with the business model approach (Johnson & Suskewicz, 2009; Zott & Amit, 2013). Meanwhile, the literature is not consistent and overlaps with the distinction between the ecosystems and the value chain concept. We distinguish the industry value chain from the ecosystem approach, while the industry value chain represents a more sequential process of how value is generated from “raw materials” to a “consumable value” for customers on an industry level. Ecosystems instead is a more networked approach, which also includes the connections between concrete firms, their roles and their power relations (van der Borgh et al., 2012). We argue that ecosystems are a smaller analysis framework within an industry value chain. In other words, there can exist various ecosystems in an industry value chain which compete against each other (e.g. the ecosystem of Apple and Google in the smartphone industry) (Adner & Kapoor, 2010). Although in the business model literature the role of a changing industry value chain is repeatedly discussed as a trigger and an opportunity for business model innovation (Gambardella & McGahan, 2010; Amit & Zott, 2001; Chesbrough & Rosenbloom, 2002), to our knowledge, there exists little empirical research and almost no conceptual framework that examines the interplay of the industry supply chain and new business models. Hence, we directly respond to Zott and Amit’s (2013) call for further investigation of the adjutant literature, like the ecosystem literature or the industry value chain.
3. The games industry 3.1
Definitions
In the literature on the games industry, there are no uniform and generally accepted definitions and/or explanations of the term “games”. While games may include analog (board) games as well, terms such as e.g. "digital games", "electronic games", "computer games" and "video games" are often used as synonyms in a digital entertainment context. However, while the terms "digital games" and "electronic games" can be used as generic terms for various forms of play, the terms "computer games" and "video games" describe the game forms that are differentiated on the basis of the hardware platform used (Jöckel, 2009 p. 22 f.). In the following, we use the word “games” to mean all "digital games" and "electronic games". In this sense, the term “games” refers to interactive media services or programs that are produced and used for the purpose of playful entertainment in digital form (Kempf, 2010) and are characterized by implemented rules and defined game objectives (Wolters, 2006).
3.2
Game components
According to Chang (2005), games basically consist of three components: technology (programming code), game design and content. The term "technology" in this case is understood as the game engine like the graphics and audio system, as well as a variety of other technical features, such as artificial intelligence, physics system, etc. (see Choi, 2011). The two terms “game design” and “content” are not clearly separated in the literature (Aoyama & Izushi, 2003). Some of the terms are used interchangeably or reversed. In practice, however, the understanding has prevailed that game designers set the gameplay and thus the rules and goals of the game. This includes the development of new game mechanisms, and it is possible to include the interface design (the functions, not the appearance) as an interface between the machine/game and players. The content is more likely to include the narrative (storyline, characters) and visual elements (the game setting, the "look" of the graphics). These are developed by the artists and partly by authors in consultation with the game designers. It is remarkable that the tasks are not always separated, but can be covered under certain circumstances by a single person. In the literature, there are several criteria that are used to distinguish certain game types. It is possible to distinguish the different forms of play based on their inherent hardware and software characteristics. Table 1 provides an overview of the selected games’ criteria and their characteristics to distinguish games which are explained in the following:
Table 1 Distinguishing Criteria for Games (Source: Own representation based on Jöckel, 2009 p. 24; Kempf, 2010 p. 35; Wirtz, 2008 p. 575 f.; Prato et al., 2010)
Hardware Features
Software Features
Technical Platform
Skill Level
Number of Players
Genre
Price Model
PC games
Core games
Single-player
Action
Console games
Casual games
Multi-player
Adventure
Mobile games
Serious games
MMOG
Mind game
Boxed games (Full-price games in the 4060 Euro range)
Online games
Agility Jump & run
Budget/Lowprice
Children's game
Free
Management Music games Race games Role-play Simulation Sport Strategy Virtual worlds
The hardware characteristics represent the nature of the technical platform on which the game can be used (PC; console; mobile (or wireless); online). The term “PC games” includes all electronic games played on the desktop PC, mostly on the Windows platform. “Console games” (also known as “video
games”) are all games requiring game consoles, such as Xbox, Playstation, Nintendo Wii or NGage as a technical platform. “Mobile games” include all electronic games that are used on mobile (wireless) terminals such as smartphones and tablets. The concept of “online games” includes all games that use the internet (via the browser or client) as a technical platform (Kempf, 2010). However, this distinction has become increasingly blurred, as games are now offered across platforms and almost all gaming platforms have an internet connection. Thus, it should be noted that with mobile and online games not only the technical platform is meant, but also that the game contents are significantly influenced by the platforms. For example, mobile games are often casual games (see the next section), which are adapted to the usage behavior of smartphones and tablets. Online games are usually MMOGs (massive multiplayer online games) where up to thousands of players meet in virtual worlds and play with or against each other. On the software level, different distinguishing criteria can be applied: For one, the entitlements, which are expressed mainly in the frequency of play and in terms of skill level (casual games; core games; serious games). This refers to the level of complexity of games, the requirements for the gamer and the play time budget associated with the game (Prato et al., 2010). Casual games are distinguished in the way that they serve as a stopgap by their relatively low complexity, low player requirements and low use-cost of short-term entertainment and free time. Core and hardcore games have medium to high complexity, provide much higher requirements on the player and consume considerably more time. Serious games are games that do not primarily have to serve the purpose of entertainment, but serve a "serious" purpose. However, this term has been criticized because of its fuzziness. Furthermore, games can be distinguished according to the number of possible players. Basically, there is a distinction between two modes: single-player and multi-player. In the single-player story mode, the gamers play alone. In multi-player mode, several gamers play together (or against each other) simultaneously (Jöckel, 2009; Wirtz, 2008). From these, the MMOGs can be separated, since in MMOGs several thousand users interact on the Internet and therefore have other technology and game-play requirements. Widely used and more relevant to the gaming experience itself is the distinction between game genres. Similar to movie or music genres, the differentiation of games is based on their content, including the relation to the form of play and the game-play. In general, games can be divided into the following categories (Marchand & Hennig-Thurau, 2013; Kempf, 2010): Action, Adventure, Puzzle, Skill, Jump & Run, Children's, Management, Music, Racing, RPG, Simulation, Sports, Strategy, and Virtual Worlds. Combinations may arise from the genre. Furthermore, there is the distinction based on price. It is believed that the game’s price is reflected in its production costs, quality, and thus the gaming experience. So-called Boxed Games (also called "Triple-A (AAA) Games") represent the pinnacle of game production and are called blockbuster games due to the high production costs and the possibility of generating extremely high profits (Jöckel, 2009 p. 24; Wirtz, 2008 p. 575). But, meanwhile, the production costs and the revenues of online games has also reached the multi-million dollar mark.
3.3
Characterization of the games industry
In the past ten years, the games industry has developed into one of the most important and fastest growing sectors, and not only within the media industry. Games find greater and greater social distribution as the number of game devices increases and the necessary technical and commercial infrastructure greatly expand. Today, almost every device with a screen is considered a platform for games. Already in 2008, worldwide games sales overtook (32 billion dollars) the global sales of DVD and Blu-Ray (29 billion dollars) (Media Control GfK International, 2009). Also from the user side, games have arrived in the center of society. On average, there are two players in every American household and at least one device that is used for playing. Here also the cliché of male adolescents playing is outdated: 45% of players are female and the average age of those who spend the most on games are aged 35 years (ESA, 2013). Table 2 shows the volume of the global games market compared to the global entertainment and
media market and to the selected market segments of the music and film industry (including cinema) (PricewaterhouseCoopers, 2012a): Table 2 Sales development of the global games market in comparison (incl. advertising) (Source: Based on
PricewaterhouseCoopers, 2012a p. 57)
Year Market
Games market, Bil. $ (changes in %) Film market, Bil. $ (changes in %) Music market, Bil. $ (changes in %) Entertainment & Media market, Bil. $ (changes in %)
Forecast period 2014 2015
2012-2016 ∅ in %
2009
2010
2011
2012
2013
55,201
57,459
58,723
62,349
66,206
71,243
76,878
82,976
(2.2)
(4.1)
(2.2)
(6.2)
(6.2)
(7.6)
(7.9)
(7.9)
83,359
84,897
85,433
87,877
90,724
93,651
96,714
99,657
(1.6)
(1.8)
(0.6)
(2.9)
(3.2)
(3.2)
(3.3)
(3.0)
53,154
49,270
49,886
51,124
52,771
54,810
57,141
59,741
(–2.0)
(–7.3)
(1.3)
(2.5)
(3.2)
(3.9)
(4.3)
(4.6)
(3.7)
1,4644 52
1,5301 97
1,6045 83
1,6908 71
1,7815 93
1,8899 23
1,9942 05
2,1200 70
(–2.5)
(4.5)
(4.9)
(5.4)
(5.4)
(6.1)
(5.5)
(6.3)
(5.7)
2016
(7.2)
(3.1)
According to calculations by PricewaterhouseCoopers, as measured by the average annual sales growth over the past three years, the music market at -2.7 percent and the film market at +1.3 percent lie behind the games market at +2.8 percent. Also in Germany, the games market becomes increasingly important. Here, the market volume of the games industry for the year 2011 amounts to around 2 billion Euros (PricewaterhouseCoopers, 2012b). The German industry associations expect high growth rates of over five percent in the coming years (ibid.).
3.4
Industry value chain in the games industry
The games industry is a part of the entertainment sector, and in the broad sense includes the aspects of development, publishing, production, distribution and sale of electronic gaming devices, as well as software and accessories (Deloitte & BITKOM, 2009; Wesley & Barczak, 2010). The games industry can be described as a "typical system industry" meaning that consumers can only reap the benefits if they possess the required system elements (game software and hardware) in the system network (see Wirtz, 2008 p. 548 f. in the following). However, not only consumers are dependent on this system principle; this also has effects on the other side of the market. Basically, the games industry is divided into two segments: hardware and software. The software sector consists of the market for the various electronic games. The hardware sector consists of the market for physical devices (Devices) (e.g. PCs, consoles and related input devices), on which games can be played, as well as a necessary infrastructure (distribution and network). In this industry system, the hardware producers are reliant on the software producers to provide games that take advantage of the potential of the developed hardware. Again, the software production depends on whether the users have the
hardware required for the game software. The present work deals primarily with the production of game software. Therefore, the fields of hardware and additional services are not considered in detail, but indirectly. In the literature, the value chain of the games software industry is often generically divided into the following three stages: development, publishing and distribution and trade (Wirtz, 2008 p. 578 f.). The stakeholders have different goals and skills and basically occupy different positions along the value chain. However, the individual actors, such as publishers or platform manufacturers, take on parallel tasks of several stages in the value chain (Deloitte & BITKOM, 2009). Figure 1 shows a simplified value chain in the gaming software industry and the assignment of the individual actors to the corresponding industry value chain with the average profit share.
Figure 1 Value chain in the games industry (Wirtz, 2008 p. 579; EGDF, 2011) The first stage of value creation deals with the actual development of electronic games. This is dealt with by independent game developers (development studios and private developers) and the internal game development departments of publishers and platform manufacturers (Wirtz, 2008 p. 578). The game development process consists of three major phases: conception of the idea, pre-production and production (Tschang, 2008; Wirtz, 2008; Smith et al., 2013). In the first phase, the basic idea arises and the vision and the core concept of the game are formulated. Furthermore, a market analysis is conducted and the budget is planned. In pre-production, the game is made concrete by working out the ideas and eventually realizing a (playable) prototype. In the last step - production - the prototype is extended for further technological features as well as other design and content details. Furthermore, the various versions of the game (such as alpha, beta and Gold Master) are subject to extensive testing during the production phase. In the second stage of value creation, the publishing takes place. Here, the developed games are published by game publishers (Wirtz, 2008 p. 578). The production of the hard copy is taken over by the game’s manufacturers or producers approved by the platform manufacturers. In the stage of distribution or trade, finally, the electronic games are sold in
physical or digital form to end consumers. Depending on the selected distribution and trade channels, different market actors can be involved in this phase value.
3.5
Conclusion and research design
The increasing convergence of market and technology levels as well as the rapid growth in the games sector have led to an increased interest in the games market by other media companies that are looking for new ways to expand and/or hold their scope. On the other hand, industry newcomers are attracted to the potential of high returns. Also the hardware providers of TV and mobile devices are positioning themselves into the right market. At the same time, the customer segments (still) grow, although the first signs of saturation can be observed. This is not to mention the multitude of small and medium-sized developers who are now – thanks to new platforms such as the various app stores – no longer relying directly on financially strong publishers. All these changes massively affect the existing industry value chain and thus the design of business models in the various value chains. The following sections will show how to map the industry developments outlined here in the business model of a game developer. Our research questions are: • •
What changes the business model of a market actor (especially in the production of games) in the games industry? How does the changing business model fit to the new industry environment (with respect to a modified industry value chain)?
We address the identified research gap in the business model literature by linking the macroeconomic and microeconomic perspectives. In this way, we want to show how environmental influences in sector upheavals affect the business models and their position within the industry value chain.
4. Case study of a game developer In the following, an empirical case study serves to illustrate the effects of sectoral upheaval on a business model and the products. For reasons of confidentiality, the case study will be anonymous; the company is given the fictitious name GamesDev. The following sections describe the method and the procedure, followed by the analysis of the business model based on the Business Model Canvas. Based on the ex-post analysis, it is possible to show the transformation of the business model and the relevant factors responsible.
4.1
The choice of a case study as a research approach
A case study is a common approach to research, often used in organizational studies and across different social science disciplines (Hartley, 2004). Case studies are very versatile. They can be used for the purposes of exploration, description and/or explanation (Yin, 2010 p. 7 f.; Eisenhardt, 1989). According to Yin (Yin, 2010 p. 18), the case study allows the exploration of a recent phenomenon, in particular when the boundaries of the phenomenon and the context are not clear. Since business models are a complex phenomenon in themselves, and since their integration entails additional complexity in the environment, we decided to carry out a case study in order to gain clarity in a particular case (ibid, p. 46). Thus, it involves a single holistic case study. Furthermore, different complementary data sources were consulted in order to increase the construct validity (ibid, p.41).
4.2
Expiration of the case study
Our sequence was basically geared to those five phases of the case study research process proposed by Yin (2010): design of the case study, preparation of data collection, data collection, data analysis
and documentation of results. The design of the case study was influenced by the issues identified from the business model literature and hands-on industry developments. The preparations for data collection included desk research on the industry, especially on technological, content and social developments, being subject to a separate market study on digital convergence (Botthof et al., 2011). The specific selection of the company happened due to the repeated appearance of the company in the relevant industry press (e.g. Gamesmarkt and gamesindustry.biz) as well as in games developer conferences, which were attended by the research team. The magazines’ repertoire includes much of the documents used for both the preparation of the data collection and the collection of data itself. Due to the public nature of the data, a relatively small developer community and local professionals desire to share information quickly, the games industry is a very transparent and networked industry. So, for example, Tschang (2005) was able to conduct an analysis of success factors in games production, since the exchange and dissemination of so-called post-mortems2 has a long tradition in the industry. As common in the empirical data collection of case studies, we triangulated the secondary data in specially collected interviews (Yin, 2010 p. 114). For the case study, a total of four semi-structured, direct interviews were conducted with representatives of the developers in April 2013 based on an interview guide. The length of the interviews varied between 22 and 49 minutes. In parallel, the data were enriched with presentations by industry experts at the annual developer conference Quo Vadis in 2012 and 2013. Furthermore, 12 documented and recorded interviews at the conference with experts from other games developers and publishers served as a triangulation point to put the development of a concrete company in the context of the rest of the industry. Table 3 provides an overview of the knowledge domain and positions in the company of each interviewee in an anonymized form:
Table 3 Knowledge domain and positions of interviewees (Source: our own presentation)
Number
Knowledge domain
Position
1
Internal organization, project management
COO
2
Game development, technology
Head of Console Technology
3
Management of Resources, Technology
Head of Production
4
“Pitching”, Sales
Business Development
While the conference lectures treated the transformation of game companies’ business models and new products, the unstructured interviews were used to address open topics or to get further information. Respondents from the case study company were selected according to their ability to cover various possible areas of the games production. The interviews with developer employees were recorded and then fully transcribed. The interactive analysis of interview material for the case study included about 50 pages. The analysis of the data in the context of the present study was based on the method of qualitative content analysis by Mayring, in which the material is gradually guided by theory deductively and inductively processed with the developed material on the category systems (Mayring, 2002 p. 74 f. und 114). The material coding and analysis was carried out with the aid of computer-based software program MaxQDA 10. The relevant passages were highlighted here and assigned to one or more categories. The coding was carried out according to the change of the business model by means of the components of the Business Model Canvas (Osterwalder & Pigneur, 2009) and from the Post mortems are mostly reports on completed productions reprinted from the Game Producer that are published in professional journals and aim to share knowledge and learning within the developer community.
2
environmental factors that were mentioned in the interviews and in the secondary data. In the last phase, "documentation of the results,” the manuscript of this case study was written.
5. Results – Adapting the game developer’s business model to the new environment The focus of the investigation is an international game development studio from Europe, the GamesDev (pseudonym). The company under consideration is an established games developer which is considered to be a medium-sized company in this industry. GamesDev has developed games for over ten years on behalf of major international clients for various platforms. Originally, productions in the PC and console arenas were responsible for the success, but now, due to the change in the requirements and needs of players, online platforms and mobile play play an increasingly important role for the company. GamesDev is working in collaboration with major international publishers, as well as with major telecommunication providers who establish themselves as a platform for online games. In the following, the business model of the company investigated here is described in terms of the business model canvas of Osterwalder & Pigneur (2009). Here, the changes in the business model, the factors that drove these changes and their effects are presented.
5.1
Customer segments
GamesDev considers itself "...a pure service company..." (interviewee 2, lines 512 ff). As with many classical game developers, the company mostly focuses game development on commissioned productions (interviewee 3, lines 148 ff). There exists the possibility that an entity passes a game idea on to GamesDev, or that GamesDev develops its own game idea and "pitches" the idea to a publisher. Thus, the company operates and sells the games not produced with the game player (interviewee 2, line 210). Therefore, the direct customers for which the games are being developed are generally differentiated into two customer segments: game publishers and clients from other industries. It is thus a business-to-business (B2B) relationship. Players take on the role of indirect customers. In contrast to the B2B-business in other sectors, the end customer receives exactly the end product that the developer produces; only the marketing and distribution, as well as parts of the design concept, shall revert to the client. Due to the fact that the games are developed in GamesDev, they can be produced according to customer requirements and expectations (interviewee 2, lines 220 ff). This means that for each customer, publisher or other client, the games will be developed individually. The finished products differ from each other in terms of the technology used, the created design, the content, the set price and the indirect target groups (end users). In this way, the games can be designed for one or more platforms at the same time by assigning different game genres, being available in different price ranges and appealing to a wide variety of end-user groups. This assumes that GamesDev has acquired a broad repertoire of explicit knowledge about technological platforms, but also implies knowledge or experience of how different genres are designed and the way different groups of customers can be addressed depending on the platform. Because of that, GamesDev can show a large number of publishers worldwide as regular customers, despite the fast pace of the industry. Thus publishers and, increasingly, clients from other industries (such as telecommunications providers or TV companies) represent the main target segments in the game development studios.
5.2
Value proposition
The business model of GamesDev is based on the development of electronic games on behalf of major international companies. The company has the know-how and many years of experience in the production of games for different technical platforms. Relatively early, the focus of game production was placed on different platform developments, whereas competitors partially specialized on one platform. A game is created simultaneously for
different platforms of the console providers Nintendo, Sony or Microsoft (interviewee 1, lines 142 ff). The value proposition thus consists of the development of different games tailored to the specific platform-dependent specifics, and at the same time a rapid porting to these different platforms. This is done by using an internally developed technology that represents a core resource (interviewee 2, lines 62 ff). This is an engine that is used to optimize the development process and simplifies the porting of the different codes. Although many existing platforms can be covered by means of the software, no browser can be covered that has the largest share of growth in the games sector worldwide, particularly in recent years. In the future, this should change: With increasing efficiency and optimizing of browsers, the online infrastructure scaling between these platforms should be at least somewhat possible. This specialization is a unique selling point that enables the company to distinguish itself better from its competitors (interviewee 1, lines 142 ff). First, the company specialized in the production of PC and console games (interviewee 1, Z. 135 ff; interviewee 2, lines 162 ff). Here, the game development studio mainly produced short role plays (interviewee 1, line 52 ff). Due to the financial crisis of 2008 (interviewee 2, line 171 ff) and the decline in physical distribution (ibid. , line 550 f), the number of orders for PC and console games in the medium price segment in which the company was positioned decreased (ibid., Z. 552 f; interviewee 3, lines 122 ff). Partly due to the increasing spread of broadband internet, the market for free online browser games or Free2Play games quickly developed (interviewee 2, lines 122 ff), which use alternative revenue models such as advertising or micro-transactions for virtual goods. Due to the increasing popularity of these Free2Play games, the company recognized the demand for products of higher quality than the previous operators of online games offered in this segment at the time (ibid., lines 188 ff). Due to the declining share of jobs in the PC and console arena, the decision was made to enter the new market for online games (ibid., lines 552 ff). The first browser game of GamesDev was a great success (interviewee 1, lines 150 ff). The company continued to work on browser games and continued to build its additional multiplatform competence. Shortly after the boom of online games for PC, the proliferation of smartphones and tablets followed. This became a new long-range trend for the industry, which meant that GamesDev, like many others, began to develop games for mobile devices (ibid., lines 153 ff). This was associated with the emergence of new players such as Apple and Google that could regulate access to the market through their app stores. Currently, the focus of GamesDev is placed on the development of Triple-A Free2Play multiplatform games. These are online games that require an increasingly higher production budget, as they get qualitatively closer to PC and console productions in terms of graphics and content. The residue of online games for PC and console productions in the Triple-A region in terms of graphics quality has shrunk by subjective expert opinion of the original ten to two years. The continuous re-orientation and consideration of these new trends and related new devices, new user scenarios, new production technologies, new platforms and new payment models not only led to significant changes in the organization, such as in project management, but also influenced the game design and the aesthetics of the games themselves (ibid., lines 246 ff). An online game for PC has, as opposed to game consoles and mobile devices, fully met different requirements in terms of graphics, story, player interaction, time and cost, so that immersion is created.
5.3
Distribution channels
GamesDev offers its services in the B2B sector. Players are addressed indirectly, as the clients usually make the game available to players on their platforms. Therefore, channels should not be understood primarily as the games’ distribution channels. In this particular case, the blurred boundaries of the Business Model Canvas between distribution channels and customer relationships are evident. In the service sector, both components are blurred. In the interviews, the interviewees see the acquisition and the final delivery as a channel for business customers. The collaborative development and integration of feedback (by players during the first test phase) are rather understood as customer relationships. The aim of the acquisition is to convince the prospective publisher or clients from other sectors of the
competencies of the company. Since, like many media industries, the games industry is a "people" industry, in which reputation plays a crucial role due to the difficulty of estimating the final result (Hotho & Champion, 2011; Aoyama & Izushi, 2003). Different personal communication, promotions and sales activities are used for the acquisition of game ideas. As is common in the B2B business, especially personal contact channels are used, such as games fairs, conferences and other events (ibid., line 123 ff), in order to discuss possible contracts with potential customers. In the contract manufacturing of external game ideas, the publisher or other authorities always contact the company (interviewee 4, lines 99 ff). Because of its good reputation, GamesDev is "in some publisher [s] on the list" (interviewee 2, line 254) which send the RFQ to the company (ibid., lines 254 f). Nevertheless, the communication with the company via broadband Internet plays a significant role. The exchange of large amounts of data (graphics, programs, trailers) has an significant influence on the games’ development, since early impressions of the game could be exchanged over a large distance (ibid., lines 295 ff).
5.4
Customer relationships
In customer relationships, it becomes clear that GamesDev gradually approaches the end user from a B2B-centric business model. Since the B2B business still represents the largest share of sales and the lower risk in the business, the connection to business customers plays a major role. As interviewee 4 stated, the degree of involvement or the influence of the publisher is different from the process of game development from project to project, but generally the connection between publisher and developer /contractor in the industry is one of the most crucial factors. Since the path from the idea to the first prototype is dominated by extreme uncertainty (such as how a game idea will finally be implemented ), the relationship between publishers and developers is one of the most crucial factors in the industry, since the game’s marketing and placement must arouse corresponding expectations among the players. On the other hand, the reputation and trust in the developer studio are connected to receiving future orders or to being perceived by other clients (interviewee 4). In the development of the game, especially in the Free2Play games, the timely response to feedback from the indirect customers, the player, is important. The company communicates with the end user via forums (interviewee 3, lines 290 ff). The often large fan bases are highly motivated to participate in the development of "their" games. Due to the increasing proximity to the player, GamesDev operates more than before on its perception by the public and on a corporate identity matched more to the player. These include sponsorship and the increased use of social media channels like Facebook. The continuous exchange of information on new projects still in development is the final marketing strategy to build a community of players beforehand.
5.5
Key resources
As the game development does not require great physical production equipment, the core resource of the games industry is a professional development team (Cohendet & Simon, 2007). Even with GamesDev, the central resource is the staff’s knowledge and ability to create exciting game worlds with the appropriate technology. Due to the young age of the industry, many older employees are selftaught in the area of art, design, film or computer science. Only recently have industry-specific vocational trainings appeared at universities. The required staff for the development and sale of electronic games includes programmers, game designers, artists, testers and marketers, as well as employees that coordinate the development process and the cooperation. Partly from these soft resources arise further key resources (interviewee 3, lines 126 ff.; interviewee 2, lines 392 ff.; interviewee 3, lines 321 ff.): - The technology for the production platform and porting of games; - Protected "Intellectual Properties" (IPs) of the existing games (e.g., out-licensing of trademarks); - The company's reputation as an indicator of reliability and punctuality in the international games industry.
5.6
Key activity
The individual, custom or in-house development of electronic games for different technical platforms is the most important key activity at GamesDev. It is a matter of using the resources so efficiently that the projects can be completed on schedule and within budget (interviewee 2, line 223 f). The use of these resources is organized through developmental processes that are borrowed from software development. Examples include Scrum or Kanban, which are modified in a way that, under extreme deadline pressure, a high quality is possible through different iteration loops. These development processes differ depending on the technical platform for which the electronic game is produced (interviewee 2, lines 431 ff.; interviewee 1, lines 399 ff.) In this context, different activities are required for various game development stages. The generic project schedule foresees the production of game design, content, the use of specific technologies and then testing and, if appropriate, support. If the required know-how for these activities is lacking in the company, it is procured, e.g. through the acquisition of the necessary technologies (license names of partners) or by hiring freelancers (interviewee 2, lines 362 ff). With the increasing displacement and specialization of individual process steps in the value chain, various tasks are also awarded externally for time- or resource-saving purposes (outsourcing) (ibid., lines 274 ff.) and, when it comes to long-term or sensitive tasks, codevelopment agreements. A special key activity is the continuous development of a company’s own technologies to optimize the development process and the subsequent use of these in the production of games (including the aforementioned cross-platform porting software) (interviewee 3, lines 159 ff). This creates independence from technology suppliers, enabling the company to exclude the risk associated with the use of foreign technology (technology availability) (interviewee 4, lines 195 ff and 334 ff).
5.7
Value network
As the CEO of GamesDev explained in an interview, the development studio barely outsourced activities in the beginning. With the increasing complexity of production due to higher demands on quality of play and the diversification of platforms, that changed. To acquire the necessary resources and activities (interviewee 2, lines 362 ff) and to optimize activities and resource allocation (interviewee 1, lines 284 ff), the games developer established partnerships with other companies. This includes, on the one hand, classical areas such as code programming or artwork in which GamesDev offers its services to other developers. Meanwhile, however, freelancers are also tasked to conduct complete projects. In addition, professional writers from the TV area are temporarily hired to develop storylines for games. The same applies to the music industry, Quality Assurance (QA) and in the localization of content to specific regions (language, graphic). Other companies are performing, for example, load tests, certification tests for consoles and PC-hardware compatibility tests (interviewee 3, lines 234 ff). If necessary, GamesDev can purchase licenses for the use of technology by the partners. Thus, for example, for some games the library for gesture recognition with the controller was licensed (interviewee 2, lines 365 ff). For the development of its own technology GamesDev takes programs to promote technology projects. The partners then include public technology funding agencies (interviewee 1, Z. 339 ff and 497 ff Z.). With the increasing complexity of game development and the specialization of know-how, not only the technological and content production is seen as a challenge, but also the coordination of the projects. The large number of partners in a project may add to the complexity and thus pose a risk, which then could jeopardize the success of the project (interviewee 3, lines 243 ff). Because the industry is very much internationally oriented, it is important to ensure the communication between the different locations (interviewee 2, lines 338 f; interviewee 3, lines 244 ff).
5.8
Revenue streams
Since GamesDev operates in a work-for-hire environment, the publishers are the main source of income (interviewee 4, line 274). Depending on the contractual arrangements, the revenue for game development can be generated in different ways (interviewee 1, lines 459 ff.). Firstly, the contractor pays the fixed amounts according to the service rendered during the project or at the end of the project (interviewee 2, line 178 f.). Here, certain sums of money are paid per unit of work done (ibid., lines 478 f.). On the other hand, if the company agreed to profit-sharing in the contract, it receives a fixed percentage of the revenue from the sale price of the game or in-game sales in Free2Play games (ibid., Z. 493 f.). The two revenue models are used separately and in combination. In combination, the rule is set: The lower the fixed amounts, the higher the risk for game developers, but therefore also the negotiated percentage of revenues is higher (ibid., lines 482 ff.). In addition, some publishers pour out bonuses to the game developers if certain targets are met, such as:
" ... When you are done a week earlier, when you create the certification after the first pairs, [or] if the criticism [of magazines or user forums ] reaches a certain level ... " (ibid., Z. 489 f).
Another revenue stream results from the property ownership of IPs. The Developer Studio can receive a monthly (license) fee for the licensing (interviewee 3, lines 321 ff.). While technology projects are financed from the cash flow and through technology promotion (interviewee 1, line 496 ff), game development is paid for by clients (interviewee 2, lines 476 ff).
5.9
Cost structure
As mentioned in the key resources, intellectual capital and especially the employees’ knowledge, intuition and personal network plays a significant role in the game production. The management therefore sees the quality of its games as interdependent withthe team. Especially when the budget is tight, it is not about saving man-months, but to use the man-months as well as possible (interview in a magazine). Therefore, the personnel costs account for the largest portion of the expenditure. Another important point is the cost of the IT-infrastructure. Since the company has high demands in its ITinfrastructure, the expenses for setup and operation are equally high (interviewee 1 , Z. 475 et seq.). Furthermore, costs are incurred by developing the company’s own technologies. Therefore, larger sums are invested selectively and subsidized (ibid., lines 339 ff.). In addition, the company has to pay for the use of third-party software license costs, especially for 3D-modeling programs and various games and browser engines. Due to newer technological platforms and the resulting cost and quality pressure, the amount of required software increases (so-called middleware); at the same time, there will be savings due to efficiency effects from their use. In addition to the regularly occurring expenses such as rent for office space, travel expenses, and expenses for customer acquisition and support, spending on marketing rises sharply in the industry. This does not concern GamesDev directly, since they focus mainly on the development, so commercialization will revert to business customers. The rapidly growing number of development studios, the resulting flood of games and especially the problem of imitation (so-called "clones") all make it difficult to stand out in the market. Experts in the industry give productions without large advertising budgets only a few chances for success. In summary, Figure 2 shows the changes in the business model of GamesDev in the Business Model Canvas.
Fig. 2 The expanded business model of GamesDev (red marks the changes)
6. Analyzing the change in industry value chain and business model stretching The case study of GamesDev shows how the business model has changed due to global and industryspecific changes. Primarily, changes come from two directions, which can be assigned to the two known drivers of innovation genera: technology-push and market-pull. Technology-push includes new technological developments such as new hardware platforms, the ubiquity of the Internet, and new input devices that can be identified as the driving force of change. On the market side, there are changes in user behavior and a shift in the entertainment needs towards more interactive content. This results from several factors. On the one hand, the growth of the first critical mass of players who started playing computer games as children and are now of working age between twenty and midthirties. On the other hand, new game content also attractive to non-core gamers is created. In addition, the willingness to pay money for content and entertainment on the internet increases. Figure 3 shows how the value chain of the games industry has changed (Prato et al., 2010; Business Insight, 2011; Marchand & Hennig-Thurau, 2013). Overall, it can be stated that the value chain of the games industry has massively been fragmented and supplemented. One can speak of a "Cambrian" explosion of new value chain and business models, analogous to the types of Cambrian explosion in the era, in which, an enormous biodiversity suddenly emerged over a short period of time. The rising expectations and needs of the players and the willingness to pay, as well as an ever-more specific training of professional skills and competencies of employees in the games industry leaves the industry for now prosperous, with the first consolidation trends emerging on the horizon.
Figure 3 The old and new value chain of the games industry
The new value chain is characterized by new lenders, such as venture capitalists, technology grants or crowdsourcing, causing game developers to develop and implement bolder game ideas. New portals and the operation of the company’s own online games on the internet allow the elimination of individual value actors who were always seen as a barrier. This is, on the one hand, the stationary trade: partly, it is also the publisher who plays little to no role for some developers. A few years ago, publishers saw no portable business model in the online games sector. Today, all the major publishers who produced formerly PC and console full price games (known as Boxed games), have invested heavily in these areas and increasingly experimenting with hybrid forms (e.g. in-game purchases or downloadable content in Boxed Games). Meanwhile, there are also publishers who have purely specialized in online games. With growing know-how and increasing revenues, many online game developers have become publishers themselves or offer platforms and games from foreign developers on their own. Also, download portals for Boxed games are being used increasingly by the user. All major publishers have their own music download sites, some of which are also open to independent game developers. The result is that they are available for download in direct competition with some online retailers like Amazon, selling both the physical media on the Internet as well as boxed games. The changed value chain is both a result and a trigger of a massive impact on the developers’ business models. Two significant impacts, innovations in the revenue mechanisms and innovations in game content will be a recurrent theme in the interviews. Innovation in the revenue model show up with the completely different monetization principles of online games as opposed to the Boxed Games (interviewee 3, line 199 ff and 216 ff). These so-called Free2Play games can be played for free, although for additional features it is required to pay money in the form of micro-transactions, e.g. to improve the avatar for time advantages in gameplay or in-game currency with which you can engage in trade (interviewee 2, lines 122 ff.). Compared to the traditional sales model for Boxed titles, in which the electronic game is paid once (ibid., line 455 ff), the Free2Play revenue model differs in that the online games "capable of generating revenue permanently"(ibid., lines 199 f) set no limits on how much money the players can spend. Meanwhile, the Free2Play model is used more and more frequently in comparison to the subscription model. In Free2Play games (both browser and mobile games), not only other technologies than the console games are used, but the product is set online "unfinished" and successively developed, depending on the number of players (interviewee 3, lines 199 ff and 216 ff). This results in completely different work and development processes, which in turn trigger other player behaviors. Another effect provides content innovations. Innovations in the games industry are now increasingly driven by content rather than by the technology (EGDF, 2011). The new revenue models and terminals allow a bold experimentation of game concepts that explain, for example, the success of games like Angry Birds or Nintendo Wii sports games (for conceptualization of the innovation in games content, see Tschang, 2007 p. 991; Choi, 2011)). The new technical and commercial opportunities are increasingly leading to a debate within the industry about the emotional content and the value of games and game concepts (see the discussion on Gamification, meaningful play or serious games). This spiral consisting of newly initiated industry drivers accompanying a new composition of the value chain requires incumbents such as GamesDev to continuously define their position in this chain by means of the business model. The analysis of the GamesDev business model demonstrates that the company is strengthening its position primarily in the development phase. GamesDev continues to produce primarily on behalf of publishers of boxed games or even online
games and leaves the distribution of the client. Thus, it must focus primarily on the technological and content development of the games, while some competitors switched to the operating model for their own online games. In contrast, GamesDev produces online games for both publishers and companies in other industries, and prepares them to the extent that the customer can act as the operator of the game. This means that, under certain circumstances, a game can be produced once and then be evaluated differently, operated or resold. The variety of platforms and portals makes this possible. GamesDev, however, has not decided on the basis of their skills, resources and good links to publishers to take on the function of a publisher. The reason for this is that the market for online games is extremely competitive now, so that large development and marketing expenditures are necessary to draw attention to new games. In addition, there is a decrease in the time span allocated to attract players and motivate them to spend money. A game has to convince in a few minutes, since the players have no initial investment, like with console games, and thus can change with a few mouse clicks to the next game if they are displeased in any way. Because of these considerations, GamesDev remains focused on development work, but has changed its business model: Due to the high platform fragmentation and the increasingly specific requirements regarding the technological characteristics and the user-oriented use of each platform, GamesDev has expanded its value network significantly. The network consists of more suppliers of middleware that help to optimize the production effort, for example by in-licensing tools and external services (increasingly powerful game engines, project management tools, software to support collaborative game development or providers of object libraries). By adjusting the network, it is guaranteed that the activities and key resources meet the existing value proposition (multi-platform skills) for the client on the new platforms. New clients include, for example, new platform operators of online games as well as companies in other sectors, such as the telecommunication or the traditional media industry, now offering their own distribution platforms. Especially the production of online games in conjunction with the associated new revenue models and game mechanics affects the GamesDev business model and requires an expansion of knowledge to bring revenues and mechanisms in line. Furthermore, the direct communication with the players themselves is an essential factor for success - both during production and after publication. Due to the network effects, which are responsible for the success of multiplayer online games, word of mouth and the creation of player communities have become essential elements of the business model of developers. Therefore, GamesDev tries to transfer its reputation and notoriety from the client as the direct customer segment onto the players. Overall, it is clear that GamesDev’s business model focuses especially on the development phase to establish a key role for the development of games on all platforms and across platforms. The contradiction of objectives between greater quality (graphics, story) and an increasing number of platforms with different revenue mechanisms together with decreasing costs can be offset through specialization, outsourcing, synergy effects and permanent further development. All in all, the company delivers a wider spectrum of offers in customer segments, channels and customer relationships. However, it is streamlined partly in the supply infrastructure by simultaneously building the skills necessary to be able to re-run outsourced parts of the value itself. In summary, the company case study analyzed here demonstrates how to adapt the changing business model of a company to a dynamic-disruptive industry transformation and thus itself drives the change in the value chain and consequently the industry. As a result, interesting perspectives on generalizable activities in the management of business models can be observed: An existing business model is focused on a specific function and position in the industry value chain (Gambardella & McGahan, 2010). If radical changes in technology and customer need lead to splitting and re-configuration of value chains, this position of the business model can automatically change or even become obsolete (Sabatier et al., 2010). Existing structures are threatened by offering new business opportunities at the same time. The resulting opportunities and threats drive the company to search for docking facilities for their existing business models (Bucherer et al., 2012). However, they are faced with a paradox that can be
called an implementation paradox for business models particularly in dynamic industries3: To be able to position itself in a new, dynamically changing value chain, a tailored business model must exist. In contrast to product innovations, the characteristics and functionality of new business models cannot be planned in a lab or on a drawing board (Andries & Debackere, 2013; Bucherer et al., 2012). But in order to be able to implement a coordinated business model, one should already be positioned in parts of the new value chain. However, due to the uncertainties of new value chains, there is a lack of experience in the design of new business models. In other words, business models hardly be tested before being introduced to the market, unlike products, since the market is the only test of business model innovation (Ries, 2011). Through a trial-and-error method, a new business model can only be tested on the market at high risk (McGrath, 2010). Considering the risks, costs and success, either new (subsidiary) companies with new business models or modified existing business models are being established. In the latter case, in order to move into new positions within the value chain, a stretching of the business model is necessary, which we refer to as business model-stretching4. The term stretching in the business model approach is to be understood as an activity meant to overcome the paradox of implementation in order to adapt the business model to a changed value chain (see Figure 4). The business model is stretched by deliberately taking on tasks or jobs that do not lie entirely within the focus of the current business model. One therefore looks for potential jobs, partners or customers, in which one knows that one's own business model can be extended. Knowhow, production infrastructure and the use of new sources of revenue are extended in a "secure mode" in various projects. For example, the resource base, such as employee knowledge in terms of new technologies, new product architectures or even the knowledge of a new customer segment is expanded. Also, the value network is expanded, in which existing relationships remain even after the expiration of the contract project.
see O’Mahony and Becky (2006) p. 920 The term is based on the concept of stretch work that describes the expansion or further development of employees’ individual skills in highly uncertain and fast changing sectors (O’Mahony & Bechky, 2006) 3 4
Figure 4 Business Model Stretching in the transformative industry value chain
The stretching does not necessarily have to be associated directly with the change in the existing business model, but can be delayed and occur in smaller steps. The modifications of individual mechanisms of the existing business model can tend to lead to incremental business model innovation, but can also be the breeding ground for radical changes at the same time. In the case of GamesDev, it was the development of the first online and mobile games with which a material impact in the revenue mechanisms and game content were tested. For the clients, new content was created, but at the same time the development process had changed and the game logics of the new platforms had to be adapted. In addition, the full operating model had to be developed. This modified the GamesDev business model incrementally, as the same business model has been used, but additional knowledge, skills and resources were needed to switch from the production of boxed games to online and mobile games. By "stretching," GamesDev maneuvered itself into the value chain
of online and mobile games. In addition, GamesDev has thus placed itself in the position of an operator of online games and thus of carrying out a radical business model change. Even if GamesDev has not yet made use of this option, other developers have already dared to take this step. Meanwhile, GamesDev has the necessary knowledge base to convert the business model, but this would also mean that by having a change in its business model the company would suddenly become a competitor of former clients. However, this capability of business model stretching ensures the flexibility to convert the existing business model if new or existing competitors should position themselves in the previously attractive and addressed value chain. Unlike the concept of stretch work (O’Mahony & Bechky, 2006), the increase in competency and knowledge on an individual level, business model stretching is more radical: Advanced individual skills can either be used or not. In contrast, using the potential ability to change the business model in an actual business modification is irreversible, because then a whole system is changed. In other words, business models, if they were once converted or changed, are then institutionalized. At the same moment in which the new business model competes with previous partners of the old business model, it is possible that the profits of the new model cannot compensate for the resulting slump in sales.
7. Summary and Conclusion In the present study, we discussed the relationship between sector transformations that are particularly evident in altered value chains at the industry level, as well as the relationship with the changes at the business model level. We associated the micro- and macro-perspectives of the business model literature to show the gap in research on the mutual influence of sector breaks on business models (Zott et al., 2011). Therefore, we used a single case study of a game developer who is confronted with new technologies at different levels and new products in the form of modified games and new revenue models in the turbulent environment of the games industry. It was recognizable that the suggestive objective contradictions of more quality on more platforms with different revenue mechanisms can be absorbed by reducing costs through specialization, outsourcing, and synergistic effects. Overall, the company has positioned itself more widely with regard to customer segments at channels and customer relationships. It is streamlined, however, partly in the supply infrastructure but at the same time it builds the skills to be able to re-export outsourced parts of the value chain itself if necessary. These changes (modifications) associated with radical changes in their own traditional business model and the business models of other actors in the value chain (e.g. integration or disintegration of individual stages of the value chain), require a competence and network building that is tested step by step in miniature. There is an expansion of the business model. This expansion we call business model stretching. The existing business model is supplemented by individual new aspects to adjust the value creation infrastructure according to a changed business model environment. Thus, the development paradox for business models is to be overcome, indicating that the necessary experience for business model innovation cannot be collected as products introduced to the market in tests and experiments, but that the launch is the test of business model innovation itself. Of course, this study has several limitations. First and foremost, we consider a particular case. As with any case study, investigation into the generalizability of the results is thus questionable. Nevertheless, we believe that this behavior is explicitly observable in other industries and businesses. On the basis of one case, no conclusions can be drawn as to whether there may be different types of business model stretching. But different modes would be conceivable. Furthermore, the number of the respondents is relatively low. Thus, it may be that some changes which had a significant influence have not been mentioned in the business mode.
In the analysis and evaluation of the data, we noticed multiple directions for future research. The inclusion of economic and social environmental factors on the business models have not yet been explored enough empirically. While there are more and more studies that address these issues, so far the environment in the business model literature is hardly systematic. Other trends in the literature on organization or research strategy linked with the business model approach could reveal whether they provide new insights regarding the environmental impacts on business models. Furthermore, in our opinion, it has been even less explored how customer expectations regarding a product may change due to a new business model. In the innovation management literature, especially the diffusion and acceptance of products have been investigated (Rogers, 2003); the diffusion and adoption of new business models from the customer perspective is unclear. Customers must get used to not only new products but also to new business models (pay models, new customer relationships, etc.). Another box that appears so far under-researched is the influence of the business model on the characteristics of the product, especially when changing the business model. Unfortunately, we could approach the fact that, for example, online games use completely different game mechanics and aesthetics than existing boxed games in terms of design and development. We believe that this line of research hardly exists. Therefore, it would be interesting to find out how to change products due to new business models. By this, we mean also the technological aspect of products with respect to the business models (Baden-Fuller & Haefliger, 2013), but also their symbolic dimension as design, branding or content, which increasingly plays a role for non-cultural goods (Ravasi & Rindova, 2008; Dalpiaz et al., 2010).
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