ICT Business Models
Capturing the value from technological innovation
Prof.Dr.ir.Frank Gielen
1
Overview
•
•
•
•
Introduction: What is it (not) ?
Business Model Framework
Software Pricing
Dotcom.back
– Internet age business models
• Open Source Software business models
• Applied Open Innovation
2
What is a business model ?
• It is a description of how your company
intends to create & capture value in the market
place.
• It includes :
– the unique combination of products, services and
distribution.
– the organisation and the operational infrastructure.
– ….
3
Bus.model = work in progress
• Business Modeling is not different from the
logic of scientific research:
– Start with a hypothesis
– Test in the market place
• Conceptual test: does it make sense ?
• Market test: do the numbers add up ?
– Constant change
• Impacts your technical architecture !
4
Initial software architecture
5
Extended architecture
6
Systematic mapping of business models to
architecture
• Create the initial architectures for each stakeholder
using reference architecture.
• Align business models and the value web
integrating stakeholder architectures as deployed
e-service architecture.
• Map business models to non-functional properties
of deployed architecture.
• Handle evolution of business models and
architecture.
7
Why make a business model ?
The business model unlocks the value of the technology
and justifies the capital requirements to implement it ..
8
Hamel’s framework for business
models.
Customer
Benefits
Customer
Interface
Fulfillment &
support
Info & insight
Relationship
dynamics
Pricing Structure
Configuration
Core
Strategy
Business Mission
Product Market
scope
Basis for
differentiation
Company
Boundaries
Strategic
Resources
Core
competencies
Strategic assets
Core processes
Value
Network
Suppliers
Partners
Coalitions
Efficiency – Uniqueness – Fit – Profit Boosters
The business model searches for temporary monopolies
9
Business Model: basic elements (1/4)
The customer interface element has four
aspects:
– Fulfillment and support describes the way the firm
reaches its customers,
– Information & insight, which describes the
customer information collection, and use,
– Relationship dynamics refers to the nature of
interaction between the customer and the firm
– Pricing structure describes the used combination of
different pricing methods.
10
Business Model: basic elements (2/4)
The core strategy element includes three topics:
– Business mission describes the objective of the strategy,
– Product/market scope of the business model refers to the
competition environment including customers,
geographies, and product/market mix
– Basis for differentiation describes how the company
competes differently from its competitors.
11
Business Model: basic elements (3/4)
The strategic resources element consists of
three topics:
– Core competences are skills and capabilities of
the firm, i.e. what the firm knows,
– Strategic assets are what the firm owns, like
brands patents, infrastructures, etc.,
– Core processes are activities which are used in
creating value to customers from resources and
assets.
12
Business Model: basic elements (4/4)
The value network element includes suppliers,
partners and coalitions.
– Supplier topic describes the nature of relations between
producer and supplier.
– Partners are more integrated in the producer’s business
than suppliers.
13
Business Model links
The basic elements are linked together with three links.
–
–
–
Customer benefits describe the actual offerings to customers
and how the firm’s core strategy fills the customer’s needs.
Configuration describes the unique way in which
competencies, assets and processes are combined and
interrelated in support of a particular strategy”.
Company boundaries describes the linkage of the firm to its
surrounding environment that is the value network.
14
Hamel in practice: GFF – a
mobile multiplayer game 1/2
15
Hamel in practice: GFF 2/2
16
Due diligence: justify capital requirements
Value Chain
Financial Assumptions
Investment
Ready
Maturity
Level
Team
1
Business Model
2
3
4
Product/Market
Idea/Technology
Evolution
Potential
17
Software business economics
• Manufacturing cost is close to zero.
• Product development cost vary dramatically
upon the type of product & the company’s
competitive position.
– Microsoft R&D cost < 10% of revenue
– Majority of software businesses have R&D costs
between 10%-30%.
• Marketing is typically the largest cost.
– One has to rise above the noise of thousands of
new software product.
18
Categorizing software technology
business models
• License Options
– Individual , group, site,
enterprise
• License Terms:
– < 1yr., 3 yrs., perpetual
• Installation:
– Designated server
– Concurrent users
19
Traditional Software Models
• Revenue comes from 3 buckets:
– Perpetual License
– Maintenance fee: 15% - 25% of list price
• Patches, bug fixes
• Updates
– Services:
• Install
• Training
• Customization
20
New Software Models
• Subscription License
– “Buy the right to use for a predetermined
period of time”
• Usually 2-3 years
• Installed @ the customer site
• SaaS: Software as a service
– Short period (monthly)
– Combined with hosting
21
Dotcom.back: Business Models in the Internet age
• Business models are the most discussed and
least understood aspect of the web.
• The web has and will introduce new business models.
– Amazon.com vs. Barnes & Nobles
– iTunes vs. Free Record Shop
• … but also reuses existing models:
– Auctions : eBay
• Web 2.0: services not software packages
– Netscape vs. Google
– Doubleclick vs. Adsense
Innovative business model create new markets or reaches
more customers
22
Why different ? The Long Tail
• Many limiting factors from the physical
world are absent from the internet.
• Therefore: Use the power of the internet to
monetize niches that formerly were too
small to be commercial.
23
Web based business models
•
•
•
•
•
•
•
Brokerage
Advertising
Information intermediary
Merchant
Manufacturer (Direct)
Community
Subscription
24
Brokerage
• Brokers are market-makers:
– they bring buyers and sellers together
– they facilitate transactions.
• A broker charges a fee or commission for
each transaction it enables.
Broker
Buyer
Seller
25
Brokerage models
•
Marketplace Exchange
– offers a full range of services covering the transaction process, from
market assessment to negotiation and fulfillment. Exchanges operate
independently or are backed by an industry consortium. [Orbitz,
ChemConnect]
•
Buy/Sell Fulfillment
– takes customer orders to buy or sell a product or service, including
terms like price and delivery.[CarsDirect, Respond.com]
•
Demand Collection System
– the patented "name-yourprice“ model pioneered by Priceline.com.
Prospective buyer makes a final (binding) bid for a specified good or
service, and the broker arranges fulfillment. [Priceline.com]
•
Auction Broker –
– conducts auctions for sellers (individuals or merchants). Broker
charges the seller a listing fee and commission scaled with the value of
the transaction. Auctions vary widely in terms of the offering and
bidding rules. [eBay]
26
Brokerage models ctd.
•
Transaction Broker
– provides a third-party payment mechanism for buyers and sellers to
settle a transaction.[PayPal]
•
Distributor
– is a catalog operation that connects a large number of product
manufacturers with volume and retail buyers. Broker facilitates
business transactions between franchised distributors and their trading
partners.
•
Search Agent
– a software agent or "robot" used to search out the price and availability
for a good or service specified by the buyer, or to locate hard to find
information.
•
Virtual Marketplace
– a hosting service for online merchants that charges setup, monthly
listing, and/or transaction fees. May also provide automated transaction
and relationship marketing services. [zShops and Merchant]
27
Advertising Model
• The web advertising model is an extension of the
traditional media broadcast model.
– Web sites, provide content (usually for free) and services (like
email, IM, blogs) mixed with advertising messages
– The ads may be the major or sole source of revenue for the
website.
• The advertising model works best when the volume of
viewer traffic is large or highly specialized.
– The Web grows larger and more complex by the day: with more
Web sites, news feeds, networking services, multi-media content
and communication tools.
• Users need to spend less time navigating
28
Advertising Models 1/2
•
Portal
– Usually a search engine that may include varied content or services. A
high volume of user traffic makes advertising profitable and permits
further diversification of site services. A personalized portal allows
customization of the interface and content to the user. A niche portal
cultivates a well-defined user demographic. [Vodafone Live,
Skynet,…]
•
Classifieds
– list items for sale or wanted for purchase. Listing fees are common, but
there also may be a membership fee. [Monster.com, Craigslist]
•
User Registration
– Content-based sites that are free to access but require users to register
and provide demographic data. Registration allows inter-session
tracking of user surfing habits and thereby generates data of potential
value in targeted advertising campaigns. [NYTimes Digital]
•
Query-based Paid Placement
– Sells favorable link positioning (i.e., sponsored links) or advertising
keyed to particular search terms in a user query, such as the "pay-forperformance" model. [Google, Overture]
29
Advertising Models 2/2
•
Contextual Advertising / Behavioral Marketing
– Freeware developers who bundle adware with their product. For example, a
browser extension that automates authentication and form fill-ins, also delivers
advertising links or pop-ups as the user surfs the web. Contextual advertisers can
sell targeted advertising based on an individual user's surfing activity. [Claria]
•
Content-Targeted Advertising
– pioneered by Google, it extends the precision of search advertising to the rest of
the web. Google identifies the meaning of a web page and then automatically
delivers relevant ads when a user visits that page. [Google]
•
Intromercials
– animated full-screen ads placed at the entry of a site before a user reaches the
intended content. [CBSMarketWatch]
•
Ultramercials
– interactive online ads that require the user to respond intermittently in order to
wade through the message before reaching the intended content. [Salon in
cooperation with Mercedes-Benz]
30
Information intermediary Infomediary model
• Data about consumers and their consumption habits are
valuable
– when the information is carefully analyzed
• Data is used to target marketing campaigns.
• Independently collected data about producers and their
products are useful to consumers when considering a
purchase.
• Some firms function as infomediaries assisting buyers and/or
sellers understand a given market.
31
Infomediary Models
•
Advertising Networks
– Feed banner ads to a network of member sites, thereby enabling advertisers to
deploy large marketing campaigns. Ad networks collect data about web users that
can be used to analyze marketing effectiveness. [DoubleClick]
•
Audience Measurement Services
– Online audience market research agencies. [Nielsen//Netratings]
•
Incentive Marketing
– Customer loyalty program that provides incentives to customers such as
redeemable points or coupons for making purchases from associated retailers. Data
collected about users is sold for targeted advertising. [Coolsavings]
•
Metamediary
– Facilitates transactions between buyer and sellers by providing comprehensive
information and ancillary services, without being involved in the actual exchange
of goods or services between the parties. [Edmunds]
32
Merchant Models
Wholesalers and retailers of goods and services. Sales may be made based on
list prices or through auction. (Long tail players)
•
Virtual Merchant or e-tailer,
– a retail merchant that operates solely over the web. [Amazon.com]
•
Catalog Merchant
– mail-order business with a web-basedcatalog. Combines mail, telephone and
online ordering. [Bruneau]
•
Brick and Click
– traditional brick-and-mortar retail establishment with web storefront. [Barnes
& Noble]
•
Bit Vendor
– a merchant that deals strictly in digital products and services and, in its purest
form, conducts both sales and distribution over the web. [Apple iTunes Music
Store]
33
Manufacturer or Direct Model
• It is predicated on the power of the web to allow a
manufacturer (i.e., a company that creates a product or
service) to reach buyers directly and thereby compress the
distribution channel.
• The manufacturer model can be based on efficiency,
improved customer service, and a better understanding of
customer preferences. [Dell Computer]
– Purchase
– Lease
– License
34
Community model
The viability of the community model is based on user loyalty. Users have a
high investment in both time and emotion. Revenue can be based on the sale of
ancillary products and services or voluntary contributions; or revenue may be
tied to contextual advertising and subscriptions for premium services.
The Internet is inherently suited to community business models and today this is one of the more fertile
areas of development, as seen in rise of social networking.
–
–
–
–
Open Source -- software developed collaboratively by a global community of programmers who share code
openly. Instead of licensing code for a fee, open source relies on revenue generated from related services like
systems integration, product support, tutorials and user documentation. [Red Hat]
Open Content -- openly accessible content developed collaboratively by a global community of contributors
who work voluntarily. [Wikipedia]
Public Broadcasting -- user-supported model used by not for-profit radio and television broadcasting extended
to the web. A community of users support the site through voluntary donations. [The Classical Station
(WCPE.org)]
Social Networking Services -- sites that provide individuals with the ability to connect to other individuals
along a defined common interest (professional, hobby, romance). Social networking services can provide
opportunities for contextual advertising and subscriptions for premium services. [Flickr]
35
Subscription Model
•
•
•
Users are charged a periodic -- daily, monthly or annual – fee to
subscribe to a service. It is not uncommon for sites to combine free
content with "premium" (i.e., subscriber- or member-only) content.
Subscription fees are incurred irrespective of actual usage rates.
Subscription and advertising models are frequently combined.
–
–
–
–
Content Services -- provide text, audio, or video content to users who
subscribe for a fee to gain access to the service. [Listen.com, Netflix]
Person-to-Person Networking Services -- are conduits for the
distribution of user-submitted information, such as individuals
searching for former schoolmates. [Classmates]
Trust Services -- come in the form of membership associations that
abide by an explicit code of conduct, and in which members pay a
subscription fee. [Truste]
Internet Services Providers -- offer network connectivity and related
services on a monthly subscription.
36
Open Source Business Models
Can open source support viable
businesses ?
37
Open vs. Closed Source
 Revenue from services
 Selling software licenses
 Source code is publically
available « Copyleft »
 Source code protected as
intellectual property
 Source can be adapted /
improved
 Customer can’t get the source
code
 Development by a community
Development inside the
company
The business models are linked with the license model:
•GPL/LGPL business models
•BSD/Apache models
•Multi license business models
38
Customer value
39
Can you make money with open source ?
• The Teece model describes the key factors
to generate revenue & profit from
innovation
– Appropriability:
• The ability to protect knowledge from imitation
– Complementary assets
• All other capabilities of the firm must have e.g. to
commercialise the technology
• Production & marketing capacity
40
Teece model: who makes
money?
COMPLEMENTARY ASSETS
Free available or
unimportant
APPROPRIABILITY
L
o
w
h
i
g
h
Difficult to make money
Inventor
Tightly held and
important
Holder of complementary
assets
Inventor or party with
bargaining power
41
41
First Generation Business Models
Services based
Revenues are generated through support, consulting,
training, documentation
Loss leader
A free OS product is used to create a market position for
the traditional commercial software.
Fight competition
Vendors as IBM, Apple, Novell, Oracle.. realize that OS provides a way to
compete against Microsoft because:
• They can reduce R&D costs
• Eliminate dependencies on competitor’s technology
• Of the access to a large, external development community
Example: instead of competing with Symbian, Motorola committed to OS
42
42
Hybrid Business Models
 Right to:
 Use
 View
 Modify
 Distribute
43
The Dual Licensing Business
Model
Dual licensing allows open
source vendors
to stay committed to
free software
while building
a sustainable, profitable
business.
44
Dual Licensing
•
•
•
•
Product available under a regular commercial license for
commercial customers and under a free software licence
(GPL) for those who live by the principles of free
software
The product is technically identical under both licences,
but the financials and the legal ramifications are different
It is up to the customer to decide what path he wants to
follow and what licence to use
MySQL AB, Sleepycat Software & Trolltech AS use dual
licensing
45
When to Use What License
•
As a user, choose the
commercial license if one
of the following applies:
–
–
–
you want the vendor to
be accountable for the
product
you do not wish to opensource your own
application or the
modifications you may
have made
you have a decision not
to use GPL software in
your organisation
•
... and the GPL license if
the following applies:
– you are willing to make
your own application and
modifications you may
have made available under
the GPL
– you are fine with the ”as
is” nature of the GPL in
respect to warranties,
liabilities, and
indemnifications
46
VC’s and Open Source
•
•
By 2010, Global IT organizations will use OS in 80% of infrastructure investments
and in 25% of business software investments (Source: Gartner).
OS impact on infrastructure SW is 20 B $ growing to 46 B $ in 2011
OS infrastructure SW
16.000,0
14.000,0
12.000,0
OS
DBMS
10.000,0
AD
8.000,0
Security
AIM
6.000,0
ITOM
4.000,0
Others
2.000,0
0,0
2004
47
2005
2006
2007
2008
2009
(Source GIMV )
2010
2011
47
VC activity

Increased VC investment in OS:
 2005: 294 M $ was invested
 2006: 475 M $ was invested, up 61% from 2005 (Source: Computer Business
Review, Feb. 2007)

Why do VCs invest in Open-Source?
 The increased adoption of OS by corporate users.
 Attracted by the success of Red Hat,:
 Marketcap of 3.8 B $ and .. profitable!
 Revenues increasing very fast: 200 M $ in 2005, 280 M $ in 2006 and
400 M $ in 2007
 Belief that there could me more money made from OS than from proprietary
software
 Lower cost of development
 Also lower cost of sales & marketing due to the viral effect of the dvlpt
community
 OS leads to better quality assurance, more frequent releases, community
dvlpt
(Source GIMV )
48
48
M&A activity
• Recent deals:
– There were 35 transactions
– There were 3 significant transactions;
•
•
•
•
•
Sun acquiring MySQL for 1 B $, EV/S of 14.3 x
Yahoo acquiring Zimbra for 350 M $ (email collaboration),
Nokia acquiring Trolltech for 153 M $,
Citrix acquiring Xensource for 500 M $
RedHat acquiring JBoss for 350 M $
(Source GIMV )
49
49
Case study: NTT Docomo
i Mode
50
Mobile Value Network
51
i-Mode
• Introduced in Japan in 1999, i-mode is a packet
based mobile multimedia service providing users
with e-mail and instant access to internet content
via their mobile phones and handsets.
• Copied with limited or less success in Europe.
Why ?
Culture: Japanese people like high tech -> total misconception
i-mode is essentially an extremely well co-ordinated value network
52
iMode value chain
Content &
Marketing
Bus.model
Servers
Network
Handset
Services
User
–
Right technology
•
–
Right strategy
•
–
win-win for all players
Right services
•
–
Easy to use for content developpers
Select the right content to attract users
Right marketing: sell services to consumers
•
•
Focus on what the user can do
Show how easy it is.
53
DoCoMo Vision: Operate in Internet space
– Content centric business model
•
•
Attract content providers: “Data Inside”
Positive feedback loop:
–
more customers attract more content which attracts more
customers, ad infinitum
– Focused on consumer marketing
•
•
•
Marketing: emphasis on the advantages of having a
mobile handset with content, mobile services and
applications
Participation costs: user resists services if he pays e.g.
transmission costs.
Avoid technical jargon:
–
.Net, Java, SSL, SOAP, WS …WAP etc.
54
Service Design & Business Model support
Service Design must be attractive to content providers and
support their business model:
–
–
Simple billing system with billing and data collection for
services & content.
Advertising management system:
•
•
–
–
Advertisement insertion
Statistics and reporting
Payment system attractive to consumers which makes it easy to
buy premium (local) content. (one bill, no multiple credit card
entries)
Very selective in content & service selection.
• entertainment, transaction, information and databaseoriented content
• Before the launch of i-Mode already 20 banks had
committed to support i-mode transactions.
55
Strategy: Network Alliances
Symbiotic win-win relationship for each
partner
– Technology alliance
•
•
Handset support
The right technology for Service development
– Content alliance
•
•
Positive feedback loop
Different revenue models.
– Platform alliances (horizontal)
•
Expand the reach and range of i-mode services to
more devices, technologies …etc.
56
i-Mode ecosystem: no player can dominate
NTT
Docomo
Marketing
Co-marketing
Advertising
Product
Offering
Content
Partners
User attraction
Offering
Standards
Usability
i-Mode
portal
Content
Sales
Channel
Technical
Capability
Guide User
Handsets
Portal
Functionality
Platform
Interoperability
57
Assignments for the Coaching
• Articulate your Mision & Vision:
– Mission: What do you represent to customers & stakeholders
– Vision: What do you want to be within 5 years ?
• Articulate your Value Proposition:
– What are the customer benefits from using your product or service
?
• Identify your value network & competition (External Analysis)
– Identify the players: complementors, partners & customer
– Risk Assessment : Interdependency & Integration
• Your strategic resources (Internal Analysis)
• SWOT analysis based on the external & internal analysis
• Customer interface:
– Who is your customer ?
– How will you make money?
58