1

ICT Business Models

Capturing the value from technological innovation

Prof.Dr.ir.Frank Gielen

2

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

3

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.

– ….

4

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 !

5

Initial software architecture

6

Extended architecture

7

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.

8

Why make a business model ?

The business model unlocks the value of the technology

and justifies the capital requirements to implement it ..

9

Hamel’s framework for business models.

The business model searches for temporary monopolies

Customer Interface

Fulfillment & supportInfo & insightRelationship dynamicsPricing Structure

Core Strategy

Business MissionProduct Market scopeBasis for differentiation

Strategic Resources

Core competenciesStrategic assetsCore processes

Value Network

SuppliersPartnersCoalitions

Efficiency – Uniqueness – Fit – Profit Boosters

Customer Benefits

Configuration Company Boundaries

10

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.

11

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.

12

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.

13

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.

14

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.

15

Hamel in practice: GFF – a mobile multiplayer game 1/2

16

Hamel in practice: GFF 2/2

17

Due diligence: justify capital requirements

Team Product/Market

Idea/TechnologyBusiness Model

1 2 3 4

Evolution

Potential

Value Chain Financial Assumptions

Investment

ReadyMaturity

Level

18

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.

19

Categorizing software technology business models

• License Options– Individual , group, site,

enterprise• License Terms:

– < 1yr., 3 yrs., perpetual

• Installation:– Designated server– Concurrent users

20

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

21

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

22

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

23

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.

24

Web based business models• Brokerage• Advertising• Information intermediary• Merchant• Manufacturer (Direct)• Community• Subscription

25

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.

Buyer

1: clientRequest

4: forw

ardedReply

2: forwardedRequest3: serverReply

BrokerBroker

Seller

26

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]

27

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]

28

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

29

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-for-performance" model. [Google, Overture]

30

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]

31

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.

32

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]

33

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]

34

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

35

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]

36

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.

37

Open Source Business Models

Can open source support viable businesses ?

38

Open vs. Closed Source

Revenue from services

Source code is publically available « Copyleft »

Source can be adapted / improved

Development by a community

Selling software licenses

Source code protected as intellectual property

Customer can’t get the source code

Development inside the company

The business models are linked with the license model:•GPL/LGPL business models•BSD/Apache models•Multi license business models

39

Customer value

40

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

4141

Teece model: who makes money?

APPROP-

RIABILITY

high

COMPLEMENTARY ASSETS

Free available or unimportant

Tightly held and important

Difficult to make money

Inventor

Holder of complementary assets

Inventor or party with bargaining power

Low

4242

First Generation Business Models

Services basedRevenues are generated through support, consulting, training, documentation

Loss leaderA 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

43

Hybrid Business Models

Right to:

Use

View

Modify

Distribute

44

The Dual Licensing Business Model

Dual licensing allows open source vendors to stay committed to free software while building a sustainable, profitable business.

45

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

46

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 open-source 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

4747

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

0,0

2.000,0

4.000,0

6.000,0

8.000,0

10.000,0

12.000,0

14.000,0

16.000,0

2004 2005 2006 2007 2008 2009 2010 2011

OS

DBMS

AD

Security

AIM

ITOM

Others

(Source GIMV )

4848

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 )

4949

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 )

50

Case study: NTT Docomo

i Mode

51

Mobile Value Network

52

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 ?

i-mode is essentially an extremely well co-ordinated value network

Culture: Japanese people like high tech -> total misconception

53

iMode value chain

Content &

ServicesMarketing Bus.model Servers Network Handset

User

– Right technology• Easy to use for content developpers

– Right strategy• win-win for all players

– Right services • 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.

54

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.

55

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 database-

oriented content• Before the launch of i-Mode already 20 banks had

committed to support i-mode transactions.

56

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.

57

i-Mode ecosystem: no player can dominate

i-Mode portal

Platform

Content

NTTDocomo

ContentPartners

Handsets

Interoperability

User attraction

Guide User

Offering

Sales Channel

Advertising

Co-marketing

ProductOffering

Standards

Usability

Portal Functionality

TechnicalCapability

Marketing

58

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?