Order 1079275: Entrepreneurship - opportunity analysis video game industry in Australia

A classification of business models in video game industry

Chin Osathanunkul University of Gloucestershire, UK

Abstract

Over the last few decades, video game industry has grown quickly from a small market to a massive industry. Along with industry growth, business models in the industry also have developed rapidly to meet emerging technologies and innovations. There have been a lot of studies on business models in video game industry. However, the classifications concept of business models in video game industry is still vague and ambiguous. The objective of this article is to propose a classification scheme for surveyed business models in video game industry. This will make the study of video game industry in business and management development disciplines more practical. In the study, business models in video game industry are introduced and classified through a research paradigm built upon literature. Two kinds of classification scheme are presented; the first one is a classification scheme according to customers’ accessibility and the second one is a classification scheme according to video game publishers’ revenue model. The former scheme can be classified as: Pay-to-Play and Free-to-Play. The latter one can be classified as: Coin- operated, Retail, Digital distribution, Advertising, Subscription, Micro-transaction and Player-to-Player trading.

Key words: business models, classification schemes, gaming business, video games industry

Introduction

Video game industry has developed remarkably over the past few decades and become a tremendous industry compared with the film industry in its annual revenue. In 1999, the U.S. Video game industry accounted for US$7.4 billion in sales revenue, while the worldwide video game industry revenue exceeded $32 billion (Williams 2002; Chou 2003). From 2000 onward, video game industry has become the fastest growing segment of the entire entertainment industry. The worldwide video game industry’s rate of growth accounted for over 9% in 2013 with exceeding US$76 billion. It is expected to reach nearly US$86 billion in 2016 (Galarneau, 2014).

Another phenomenon which believed to be part of this fast growing video game industry is business models. As the industry has become highly competitive environment, the method by which a firm sets and uses its availed resources to offer its customers better value than its competitors is needed. This is where business models could come in and give a chance for the firms to stand in this high competitive industry. Considering the factors such as development costs and spiraling production times, these factors have forced firms to look for alternative strategies to run the business. Owing to the existence of new innovation and technology (e.g. digital distribution systems, subscription-based technology and online micro-transactions technology), the traditional circuits of game development firms are required to reform themselves to adapt to the approaching phenomena (Sotamaa & Karppi, 2010).

In the area of informatics and marketing, video game business models display an innovative ways of running businesses and generate revenue with the use of information 35

technology. There are a number of articles about video games and business models in video game industry over the internet. However, far too little attention has been paid to the whole picture of video game business models and the classifications concept of business models in videogame industry. One of the limitations result in Lack of documents which focus on both video game business models and the classifications concept seem to be partly from the technical terminology ‘business models’ in video game area which are still unfathomed and whose definition is not generally accepted (Wolf, 2002; Shafer et al, 2005). It results in confusingly use with other terms (e.g. genres, themes, and types) in both academic and non-academic literatures. It is necessary here to clarify exactly what is meant by ‘business models’.

This article will focus on description of the existed business models in the video game industry and classify them through a research paradigm built upon literature in both perspective of the consumers and the publishers. This will assist the future study of video game industry in business and management development disciplines and make them more practical.

Background

The term ‘business model’ has emerged since 1990s, with the lack of a common definition as the term was quite novel in the academic literature. The term emerged with the advent of the personal computer and internet around mid-1990s then their concept was introduced into the mainstream vocabulary (Maggetta, 2002).

The lack of clear definition results in dispersion instead of convergence of perspectives. To prevent future confusion, technical terminology in video game industry area should be conformed. In this section, the terms ‘genres’, ‘types’ ‘themes’ and ‘business models’ in video game industry will be clarified.

Genres, themes and types

Video games genres are used to classify video games based on their gameplay interaction regardless of visual interaction and platform they operate. Video game genres are categorized independently from game setting or in-game content. At present, there is still lack of general agreement in reaching accepted formal definitions for game genres. However video game genres have usually defined in terms of having a common style or set of characteristics which are defined in terms of perspective, gameplay, interaction and objective (Konzack, 2002; Adam, 2003; Apperley, 2006). The example of video game genres are action, adventure, casual, first-person-shooter, music, online, puzzle, role- playing, simulation, strategy and sport.

Video games themes are used to classify video games based on visual interaction regardless of gameplay interaction and platform they operate. Video game themes are only categorized based on how in-game visual content look like (Nitsche, 2008). The example of video game themes are ancient world, fantasy, medieval, movie, pirate, history, robot and space.

Video games types are used to classify video games based on specific combination of electronic components or computer hardware. These electronic systems (known as platforms) imply any type of display device that can produce two or three dimensional images (Corts & Lederman, 2009; Srinivasan, 2010). Video game types normally are

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categorized on their game operated platform regardless of gameplay and visual interaction. The example of video game types are arcade, computer, console, handheld and mobile.

Business models

Different from the terms genres, themes and types, business models in video game industry are generally used to describe how the firm plan their strategy for their product or service to gain revenue. Business models are quite independent from the product or service gameplay interaction.

In the perspective of general industry, a term of business model, strategy and tactic are often used in the place of each other. Therefore confusion in terminology is very common. This has become an obstacle of research progress in business model field. Until recently, there is still no common definition of business model construction exist. Many researches (Timmers, 1998; Hamel, 2000; Amit & Zott, 2001; Weill & Vitale, 2001; Chesbrough & Rosenbloom, 2002; Dubosson-Torbay et al, 2002; Magretta, 2002; Morris et al, 2005; Shafer et al, 2005; Johnson et al, 2008; Casadesus-Masanell & Ricart, 2010; Teece, 2010) have proposed different definitions in their publications (Table 1). However the significant mutual approach between them is a holistic perspective on how firms do business to create value as a main goal.

Table 1 - Definitions of business model

Authors Definition T i m m e r s (1998)

‘an architecture of the product, service and information flows, including a description of the various business actors and their roles; a description of the potential benefits for the various business actors; a description of the sources of revenues’

Hamel (2000) ‘A Business Concept is a radical innovation that can lead to new customer value and change the rules of the industry’

A m i t & Z o t t (2001)

‘the content, structure, and governance of transactions designed so as to create value through the exploitation of business opportunities’

Weill & Vitale (2001)

‘a description of the roles and relationships among a firm’s consumers, customers, allies, and suppliers that identifies the major flows of product, information, and money, and the major benefits for participants’

Chesbrough & R o s e n b l o o m (2002)

‘the heuristic logic that connects technical potential with the realization of economic value’

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D u b o s s o n - To r b a y e t a l (2002)

‘A business model is nothing else than the architecture of a firm and its network of partners for creating, marketing and delivering value and relationship capital to one or several segments of customers in order to generate profitable and sustainable revenue streams’

M a g r e t t a (2002)

‘stories that explain how enterprises work. A good business model answers Peter Drucker’s age old questions: Who is the customer? And what does the customer value? It also answers the fundamental questions every manager must ask: How do we make money in this business? What is the underlying economic logic that explains how we can deliver value to customers at an appropriate cost?’

M o r r i s e t a l (2005)

‘concise representation of how an interrelated set of decision variables in the areas of venture strategy, architecture, and economics are addressed to create sustainable competitive advantage in defined markets’

S h a f e r e t a l (2005)

‘a representation of the underlining core logic and strategic choices for creating and capturing value within a value network’

Johnson et al (2008)

‘consist of four interlocking elements that, taken together, create and deliver value’

C a s a d e s u s - M a s a n e l l & Ricart (2010)

‘A business model is a reflection of firm realized strategy’

Teece (2010) ‘A business model articulates the logic, the data, 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’

From consideration of industry business models and company business models, this implies that several business model levels exist. However, there are only a few authors discussing different levels of business models within their literature. Schallmo and Brecht (2010) have suggested that there are 2 levels of business model (Generic and Specific), which have contained 5 sub-levels; abstract sub-level, industry sub-level, corporate sub- level business unit sub-level, product or service sub level.

1.) The abstract sub-level is defined as generic level which is independent from industries describing general principles on how to operate.

2.) The industry sub-level is still in generic level, but is more focused on how companies operate depending on an industry. Commonly, in newspapers, magazines, newsletters and websites, business can generate revenue in a variety of ways such as advertising-based business model compared to a subscription-based model.

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3.) The corporate sub-level is more specific, focused on firm, less focused on the environment and describes how a company should operate or is operating. Dell is an example company which has general corporate business model.

4.) The specific business unit sub-level describes the business units of a corporate, where the corporate level is too abstract to capture the different business models at work. Although similar to the corporate level, it can be seen in companies, which have separate business unit models and operate in several business fields or countries.

5.) The most specific sub-level is the product or service business model level where most are fixed components and specific to a product and service that are released.

If considered the level business model level concepts by Schallmo & Brecht (2010) in video game industry, some constrains must be applied and the business model in video game industry should be consider in specifically different level. Thus Business model in video game industry can be reconstructed as a new figure which focuses on differentiated in channels and revenues which will be represent as a product or service business model level.

Result of study

As mentioned above, definition of business models in video game industry is generally considered as a holistic perspective on how firms do business to create value and business in video game industry will considered as model product or service sub level. A simpler and more understandable criterion to defy the business models in video game industry was proposed here. The classification scheme was based on (1) customers’ accessibility and (2) video game publishers’ revenue track.

1. Customers accessibility classification scheme

The first classification scheme is according to accessibility of customers. This classification scheme will consider ability of customers to access a significant portion of their content in product of service with or without paying. This scheme can be classified as: Pay-to-Play and Free-to-Play.

1.1 Pay-to-Play

Pay-to-Play (P2P) business model is a tradition model in video game industry that customers need to make a payment before they obtain a fully functional content in a product or service. This business model can be found in common product or service purchased which can be seen in other various industries where customers acquire a product or service by paying for it.

In video game industry, the term P2P is also used as a slang word to refer to internet services which require users to have a payment before using them. Sometimes, the term has referred to Massively Multiplayer Online Role-Playing Games (MMORPGs) which customers have to subscribe to a product or service to maintain their game account (Lin & Sun, 2007).

1.2 Free-to-Play

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In contrast to the P2P model, Free-to-Play (F2P) model is a product or service which allow customer to access a significant portion or fully functional of content before they have to pay for any extra features (Solidoro, 2009; Marchand & Hennig-Thurau, 2013). There are several kinds of F2P model i.e. Shareware, Freemium, Freeware and Open source.

Shareware refers to a free trial version of variable in-game content. The objective of shareware is to convince customers to buy a fully functional version of the P2P product or service after a trial period end (White & Morand, 2002; Sotamaa, 2005). Shareware is also known as game demos. Shareware usually allows customers to try the product or service with a limited of time and/or functionality.

Freemium refers to a fully functional product or service that provides a free of charge, but extra payment is required for advanced features, functionality, or virtual goods (Hung, 2010). Usually, freemium comes together with advertising and micro-transaction model which will be discussed further in next section.

Freeware refers to a fully functional product or services available for use with no cost or an optional fee at all (Coleman & Dyer-Witheford, 2007). However, sometime freeware have a restricted of usage rights and is a close source product or services.

Open source refers to a fully functional product or services available for use with no cost or an optional fee at all (Scacchi, 2004). In addition, open source product or services has also their source code available to the public, enabling anyone to copy, modify and redistribute without fees.

2. Revenue model classification scheme

The second classification scheme is according to revenue model of video game publisher. This classification scheme will consider what channel that product or service delivers value to their firms. This scheme can be classified as: Coin-operated, Retail, Digital distribution, Advertising, Subscription, Micro-transaction and Player-to-Player trading.

2.1 Coin-operated

In the early age of video game industry, Arcade video game machine have reached their golden age. All of the arcade video games machine in the era have coin-operated model which provide an entertainment service for their customer via coin-operated machine. Inserting a coin into a slot can activate the machine. The amounts of revenue generated in coin-operated model service have measured from the total value of coins that inserted into machines (Wolf, 2008).

Arcade video games machine reached its peak popular in the late 1970s to the mid-1980s. The machines remained relatively popular during the late 1990s in the western countries and had begun a continuous decline in its popularity since the further development of home-based video game consoles. However, in many part of Asia arcade, video games machine still remains popular (Kum & Kim, 2011).

2.2 Retail

Retail model is a tradition way of selling product or service in physical form such as cartridge, compact cassette tape, floppy disk, CD-ROM, DVD or Blu-ray disc. Retail

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purchasing is usually made via store or by shipment. The revenue can measured from their physical copy sales.

2.3 Digital distribution

Since the mid-1990s, the internet has had a revolutionary impact on culture and commerce, Electronic software distribution (ESD) have been introduce for a purpose to delivery of media content such as audio, video and software without the use of physical form. Usually, EDS have process over online delivery mediums such as online publisher. Video game industry also adopt this this technology for their product or service (Postigo, 2008).

Digital distribution model is a way of selling product or service in digital form. The term digital distribution is also applied to stand-alone digital products and downloadable add- ons, which is commonly known as downloadable content in video game industry. With the advance development of network bandwidth capabilities, digital distribution has obtained a significant market share in video game industry in the early 2000s. The revenue from digital distribution is usually measured by their digital copy sales.

2.4 Advertising

Advertising model in video game industry is commonly referred to In-Game Advertising (IGA). For products that are fully or partly financed through advertising, these products will display sponsors’ advertisement into in-game banner, background, billboard or loading phase (Iris et al, 2008). This model is very common in F2P mobile games, or in sport and racing games which can naturally include advertisement banner in their game design. The revenue in this model comes from advertising sponsorship.

2.5 Subscription

Pioneered by magazine and newspaper industry, some product or service in video game industry has adopted this subscription model. The model requires a subscription fee to be paid to allow continued play. Instead of selling products individually, the product or service requires customers to pay periodic fee to use or access (Williams, 2009). The revenue in this model is generated from a new registration or renewal of a subscription which may be activated automatically, and the cost of a new period is automatically paid via a pre- authorised charge to a credit card or a checking account.

2.6 Micro-transaction

Micro-transaction or micropayment model are often seen in F2P online games which the product has feature to sell virtual goods or virtual currency in-game content (Whitson, 2011). These virtual goods or virtual currency can be bought with real world currency, but the customers cannot return the virtual goods or virtual currency back into real world currency. The revenue in this model is generated from micro-transaction payment.

2.7 Player-to-Player trading

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Similar to Micro-transaction model, Player-to-Player Trading model allows customer to buy virtual goods or virtual currency with real world currency. Using virtual currency as a medium of exchange can usually trade these virtual goods, and virtual currency can be transferred back to real world currency (Prax, 2012). The revenue in this model usually generated from in-game virtual good trading fee and transfer fee between real world and virtual currency.

Classified Business model in the former and latter scheme are usually independent. In a product and service, it normally has at least one model from each scheme. However, sometimes a product or service may have hybrid model which adopt more than one model in a single a product or service.

Conclusion and discussion

This study investigates the classifications concept of business models in video game industry, to assist the further study of video game industry in business and management development disciplines to be more practical.

Two kinds of classification scheme are introduced; the first scheme is a classification scheme according to accessibility of customers which classified as: Pay-to-Play and Free- to-Play model. The second is a classification scheme according to revenue model which classified as Coin-operated, Retail, Digital distribution, Advertising, Subscription, Micro- transaction and Player-to-Player trading.

This study has a limitation concerning a definition of business model as a pattern of how firms do business to create value and consider only product or service business model level. If the study concerned other definition(s) of business model and business level(s), the result might be different.

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Business Impact in the Education Sector: The Case of Oil&Gas Company MOL

Majda Tafra-Vlahović University of Business and Management, Zaprešić, Croatia

Abstract

This case study deals with the problem of shortage of highly qualified employees that would be working in oil and gas industry and in other sectors in demand of technical professions in coming decades and the way it has been dealt with by MOL, the leading Central East European oil and gas company based in Budapest. The problem was caused by decreasing interest of secondary school students to study natural and technological sciences which are considered very difficult. In addition, young people’s perception is that the chances for employment after diploma would be very limited. This has not only been the problem for the companies that rely on staff qualified in technical and natural sciences but also a wider social problem since with the rapid development of technology the need for qualified professionals in natural and technical sciences has been increasing.

The purpose of the case study research was to investigate the process, results and implications of MOL`s policy and its social impact in the education sector. The theory behind the case is the concept of creating shared value as it is stipulated by Professor Michael Porter. Through seven years, MOL had followed the logical evolvement scenario implied in the possible elaboration of this concept. The company management was stimulated by the challenge to search a solution that would benefit both business and the society. The fact that in the process the company grew to be the second most desired employer in Hungary illustrates the argument that shared value implementation contributes to ‘legitimising business’.

Programs for young people that are subject of this case study have received extensive media coverage in a number of countries, which has additionally contributed to raising the bar in recruitment policies of businesses in these countries. The rate of students enrolling in technical schools also increased. The case study research is based on secondary sources from the company archives, public web sites and media and interviews with former and current executives of MOL and the participating students.

Key words: corporate social responsibility, shared value, human resources

Is Future Fresh and Growing for MOL?

It was the end of May, 2013 in Budapest, Hungary. Members of MOL Group Human Resources team were checking the last details of the final competition and award ceremony of their star programme that was to be held next day. The programme had started seven years ago and had significantly developed ever since, yet, hundreds of things still needed to be put in place to ensure that everything would go smoothly. Two years before that this particular programme by MOL group had won highly recognised European human resources award, an excellence award in the recruitment category that was given to any company for the first time. The ceremony of this award in 2011, which had been launched to recognize and reward organisations that 45

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