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Eduardo Larrain
HEC 2005 Strategic Management Founder of an Internet start-up called Kel Quartier Strategy consultant at Roland Berger Strategy Consultants and Atos 40 projects
2. Whats a business model? ... 16 3. Why study Internet-based business models? ... 23 4. What are the key elements of a business model? Value proposition and revenue streams ... 40 Drill-down of key Entertainment markets: music, video games, book publishing ... 82 Customer channels, customer relationships, key partners, activities, resources, cost structure ......... 115 5. What are the business models of Internet heavyweights: Facebook, Google, Zynga, Linkedin, Groupon . 130 6. What are the most promising business models among the worlds most valuable companies: Digital 100, Twitter .. 173 7. Conclusion and farewell 184 8. Appendix: group project and individual test ..... 185
ICT Internet
Definitions
Web
Web (or World Wide Web or WWW) is a global set of documents, images and other resources, logically interrelated by hyperlinks. Web = HTTP, HTML, CSS, JPEG, Internet (or Net) is a global system of interconnected computer networks that use the standard Internet protocol suite (TCP/IP) to serve billions of users worldwide. It is a network of networks that carries an extensive range of information resources and services, such as the inter-linked hypertext documents of the Web and the infrastructure to support email. Internet = Web + mail + data transfer e.g. FTP incl. P2P, VoIP, streaming media, video conferencing, mobile apps (not HTML 5 based) Information and Communication Technology (ICT) is the use of computers and telecommunications equipment (IT) which also encompasses other information distribution technologies such as television and telephones (C). ICT = Internet + IT + C
Wikipedia
PORN TV
SEARCH
VIDEO PROFESSIONAL
EVERYDAY LIFE
Boston Consulting Group, The Internet Economy in the G-20, March 2011
Is Internet an Industry?
75% of the economic impact of the Internet arises from traditional companies that dont define themselves as pure Internet players (McKinsey, 2011)
Profits des 100 plus grandes socitssocits US Exhibit - Looking at top 100 US companies time: Chiffre d'affaires des 100 plus through grandes US
100% 100% 90% 90% 80% 80% 70% 70% 60% 60% 50% 50% 40% 40% 30% 30% 20% 20% 10% 10% 0% 0% 1955 1955
Conglomerate Conglomerate Professional, Scientific, and Technical Professional, Scientific, and Technical Services Services Finance and Insurance Finance and Insurance Information Information Care andAssistance Social Assistance HealthHealth Care and Social Wholesale Wholesale Trade Trade Retail Trade Retail Trade Utilities Utilities Transportation and Warehousing Transportation and Warehousing Manufacturing Telecommunication Manufacturing Telecommunication Manufacturing Automotive Manufacturing Automotive Manufacturing Manufacturing Mtaux Metal Mtaux Ptrole Petroleum Ptrole Agriculture, Forestry, Fishing and Hunting Agriculture, Forestry, Fishing and Hunting
1960 1960
1965 1965
1970 1970
1975 1975
1980 1980
1985 1985
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Internet-based activities 1. Web activities using Web as a support 2. Ecommerce, content, online, advertising
3.
Software and services activities linked to the Web IT consulting, software development
4.
McKinsey, Internet matters: The Nets sweeping impact on growth, jobs and prosperity, May 2011
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McKinsey, Internet matters: The Nets sweeping impact on growth, jobs and prosperity, May 2011 Boston Consulting Group, The Internet Economy in the G-20, March 2011
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Though, the Internet economic impact goes beyond GDP generating consumer surplus when there is not monetary reward
Real economic impact of the Internet Free services value are excluded from GDP: Emails Search Collaborative services (wikis, blogs and social networks)
Craigslist has generated consumer value though reducing classified ad revenues of the US
newspaper industry Facebook has generated consumer value
McKinsey, Internet matters: The Nets sweeping impact on growth, jobs and prosperity, May 2011
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Question raised at class#1 Whats the issue with mobile apps and HTML5?
HTML5 is a new technology that allows developers to build rich web-based apps that run on any device via a standard web browser Go to www.audacy.fr or www.webformy.com using your smartphone browser to get a view on what is HTML5
For mobile applications, choosing a technology can have a large implications on your business model
Native technologies (iOS, Android, RIM, Symbian, Windows) are great for: Using the phone features (photo,) Using lots of data (offline mode) Security (harder to crack) When you need real time data HTML5 technology is great: When you want to launch fast and cheap a mobile application Because you are not reliant on App stores indexation
Other technologies (Adobe AIR, ) are great for other specific needs
and those of main Applications Stores: iTunes App Store, Chrome Web Store, Facebook App Center
Eduardo Larrain - Linkedin - Website
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Basic definition
A business model describes the rationale of how an organization creates, delivers, and captures value.
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A business model is show me the money. It is a simple expression of the strategy of the company on how to make money without going into too much details
In French, we use the english word business model rather than translations: Modle conomique Modle dactivit Modle daffaires Modle de revenus, modle de profit
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Whats a Business Plan? A Business plan is a document that describes how a project can be implemented. A Business plan usually aims at selling the project because you cant have a funding without a Business Plan A Business plan usually includes a description of: The team The Business Model A Financial Analysis (e.g. financial spreadsheets) A Business Environment Analysis (e.g. market, competitors and competitive advantage analysis)
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Whats Strategy? Strategy is a plan of action and the allocation of resources necessary for carrying out these goals Michael Porters view on Strategy: Strategy is a plan to differentiate the company and give it a competitive advantage Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value Then decisions can only be dened as strategic if they involve consciously doing something differently from competitors and if that difference results in a sustainable advantage e.g. making existing methods more efficient (operational efficiency) are not strategic since they can be easily copied by others
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A business model describes what makes an company unique looking from the value propositions to cost structure
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Cost-side
Value-side
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Business Models
Internetbased
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2. Product Pyramid
At the base are products and services that are low price and high volume; at the top products and services that are high price and low volume E.g. Air France Group: Air France for business and long haul flights, Transavia for leisure and Hop! for local flights Profit
3. Multi-Component
Several of the components represent a disproportionate share of the profits E.g. business seminars at hotels, advertising (Google, Yahoo, Facebook)?
Basic activity
4. Switchboard
Multiple sellers communicating with multiple buyers. The more buyers and sellers join the great the organization builds on itself E.g. eBay, Alibaba, Amazon, Monster, Seloger Or the opposite: desintermediation (Dell) Seller Buyers
5. Time Profit
Takes advantage of uniqueness, profit margins erode as competition seeks to imitate. Time profit companies must take the lead and maintain a "two year" lead over their competitors E.g. Intel, Microsoft F/unit
Time Adrian Slywotzky and David Morrison, The profit Zone, 1998
Project types
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8. Entrepreneur Profit
Hierarchical design with multiple subsidiaries to maintain closeness with the customer E.g. Biotechnologies, Google Small teams
9. La spcialisation
Specialist are several times more profitable than the generalist. Characterized by lower cost, higher quality, stronger reputation, shorter selling cycles, and better price realization E.g. Home Depot Return Specialists
Different offers
Basic activity
Generalists
Key asset
12. Brand
The Company expends significant marketing investment in order to build awareness and is reinforced by customer experience. You know Brand is working when a consumer says, "I won't change because I trust AT&T". E.g. Google Price Brand price
Basic product
Market share Adrian Slywotzky and David Morrison, The profit Zone, 1998
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Common Common
Transaction size
After-sales offers
Basic offer
Capacity / Occupancy
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Unit cost
Time
Cumulated experience
Low cost
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Two reasons
i.
types:
Marginal cost of digital information comes closer to nothing Long tail enables larger segmentation of customers
Better assets rotation can enable new businesses with low margin
ii.
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Ray Kurzweil video on TED, 2005 The accelerating power of technology 1400-1910
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Basic economics In basic economics, price falls to the marginal cost which increases with production
Exhibit Market supply and demand
Price Supply
Average cost
Demand
Quantity
Quantity
Though with the technological revolution, marginal cost of digital information comes closer to nothing
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The great power of the eBay business model is the fact that a small number of salaried employees and outsource partners can handle a huge and growing volume of business: Doubling of transaction volume can be accomplished with relatively modest investments Software and servers do the heavy lifting
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Long tail Long tail is about selling less of more: They focus on offering a large number of niche products, each of which sells relatively infrequently Aggregate sales of niche items can be as lucrative as the traditional model whereby a small number of bestsellers account for most revenues Long Tail business models require low inventory costs and strong platforms to make niche content readily available to interested buyers
Add-on by a student: Internet by lowering search costs and accessibility costs can even increase the size of the Head
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Amazon sells blockbusters products but also niche hard-to-find products (online book stores bring access to increased product variety) Customer customization has enabled Dell to sell a large volume of products in small numbers
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Better assets rotation can enable new businesses with low margin
Better assets rotation Technological revolution increase assets productivity decreasing the amount of assets immobilized
Formula of Return on Capital Employed (ROCE) ROCE = Net Income (R) / Equity (K) ROCE = (R / K) * (Income / Income) * (Assets / Assets) ROCE = (R / Income) * (Income / Assets) * (Assets / K)
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Better assets rotation can enable new businesses with low margin
Design to cost Then, new business models with low margin can be designed and have the same return than more profitable activities E.g. Logan, the low-cost brand new vehicule, was designed to be sold at 5 000 (ultimately 8 000 in France)
Exhibit Different business positioning with same ROCE
Gross Margin
Assets rotation
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Better assets rotation can enable new businesses with low margin
Pyramid base: targeting tier 5 population Developing countries are inventing new business models in regions with very low purchasing power where populations where traditionally excluded from any economical business modeling. E.g. Tata vehicule costing 2 500 even cheaper than Logan 4 billion people live with less than 1 500 USD per year
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Better assets rotation can enable new businesses with low margin
Mobile banking case Half population is unbanked worldwide leaving: People with no official financial service to save or to borrow: Unofficial lending rates range between 50% and 400% p.a, microfinance rates are 20-40% One day per month is lost in Morocco to pay invoices Enabling mass tax avoidance from States with low budgets
Raising the cost and complexity for companies t pay their employees
Though new mobile banking offer are emerging in developing countries. E.g. half public servant in Kenya are paid with mobile banking
120%
Portugal
110% 100%
Russie Pologne
Royaume-Uni Sude Irlande Moy. UE Espagne Finlande Autriche Danemark Allemagne Pays-Bas Belgique
90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Algrie Moy. Afrique Mexique Maroc Guatemala Guyane Tunisie Colombie Botswana Brsil Canada Roumanie Chili Afrique du Sud Jamaque France Etats-Unis
Nicaragua Armnie Pakistan Sngal Egypte Vietnam Kirghizstan Kenya Lesotho Tanzanie Ouganda
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Three current trends Pyramid based strategy: create a business model based on people very low purchasing power
Blue ocean strategy: look for a new ocean rethinking differentiation and low-cost and go beyond industry boundaries
Cloning strategy: clone successful internet sites and replicate them in other countries
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Definition and scope The value proposition describes the bundle of products and services that create value for a specific customer segment Value proposition is marketing territory: It can be functional (solves a customer problem, physiological need,), social (need to belong, status,), emotional, relationship
It is an aggregation of the benefits that a Company offers customers (solve a customer problem or satisfies a customer need) minus sacrifices (price, technical process when buying or when recycling, travel time,)
It is a unique combination of benefits and sacrifices It is not a list of products and services, technologies or distribution channels
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Elements that can contribute to customer value creation Newness: some value propositions satisfy an entirely new set of needs that customers previously didnt perceive because there was no similar offering. E.g. mobile phones, ethical investment funds Performance: improving product or service performance. E.g. bringing more powerful PC, more disk storages and better graphics Customisation: tailoring products and services to the specific needs of individual customers. E.g. mass customisation
Getting the job done: helping a customer get a certain job done. E.g. Rolls-Royce airline engines.
Design: a product may stand out because of superior design. E.g. fashion and customer electronics Brand/Status: customers may find value in the simple act of using and displaying a specific brand. E.g. Rolex Price: offering similar value at a lower price e.g. Bic
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1 - The proposition value Defining a promise helps understanding the proposition value
Defining the promise or tagline The promise is not only advertising territory but it shapes all the business model A good promise or tagline must not only deliver a clear message but also advertise an offering truthfully A good way to test the effectiveness and strength of a strategy is to look at whether it contains a strong and authentic promise or tagline The promise can still be simple and concise even for large international and complex companies Zara (Inditex) promise is fast-fashion which has shaped all the company operations What are the promise of those companies?
Starbucks
Ikea Easyjet / Ryanair Toyota Lego
Danone
Yves Rocher
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1 - The proposition value Defining a promise helps understanding the proposition value
Company promise or tagline What are the promise of those companies? Starbucks Ikea Easyjet / Ryanair Toyota A third space of conviviality between home and work Functional home furnishing, low price and design
Lego
Danone Yves Rocher
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1 - The proposition value The proposition value has to take into account all customers
Two customers Most of the time, the buyer is not the user of the product or service
Customer 2 Consumer
Company
Employees
Students
Pharmaceutical drugs
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Companies have long engaged in head-to-head competition in search of sustained, profitable growth Yet in todays overcrowded industries, competing head-on results in nothing but a bloody RED OCEAN of rival fighting over a shrinking profit pool This strategy is unlikely to create profitable growth in the future Leading companies will succeed not by battling competitors but by creating BLUE OCEANS of uncontested market space ripe for growth
1 - The proposition value Differentiate from competitors or innovate within the value
Red Ocean Strategy vs. Blue Ocean Strategy Similar to Michael Porter definition of strategy as a differentiation plan, Blue Ocean Strategy aims at changing the proposition value to gain profitable growth Red oceans will continue to be an important part of a companys strategy (a lot of tools and framework already exists) but invest in blue oceans will create profitable growth
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1 - The proposition value Differentiate from competitors or innovate within the value
Four questions to challenge an industrys strategic logic and business model First, capture the current state of play in the known market space in order to understand competition and the principal factors (price, quality, design) Second, reconstruct buyer value elements trading-off between differentiation and low-cost E.g. is the company over delivering without payback? (typical of a company caught in the Red Ocean)
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In the 80s, Circus was a declining industry with decreasing audiences because of increasingly attractive alternative forms of entertainment
There were star performers but none could compete with movie stars, multiple show arenas and a audience of families There was also increasing sentiment against the use of animals in circuses by animal rights groups Cirque du Soleil launched in 1984 and is now one of Canadas largest cultural exports. Why?
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1 - The proposition value Cirque du Soleil created a new value curve offering the best of both circus and theater and eliminating or reducing everything else
Cirque du Soleil canvas By offering unprecedented utility, Cirque du Soleil has created a blue ocean and has invented a new form of live entertainment, one that is markedly different from both traditional circus and theater Cirque du Soleil strategically priced its tickets against those of the theater because it attracted an adult theater audience Cirque du Soleil tagline is: a mix of circus arts and street entertainment
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With which industry do Southwest airlines compete? In what do they focus, in what they differ and what are they tagline?
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1 - The proposition value Southwest airlines created a new curve offering high-speed transport with frequent and flexible departures at prices attractive to the mass of buyers
Southwest Airlines canvas and the low-cost model Southwest Airlines created a blue ocean by breaking the trade-offs customers had to make between the speed of airplanes and the economy and flexibility of car transport Southwest emphasizes only three factors (focus) and differentiate on four others factors from the industrys average profile (divergence) Southwest promise or tagline: the speed of a plane at the price of a car whenever you need it
DIVERGENCE FOCUS
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With which industry do Logan compete? In what do they focus, in what they differ and what are they tagline?
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1 - The proposition value Logan created a new curve offering a new car for the price of an used-car
Logan canvas Logan promise or tagline: for the price of an used-vehicule, have a new car
FOCUS
High
DIVERGENCE
Used-vehicule
Logan
Similarly, Amazon launched Marketplace not only to compete with second-hand cultural goods marketplace like eBay but to close the gap between new and second items
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2 Revenue stream
Definition and scope Revenue stream is the cash a company generates from each customer segment A business model can involve two different types of Revenue streams: Transaction revenues resulting from one-time customer payments Recurring revenues resulting from ongoing payments to either deliver a Value proposition to customers or provide post-purchase customer support
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2 Revenue stream
Ways to generate revenue streams Asset sale: selling the ownership rights to a physical product. E.g. Amazon selling a book Usage fee: selling the use of particular service. E.g. A telecom operator charging by the minute Subscription fee: selling continuous access to a service. E.g. Club Med Gym, WOW/World of Warcraft online Lending/Renting/Leasing: temporary granting someone the exclusive right to use a particular asset for a fixed period in return for a fee. E.g. Autolib Licensing: giving permission to use protected intellectual property in exchange of licensing fees. E.g. media industry Brokerage fees: intermediation services performed on behalf of two or more parties. E.g. credit cart providers, real estate agents Advertising: fees for advertising a particular product, service or brand.
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2 Revenue stream Each revenue stream might have different pricing mechanisms
Pricing mechanisms
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Price is determined by what a buyer is willing to pay and the competition is allowing to be charged (not by markup on cost) Price is determined by strategy
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Pricing strategy depending of the product life cycle Product introduction: Market skimming strategy setting up a very high price . E.g. Electronic goods, luxury Or Penetration strategy: real low price even below cost to gain market share
Chris Anderson, Free the future of a radical price, 2009 Milton Friedman, There's no such thing as a free lunch,1975
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Definition and scope Free is giving without a cost all included Free is not to be mistaken with free used by advertisers when its not really free: Free buy one get one free is just another way of saying 50 percent off when you buy two Free gift inside
Free shipping
Basic economics: there's no such thing as a free lunch The "free lunch refers to the once-common tradition of saloons in the United States providing a "free" lunch to patrons who had purchased at least one drink. All the foods on offer were high in salt (e.g. ham, cheese and salted crackers) so those who ate them ended up buying a lot of beer. You can make money on free (revenue stream) but also free can lead to fast growth: Before the 2000s, Dell was known to be the first company to have reached one billion sales after been launched in less than 10 years
Chris Anderson, Free the future of a radical price, 2009 Milton Friedman, There's no such thing as a free lunch,1975
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The penny gap theory The penny gap is the difference between cheap and free
For small payments, there is not a constant elasticity in price Zero is one market and any other price is another market Zero can attract lots of people because from the consumers perspective charging even a penny makes us think about the choice
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The economics of abundance (vs. scarcity) Digital technologies have become too cheap to meter creating a economy of abundance (e.g. information) Digital free theory: If its digital, sooner or later its going to be free When something halves in price each year, zero is inevitable
Waste is good
Every abundance creates a new scarcity (e.g. time) Though, externalities for the consumer still exist: technical process when buying or when recycling, travel time,
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B.
The three-parties (or two-sided markets): one customer segment subsidizes another (the most
common)
C.
D.
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Definition and scope This is the oldest and most familiar model where the cost of one product is shifted into the price of another Free attracts customer in masses. Then cross-selling or up-selling validate the business model: Give a product (equipment) and sell a service (maintenance) or another product (supplies) Key success factor is the increase the equipment rate with products with better profitability It has other names: Gillette and razor blades, Equipment and Supplies, Equipment and Maintenance
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Free or far under cost Printer Coffee machine Razor Real estate loan, credit card, savings account Airline ticket Elevator Alarms Equipement Telephone
Where the money comes from Ink Capsules Razor blades Cross-selling because customer is stuck with the same bank for 20/30 years Hotel room, rental car, cruise and vacation package Maintenance and security upgrades Electronic surveillance Reagent supplies Communications
Go Voyages, airline companies Elevator companies Security companies Medical biology companies Carrier
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More examples of direct-cross subsidies Give away services, sell products (Apple Store Genius Bar Tech support) Or Give away products, sell services (free gifts when you open a bank account) Give away software, sell hardware (IBM and HPs linux offerings) Or Give away hardware, sell software (video game console model) Give away cell phones, sell minutes of talk time (many carriers)
Or Give away talk time, sell cell phones (many of the same carriers, with free nights and weekend plans)
Give away the show, sell the drinks (strip clubs) Or Give away the drinks, sell the show (casinos) Free with purchase (retailer loss leaders e.g. gas sold in a supermarket)
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Definition and scope A third party pays participate in a market created by a free exchange between the first two parties. Thus one customer segment subsidizes another The most common of the economies built around free is the three party system Advertising is the most famous one where advertisers pay for media to reach consumers:
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Free newspapers
Free softwares Debit card Ecommerce platform Outdoor advertising
Readers
Readers Card owners Sellers Municipalities
Advertisers
Software publisher Retail Buyers Advertisers
Metro, 20 Minutes
Adobe Banks eBay, Amazon marketplace JC Decaux, Clear Channel
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More examples of three-parties Give free voice calling (in the US), charge advertisers (Facebook Messenger app) Give away content, sell access to the audience (ad-support media) Give woman free admission, charge men (bars) Give children free admission, charge adults (museums) Give away listings, sell premium search (match.com)
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Definition and scope Freemium is giving a free basic version to most of people and charging for a premium version to a few people Freemium or contraction of Free and Premium was invented by Fred Wilson in 2006. Freemium is different with direct-cross subsidiaries because the ratio of free to paid is high (e.g. 90%, 95%) when giving free sample has a low ratio This ratio is enabled by Internet because the cost of serving the basic version is close to zero
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Different kind of limitation of the basic free version Functionnalities e.g. Linkedin, Flickr, Skype, Evernote, WordPress Time e.g. legal online streaming Capacity
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Why go for Freemium business model? Marketing: By definition, having a free product makes it really easy to get customers Even though a free user might not convert, they can invite other free users who might (referral) Network effects (like fax):
A network effect is what happens when a product or service becomes more valuable the more people use it
A phone isn't very useful if you can't call anyone else with it. But once everyone you know has a phone, it becomes a pretty valuable thing to have If you're in a market that lends itself to network effects you're going to want to have a free basic product because if you don't someone else will and will use the network effects to crush you E.g. Skype has 600 million users who make calls for free over the internet and only a small percentage of those pay to make calls to landlines
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Freemium is a numbers game: if only 1% of your users are going to pay you, then you need to have lots and lots of free users (millions, typically) to make that 1% enough money
If your product is more niche, go for premium instead of freemium If your product is not sticky, go for advertising instead of freemium Have a product or service whose value to users increases with time: This is the biggest thing that most people The value of your service needs to increase the more people use it E.g. Spotify: where you create all your playlists and organize your music. Once you've done thatyou're much more likely to pay up. The value of Spotify to you has gone up from being just music to music, your playlists and your friends' playlists, so paying starts to make sense Keep costs low:
Freemium works because the marginal cost of each additional user is low, so you need to keep your operating costs correspondingly low
Time: It takes a long time to be profitable because users take longer to convert as the value of the product to them increases over time, and because you keep adding (hopefully) new free users, freemium businesses take a long time to reach breakeven point As people get older, people migrate into paying customer (premium part of freemium) because they get richer
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Examples of freemium Give away basic information, sell richer information in easier-to-use form (BoxOfficeMojo) Give away generic management advice, sell customized management advice (McKinsey) Give away Web content, sell printed content (everything from magazines to books) Give away online games, charge a subscription to do more in the game (penguins) Give away demo software, charge for the full version (most video games)
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Definition and scope People give away content with no expectation of Payment Gift economy is based on the principle that the action of individuals have a global impact People give for different reasons: to gain reputation e.g. blog writers, altruism e.g. Wikipedia or unintentionally/passively (web content helps Google) Labor exchange: paying something with labor even without knowing it E.g. free content in exchange of Captcha solving (used by spammer in exchange of free porn but also used by Google Street view to decipher street numbers, names and trafic signs) E.g. voting on Digg, Yahoo Answers or using Google 411 (phone directory in exchange of speech sound) Piracy: when piracy is so powerful that content producer have accepted that, form them, doing the activity is not a moneymaking business
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Google is getting the public to identify house numbers and signs from Street View photos as part of its reCAPTCHA anti-spam technology and feeding the data into its online mapping service
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reCAPTCHA is a free CAPTCHA service that helps to digitize books, newspapers and old time radio shows
Answers to reCAPTCHA challenges are used to digitize textual documents Example of a CAPTCHA Comparison of the accuracy of standard OCR versus reCAPTCHA transcriptions
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Adyoulike
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IFPI, press report, 2012 Synchronization rights: revenues from music acquired for movies, advertisements and music videos
Though consumers still find value in downloads from iTunes Music Store, VirginMega, FnacMusic and others because of the sacrifices of the free music downloaded illegally (quality, security, complexity,
accessibility)
Even if downloads of music from iTunes Store and others still account for 80 per cent of digital music revenues, this market is maturing and spending is flattening in all key territories
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Streaming and downloads make the digital proposition value Consumers are finding great value in: Having access to millions of songs (sellouts are impossible) Creating and sharing playlists Listening to music in on all devices everywhere (accessibility = cloud storage, remember Philipp comment on the head part of the long tail) Listening to music even offline Sharing his songs and getting recommendation on social networks Fremium streaming music services such as Spotify will be the key growth drivers over the next years as usage and spending grow rapidly: Spotify Open: free but limited in number of songs and number of hours Spotify Unlimited: a monthly fee limited on a laptop Spotify Premium: a monthly fee for listening to music in on all devices and even offline All Spotify offers enable users to share easily on social networks such as Facebook:
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11 M song tracks (stock) in 2001, 100 M in 2010 (Gracenote/Sony db > Shazam db) Growth of the Gracenote database obviously includes a lot of older music that has only recently been indexed and that is been rediscovered
E.g. Oscar Wilde - Los Vidrios Quebrados (1967)
The trend still looks like the amount of music available to consumers is steadily growing At the other side, overall sale of music (including albums, singles, digital tracks,) exceeded 1.5 billion transactions in 2010 (up from 845 million transactions in 2000)
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Psy with its Gangnam Style song, viewed more than 1 billion times, would never had been a success outside South Korea without Youtube
It generated 8 M USD from advertising (50/50 split)
Ticket prices and merchandise have become major sources of income for many popular rock stars like Lady Gaga, Madonna, Bruce Springsteen and for bands like U2 Its not easy to duplicate the experience of a live show, so concerts have become a source of revenue for musicians and arent negatively affected by the availability of free downloadable music - in fact, free music can encourage fans to attend live performances Theres actual scarcity for live music Other trends:
Algorithms may be replacing humans in some parts of discovering new talent (or at least discovering talent more cost-effectively) Gracenote, Shazam, are datamining music metadata in order to serve better music recommendations to consumers or to predict which artists will be popular with target demographic groups
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2 Revenue stream What has the Entertainment industry learned from the Music industry?
Other Entertainment industries continued to grow in the past years when the Music industry, newspapers and consumer magazine publishing took a hit
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2 Revenue stream What has the Entertainment industry learned from the Music industry?
Some Entertainment industries have found new business models successful with the Digital era, others no well not yet thus a business model challenge For consumers, today is an age of absolute abundance in entertainment due to the digital era and piracy New business models based on Digital sales are emerging in each Entertainement industry to take over decreasing physical sales
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2 Revenue stream What has the Entertainment industry learned from the Music industry?
Though not all new business models can be based on Advertising since advertising is a huge but finite market and volatile (reliant on the economic situation )
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Has the internet decimated the entertainment industry, or are we living in a new gold age for both content creators and consumers? Entertainment spending per households as a function of income is increasing from 4.9% in 2000 to 5.6% in 2008 (US)
The amount of content being produced in music, movies, books and video games is believe to be growing:
1/4 M new books were available in 2002, 3 M in 2010 1.700 new movies p.a. in 1995, 7.000 in 2009 11 M song tracks (stock) in 2001, 100 M in 2010 (Gracenote db)
The Entertainment industry is growing though the value chain is being totally redesigned
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Globally, the amount that consumers spend on video games - for hardware, software and accessories - has grown from about $20 billion in 2000 to approximately $70 billion in 2011
The demographics of video game players has expanded greatly beyond the traditional core of boys and young men:
53% of game players are male and 47% female Average gamer player age is 30 The amount of time kids are spending on video games has grown from 26 minutes per day in 1999 to 1 hour and 13 minutes in 2009 due to mobile device that has allow kids to squeeze more playing time into their busy days (Kaiser Family Foundation survey)
Worldwide, the population of gamers has exploded from 250 million in 2008 to 1.5 billion in 2011
Floor 64, The Sky Is Rising, 01/2012
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Digital sales (and rental delivery) now generate 40% of the industry
ESA, Essential Facts about the computer and the video game industry , 2012
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Piracy of video games has fewer benefits than music and movie piracy: Piracy is an issue for single-player mode though the primary reason people buy games retail is for the multiplayer modes:
Most pirated games do not allow for multiplayer as the game often has to connect to an official server where its legitimacy can easily be verified by some sort of authentication service
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Massively Multiplayer Online game are video games in which a large number of players engage simultaneously in a persistent world
Value of an MMO is in the size of the community per life time (retention) The hardcore game MMO revenue stream was invented by World of Warcraft:
Average customer lifetime of 18 months Client box or download (50 USD) Subscription fees (15 USD/m) Virtual goods Average full cost to complete WoW for a gamer is 300 USD
Few MMO have been able to replicate WoW model so they switch to F2P to lower entry barrier and get a sizable community e.g. Habbo Hotel, Kart Rider, Warhammer, Everquest,
Average customer lifetime of 6 months Free trial or free game Subscription optional Virtual goods for actions items (competition) and personalisation (expression)
Theory of engagement: the longer a user plays the more chances there are he buys virtual items
Items payable through micro-payments mainly inside the game (60%) and on an external web site
Luc Bourcier, Game in progress new business models for the videogame industry , 04/2012
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Online casual games are games played online to kill time, make a pause, relieves from stress:
Free-to-Play (F2P) is the main business model (also for social games and some mobile games) F2P is a freemium business model that can be based on:
Try-and-buy: limited access (time, levels,), though games must be really addictive Advertising with ads display on hosting sites or inside the game Virtual goods
Luc Bourcier, Game in progress new business models for the videogame industry , 04/2012
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Ten of thousands of mobile games for smartphones and tablets can be download on platforms such as the Appel App Store, Android MarketPlaces (Google Play), Amazon, Facebook Mobile and Playstation Suite
Distribution is bypassing carriers: 30/70 meaning the game app developer get 70% of sales revenue (vs. 45/55 in cell phone business)
An opportunity for mobile banking?
Luc Bourcier, Game in progress new business models for the videogame industry , 04/2012
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Social games are those games played primarily on social networking sites or games that can be played with a persons real world social graph
E.g. CityVille, FarmVille (Zynga), EA (Sims)
Luc Bourcier, Game in progress new business models for the videogame industry , 04/2012
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Looking at the e-sports business model Twitch launched 18 months ago borne out of Justin.tv, the largest online community to live streaming service to enable streaming video service embedded into popular games Twitch provide instant broadcasting of user gameplay: 23 million unique viewers per month, viewers watched 6 billion minutes viewed in December 2012, average session time of 1.5 hours Twitch is getting embedded in games such as Call Of Duty: Black Ops 2 Twitch business model is based on sharing advertising revenue with broadcaster and in growing the esports market e.g. Twitch has announced a new scholarship of $50,000 to five student gamers
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Gamification trend meaning that video games are no longer restricted to leisure:
Every part of our lives will eventually be turned into a game Potentially encourage people to change their behavior to:
Benefit the environment
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Online videos are also a substantial traffic driver to social networking (e.g. Facebook)
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Consumer and educational book publishing will increase by 0.6 percent compounded annually to 116 bn USD in 2016 from 112 bn in 2011
E-books grow their share of global spending from 5% in 2011 up to 18% in 2016 Print/audio consumer and educational books will continue to decline throughout the forecast period notably paperback books (livres de poche in French)
Publishers will need to provide eBooks in addition to paperbacks and the entire value process will be changing, from aggregation right to distribution
Piracy less likely to impact digital sales like in the music industry: demographic groups that are most often associated with digital piracy (generally men between 20 and 39 years old) and not the same than those associated with high-volume reading of mass market books (in general women age 40 and older) New intermediaries are emerging to handle eBooks:
eBook platform (e.g. mass aggregators such as Amazon, Apple, and Google) Handling of payments Support for digital conversion Establishment of a digital content system
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New revenues streams are emerging and changing current business models
Apps and special eBook editions enriched with music and video
Notably for educational and juveniles segment e.g. Byook start-up http://youtu.be/O_pBNPe3s-M
Sales of individual chapters and sections from books Offer additional content such as a blog/forum dedicated to a chapter or sentence, immediate definition of a word, links to other content (news/other authors), Easier to sell updates Books on demand Easier to sell porn and erotic fiction Establish basic contracts with university libraries to offer free eBooks for students or offer special editions exclusively to students for a discounted price Providing online reviews (non-monetary action is posting a review at Amazon website)
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In 2010, 4 million new titles were published with 92% of those being non-traditional i.e. self-publishing and books representing the reuse of content, most of it not covered by copyright Non-traditional books are largely on demand titles produced by reprint houses specializing in public domain works and by presses catering to self-publishers and micro-niche publications Non-traditional titles are marketed primarily on the Web
Bowker, ISBN Output 2002-2011, 2012 Non-traditional numbers are undersestimated since books with no International Standard Book Numbers (ISBN) are not included
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Film industry is growing but new digital-based business models are yet to be found
Filmed Entertainment has grown worldwide from 26 bn USD to 37 and is expected to reach 46 in 2015 (PwC)
Film piracy includes Internet piracy and Hard-good piracy
Though piracy apologists have long argued that online piracy was good for business (similar to freemium theory)
New business model are aimed at decreasing demand for illegal pirated downloads:
Worldwide releases Day-and-date digital releases (releasing in theaters and VOD the same day) Ultra release (releasing on VOD before a theatrical release) can also create a buzz and increase the number of people going to theaters
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Question raised at the end of class#2 Is my start-up a good idea and what do you think of the business model?
Entrepreneurship tips
1. 2. No one can tell you if your Internet-based company will be a success or not (remember Twitter) Go out and meet other entrepreneurs at conferences, start-up dating, La Cantine, Top Upcoming Paris Startup Events (Paris StartupDigest newsletter) February 18 - [cours] Faire parler de sa bote dans les mdias (45) February 18 - Master Classe Entrepreneur avec Gilles Babinet (39)
3.
Learn to pitch your business model and do a great presentation Like design, presentation performance does matter
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Question raised at class#2 Is my start-up a good idea and what do you think of the business model?
Entrepreneurship tips
4. Find a team since it is the most valuable assets of a start-up
5.
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3a Customer segments
Definition and scope Customer segments are the different groups of people or organizations an enterprise aims to reach and serve In order to better satisfy customers, a company may group them into distinct segments with common needs, common behaviors or other attributes.
An organization must take a conscious decision about which segments to serve and which to ignore (like facebook)
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3a Customer segments
Different types of Customer Segments Mass market: e.g. consumer electronic sector Niche market: such business models are often found in supplier-buyer relationships, e.g. car part manufacturers (e.g. Faurecia in France) Segmented: a company serve several different industries with the same needs or segment customers to provide a different proposition value: e.g. in the banking industry individuals customers can be segmented in wealth Management (>1M financial assets), High Net Worth (>0,1M) and large public Diversified: a company serve unrelated customers segments with different needs e.g. Amazon sell cloud computing services In fact, there are usually always two type of customers with different needs: B2B and B2C Multi-sided markets: e.g. a credit card company need a large base of credit card holders and a large base of merchants who accept those credit cards
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3a Customer segments Noncustomers differ in their relative distance from your market but they all offer big blue ocean opportunities
The Three Tiers of Noncustomers First-tier: buyers who minimally purchase an industrys offering out of necessity and they are waiting to jump ship and leave the industry Second-tier: people who refuse to buy your industrys offerings Third-tier: people who have never thought of your markets offerings as an option
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3a Customer segments
How to attract each tiers of noncustomers First-tier: Pret targeted UK workers who used not to go to a restaurant for healthy and time-consuming reasons with fast-food and fresh meal Second-tier: JC Decaux targeted refusing municipalities and corporations by putting advertising in the street furniture instead on city outskirts
Third-tier: defense department has usually sold military technology to the private sector
Companies should go for the biggest catchment at the time although there could be overlapping commonalities across all three tiers of noncustomers
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3b Channels
Definition and scope Channels are the way how a company communicates with and reaches its customer segments to deliver a value Proposition Communication, distribution and sales Channels comprise a companys interface with customers
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3b Channels
Type of channels Distribution channels can be owned (sales force, web sales, own stores) or done with partners (partners stores and wholesaler) Partners channels lead to lower margins but they allow an organization to expand its reach and benefit from partner strengths
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3c Customer Relationship
Definition and scope Customer Relationships are the type of relationships a company establishes with specific customers segments A company should clarify the type of relationship it wants to establish with each customer segment (customer acquisition, customer retention, boosting sales/upselling)
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3c Customer Relationship
Categories of Customer Relationships Personal assistance: relationship based on human interaction. E.g. point of sales (pos), call-centers. Dedicated personal assistance: dedicating a customer representative specifically to an individual client. It represents the deepest and most intimate type of relationship and normally develops over a long-period of time. E.g. key account managers, HWN individuals consultant
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3c Customer Relationship Great blocks to utility can be identify looking at the buyer experience in order to be removed and unlock exceptional utility
The buyer experience cycle A each stage of the buyer experience, managers can ask a set of questions to gauge the quality of buyers experience and thus unlock utility for buyers
The following questions can help you identify the most compelling hot spots to unlock exceptional utility:
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4a Key ressources
Definition and scope Key resources are the most important assets required to make a business model work Key resources can be: Human Physical assets: manufacturing facilities, buildings, vehicles, machines, systems, point-of-sales systems and distribution networks Financial resources / guarantees: cash, lines of credit, or a stock option pool for hiring key employees. E.g. distributors (B2C) have usually a low or negative working capital as for producers (B2B), they usually have positive working capital Intellectual: brands, proprietary knowledge, patents and copyrights, partnerships and customer databases
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4b Key activities
Definition and scope Key activities are the most important things a company must do to make its business model work There is several types of key activities: Production: designing, making and delivering a product. E.g. Manufacturing Problem solving: coming up with new solutions to individual customer problems. E.g. hospitals, consltancies and services organizations Platform/Network: networks, platforms, software and brands. E.g. eBay, Visa
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4c Key partnerships
Definition and scope Key partnerships are the network of suppliers and partners that make the business model work There is four types of partnerships: Buyer-supplier relationships to assure reliable supplies Strategic alliances between non-competitors
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4c Key partnerships
Motivations for creating partnerships Optimization and economy of scale: optimize the allocation of resources and activities since it would be illogical for a company to own all resources or perform every activities by itself E.g. 100,000 people will have contributed to build your iphone 5.0, limitation for 3D printers Reduction of risk and uncertainty: it is not unusual for competitors to form a strategic alliance in one area while competing in another. E.g. Blu-ray Acquisition of particular resources and activities: such partnerships can be motivated to acquire knowledge, licenses or access to customers
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4c Key partnerships
Tracking partnerships with the code bar and code packer Exhibit - Code bar Exhibit - Code packer
Exhibit Tracking a partnership for a bean can with Open Food Facts
OpenFoodFacts
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5 Cost structure
Definition and scope Cost structure is all costs incurred to operate a business model Naturally enough, costs should be minimized in every business model but we have already see that some business models are more cost-driven than others (design to cost, pyramid base): Cost-driven: focus on minimizing costs wherever possible maintaining the leanest possible cost structure
Value driven: focus on value creation rather than the cost implications
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Shanda Games
Zynga Giant Renren Groupon
2009
2012 2007 2011 2011
Online games
Social games Online games Chinese social media Discounted gift certificates
-70%
-60% -70% -80% -80%
2011
+70%
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Facebook value proposition Facebook helps Internet users stay connected with their friends, families, and colleagues Facebook provides a number of products, free of charge, to its users: Timeline, News Feed, Photos and Videos, Messages (Email, Chat, Text Messaging), Groups, Lists, Events, Places, Subscribe, Ticker, Notifications, and Facebook Pages
Facebook have a long tail of customers (not dependent upon any single customer for their revenues)
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Facebook key operational figures Fourth Quarter 2012 Operational Highlights: Monthly active users (MAUs) were 1.06 billion as of December 31, 2012, an increase of 25% year-over-year Daily active users (DAUs) were 618 million on average for December 2012, an increase of 28% year-over-year Mobile MAUs were 680 million as of December 31, 2012, an increase of 57% year-over-year
Mobile DAUs exceeded web DAUs for the first time in the fourth quarter of 2012
Recent Business Highlights Mobile revenue represented approximately 23% of advertising revenue for the fourth quarter of 2012, up from approximately 14% of advertising revenue in the third quarter of 2012 Facebook launched Graph Search Beta, a structured search tool that enables users for the first time to find people, places, photos and other content that has been shared on Facebook Launched Facebook for Android 2.0, completely rebuilt to deliver improved stability and faster performance and opened Facebook Messenger to anyone with a telephone number
Facebook, Facebook Reports Fourth Quarter and Full Year 2012 Results, 30/1/2013
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Facebook key financial figures 5.1 bn in 2012 (up from 3.7 bn USD in 2011) 83% of revenues coming from advertising Profit down to 0,05 bn in 2012 (down from 1 bn USD in 2011) mainly due to shares given to the top management Exhibit Key figures 2011
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What is Facebooks business model? Facebook replicated Googles formula... with relatively less success
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What is Facebooks business model? Facebooks main asset is the connections and interactions between users
Facebooks Social Graph 100 billion friendships, 250 million photos uploaded every day and 2.7 billion Likes and Comments per day User engagement is key for Facebook success
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What is Facebooks business model? Similar to Googles Page Rank, Facebooks created its Edge Rank based on an algorithm
Facebooks Edge Rank
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What is Facebooks business model? Its new Open Graph is expected to leverage its current business model (key partners)
Facebooks new OpenGraph
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What is Facebooks business model? Facebook is a social media (not only network) based on advertising
Facebooks like button developed the social graph even further
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What is Facebooks business model? Facebook could be squeezed out in the next years by new competing apps
On Mobile Facebook lost the central position n the ecosystem which made its success on the web
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What is Facebooks business model? If successful, Facebook can become the apps merchandising expert
In May 2012, Facebook launched its mobile weapon: the Facebook App Center
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Facebooks stock quote highly volatile since the company is still growing fast and it is in the advertising business
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Google value proposition Organize the worlds information and make it universally accessible and useful for better quality leads
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What is Googles business model? Google has changed the ad industry by giving products away to end users for free (in return for advertising), as well as reducing the advertising costs for brand
Google revolution on advertising Google opened up the market to SMEs and extended the reach of larger corporations A great search algorithm is important though real advantage comes from the massive investments in Google platform which means tiny marginal costs, so Google give Free products to end users Illustration Advertising market by company size
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What is Googles business model? Google revenue stream comes from Google AdWords and Google AdSense
Traffic acquisition costs (TAC) comprises of money paid to the Google Network websites under the Adsense program and to the distribution partners who distribute Google Toolbar and other products or drive traffic to the Google websites.
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What is Googles business model? Two-thirds of Google revenues come from AdWords and remaining from AdSense
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What is Googles business model? Google give products away in return for advertising (two-sided market) and Google reduce the advertising costs for brand
Google business model using the Canvas
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What is Googles business model? Google is trying to remain central in the Mobile experience
Google is trying to remain central in the Mobile experience controlling the hardware, as well as the software: On the software side, Android was created to be a free, fully open source mobile software platform that any developer could use to create applications for mobile devices and any handset manufacturer can install on a device
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Key activities: even if Zynga has plenty of games, revenues come mainly from three games: Farmville, CityVille and MafiaWars
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What is Zyngas business model? Zynga relies on "hit" games and so its business will always have an element of cyclicality
Zynga users growth
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Facebook and Zynga revised their partnership: Facebook can make its own games, if it chooses Facebook will no longer be the exclusive social platform for Zynga, allowing it to launch games first on mobile or its own Zynga.com platform
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What is Zyngas business model? Growth will have to come from other platforms, particularly Google+ and mobile games
Zynga stock quote dropping since the IPO because of stable bookings and partnership revision with main partner, Facebook
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Linkedin acquired Slideshare in 2012 to add presentations to your Linkedin profile (individuals and company) to differentiate from other Hiring solutions showing just a resume with cold data (education, experience and skills) leading to: A better recruitment search
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What is Linkedins business model? Recruiting presents the best growth catalyst for Linkedin
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Cost structure:
High cost of customer and merchant acquisition (sales people on the ground) Lack of network effect: each city has to be won separately Low switching costs for merchants and customers Competitors: Living Social (Amazon) and DealMap/Dailydeal (Google) Past competitors: Yelp and Facebook
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Sami Dob, Is Groupon Business Model profitable for Merchants? for Consumers? 2011
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What is Groupons business model? Groupon growth future remains in its huge customer database of 200 Million
Groupon key growth levers Increase purchasing frequency and repeat buys
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Quizz
1. 2. 3. 4.
Which company has network effects? Which company has locked the customer (high switching costs)? Which type of employees work in each company (sales and/or R&D/engineers)? For which company, revenue is not a Key Performance Indicator?
1. Network effect?
2. Switching costs?
Groupon
Linkedin
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Looking at the most promising Internet companies World's most valuable private digital tech companies
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Executive summary
Popular revenue streams among top Internet companies Freemium: Zynga, Rovio, Linkedin, Spotify, Dropbox, SurveyMonkey, Eventbrite, Tumblr, Evernote, Skype Advertising: Google, Facebook, Twitter, Craiglist, Criteo, Path Marketplace: Amazon, Alibaba, Venteprivee, ZocDoc, TaskRabbit, Airbnb Ecommerce: Groupon, LivingSocial, Foursquare, Hulu Others: Premium: The New York Times, Les Echos Crowdsourcing/Crowdfunding: Kickstarter, Kaggle Digital money: Starbuck, Paypal Datamining and big data at the heart of the Data revolution: Shazam, Meilleuragents, Trulia, Zillow, Kel Quartier
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Focus on ecommerce
Free (internal)
Partners
White Label
Comparators
Advertising
CPM / CPC
CPC / CPA
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Share text messages with a length constraint (social Networking Site / SNS and Micro-blogging platform)
For advertisers, marketers, and media, Traffic generator (ecommerce, fund-raising,) Communication tool (customer service channel, brand awareness, PR,) Cheap monitoring on niche subject and tracking the spreading of news
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Productivity in the service sector is expected to exponentially with the Digital revolution
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This class will be evaluate using an individual test and a group project
Notes and evaluation Short individual test at the beginning of class #3 based on classes (30%) Group project (70%) Each group of students will present the business model of an Internet-based company of their own design 5 minutes presentation: explain and challenge the business model of a company (thus just a few slides)
5 minutes Q&A
Evaluate by three judges: Presentation performance (2/3) Facts and Figures (1/3) Send me an email to submit the company for your Group project (before 10 February 2013) Strong advices: Choose a company which is a leader in what it does (even though it doesnt necessarily make money on it), not glamorous but with market potential (e.g. B2B) Dont choose a really glamorous one (e.g. Google, Facebook, Linkedin) or really small ones Need help? Look for a company at http://techcrunch.com/ Attendance is mandatory
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HTML5 technology for fast and cheap mobile apps and Native for more complex apps like those using the phone features
BM is a simple expression of the strategy of the company on how to make money without going into too much details. BP is a document which includes BM and other documents (team, financial analysis, roadmap,) Key activities, resources, partners, customer relationships, customer segments and channels, cost structure
Because they lock the customer for a long period giving time to sell more profitable products
X X
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Industry is expected to be stable in few months bceause itsfinding new business models such as streaming
Gamification: eery part of our lives could eventually be turned into a game
Free-to-Play is the freemium name model for games in which you charge for virtual goods
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