1. A/Prof Jeffrey FunkDivision of Engineering and TechnologyManagementNational University of Singapore

2. Business Model Value proposition: what to offer and how to differentiate Customer selection: whom to serve and not serve Scope of activities: what activities to carry out and whatrelationships to have Value capture: dominant sources of revenue Strategic control: how to sustain profitability (e.g., how tocontrol architecture and standards) 3. Remember! Consistency Among Elements and anIterative Process are Critical Customer selection: whom to serve and notserve Value proposition: what to offer and how todifferentiate Value capture: how to make money Scope of activities: what activities andrelationships to have Strategic control: how to sustain profitability 4. For Example Scope of activities is related to method of valuecapture Smaller scope of activities may lead to lowerdevelopment costs and thus enable smaller grossmargins, i.e., new method of value capture, lower margins buthigher volumes (and thus perhaps lower costs) and thushigher overall profits 5. OutlineDefinitions/Review Scope of activities Value configuration: chains, shops, networksExamples Computers Video Consoles/Games Music Mobile Phones 6. Scope of Activities What do you make or do, versus what do you buy oroutsource? Partly a cost decision, partly a strategic decision Want to reduce costs But also want to develop capabilities dont want to become dependent on a single firm for a keycomponent Thus, make versus buy decisions determine the areas inwhich a firm intends to compete 7. Example of Strategic Issue If an automobile supplier stops making engines, can itbegin making them again? If a leading automobile firm begins selling engines toother firms, will this help its competitors and thus hurt its autosales? or will this enable greater development spending? How about the country level? 8. Other Strategic Issues Part of the make or buy decision involves whether youcan buy or outsource something this depends on the degree to which independent suppliersof components and services (i.e., vertical disintegration)have emerged This is why one must consider the levels of vertical(dis) integration in the industry using valuechains, etc when considering the scope of activities Increasing amounts of vertical disintegration may providefirms with new opportunities for outsourcing You must be aware of how industries are evolving when youdetermine your scope of activities 9. Vertical (Dis)integration Represents extent to which work is shared amongdifferent organizations Changes in vertical (dis)integration can come fromtechnological, institutional, or social changes In particular, reductions in transaction cost lower costs of having work done by multiple agents importance of integrative capabilities and thus facilitate the emergence of vertical disintegration(and entrepreneurial opportunities) 10. Reducing Transaction Costs Emergence of standards often leads to reductions intransaction costs Political and regulatory changes can also lead to lowertransaction costs Whether these reductions in transaction costs alsolead to emergence of vertical disintegration alsodepends on whether standards are open? different capabilities required? economies of scale or network effects exist? 11. As an aside, Horizontal (Dis)integration Scope of products that a firm offers Similar to narrow or broad market scope thatwere discussed in first Week Apple offers many kinds of electronicproducts Desktop computers, laptop computers MP3 players, Phones Tablet computers Televisions 12. OutlineDefinitions/Review Scope of activities Value configuration: chains, shops, networksExamples Computers Video Consoles/Games Music Mobile Phones 13. Firm infrastructure activitiesHuman resource managementResearch, development and designPurchasing,inventoryholding,materialshandlingManufac-turingOutboundlogisticsMarket-ing &SalesDealersupportandcustomerserviceSupportactivitiesPrimaryactivitiesPurchasingVendorrelationsInboundlogisticsInventoryholdingMaterialshandlingRawmaterialsCapacityLocationPartsproductionAssemblyPricesAdvertisingPromotionSales forcePackagingBrandSalesChannelsInventoryWarehousingTransportWarrantySpeedCaptive/independentValue chainsIssues 14. Value Chains for Individual Firms Exist withinLarger Value ChainsSupplier Firm ChannelBuyerValue Value Value ValueChains Chain Chains Chains 15. The Degree to which One Firm does all these activities is CalledScope of Activities or Vertical Integration (the opposite is verticaldisintegration)Some people use the term industry architecture to describe the levelof vertical integrationSupplier Firm ChannelBuyerValue Value Value ValueChains Chain Chains Chains 16. Value Shops The primary activity is finding out what thecustomer wants and how to fulfill it Examples Health care Travel agencies Real estate companies Financial institutions Education Technology, in particular the Internet is changingthe way value shops can be managed 17. Value Networks Firms operate as brokers between buyers and sellers in avalue network Network effects play a larger role in value networks thanin value chains or value shops Examples Before the Internet: banks, stock brokers, newspaperclassified ads, video games Change to value network or increased importance of valuenetwork by the Internet: employment sites, E-Bay, real-estate sites, Amazon.com Many successful Internet sites are value networks 18. Scope of Activities Firms operating in value shops or value networksmust also think about their scope of activities Vertical disintegration has emerged in many of valueshops and value networks at a global level (Internet isa big facilitator). Examples: U.S. hospitals outsource medical decisions to Indian doctorsby using the Internet Universities outsource courses to contract professors thatteach in class or over the Internet This vertical disintegration increases the number ofchoices for firms with respect to scope of activities 19. Impact of Vertical Disintegration on OtherAspects of a Business Model (1) Vertical disintegration complicates the choice ofvalue capture, customer selection, valueproposition by increasing the number of firmsinvolved with delivering value to the finalcustomer Firms must consider impact of their choices(methods of value capture, customerselection, value proposition) on theirsuppliers, customers, and other firms(e.g., collaborators) that supply complementaryproducts 20. Impact of Vertical Disintegration on OtherAspects of a Business Model (2) If suppliers of complementary products do notfocus on same customers or value propositions, orimplement complementary methods of valuecapture, then your business may not grow If your method of value capture prevents suppliers of complementary products from makingmoney, complementary products will not emerge retailers or distributors from making money, they willnot distribute your products Many of the examples below involve these issues 21. OutlineDefinitions/Review Scope of activities Value configuration: chains, shops, networksExamples Computers Video Consoles/Games Music Mobile Phones 22. Computers Many changes in computer sector over last 60 years some discussed in previous weeks In discontinuities: mainframe, mini, personal, portable In lead customers from accounting departments to scientists and engineers to mobile professionals In methods of value capture from leasing and/or selling them with a sales force to selling them through a retail outlet to selling them online to licensing software 23. Other Changes (1) Emergence of relatively open interface standards between computers and peripherals computers and remote services computers, LAN, and Internet operating system and application software in some cases operating systems and microprocessor Rising development cost for OS, application software andmicroprocessors 6 Billion USD to develop Windows Vista, the 2007 Windowsoperating system 100 Million USD to develop high-end microprocessor Emergence of these standards (and high developmentcosts) supported emergence of vertical disintegration 24. Other Changes (2) Political/regulatory decisions US government forced IBM to unbundle hardware andsoftware in late 1960s But didnt force Microsoft to unbundle operating systemand application software in 1990s U.S. government supported the development andcommercialization of the Internet Universities defined open standards for the Internet These decisions also impacted on levels of verticaldisintegration 25. Source: Christensen & Raynor, 2003Vertical DisintegrationEmergence of Standards Drove: 26. Evolution of Vertical Disintegration in IT Sector1960 1970 1980 1990MainframeComputersMini-ComputersPersonalComputers(PCs)ComputerDesignSystem360PeripheralsIBMUnbundling16-bitwordlengthIBMPCWindows,UNIX, TCP/IP,Ethernet,S/W: software; App: application; OS: operating system; CPU: central processing unit; VAR: Value-added reseller. (1): Includes PCsand workstations. (2) Mainframe computers and workstations are also used as servers;VARsPeripheralsApp S/WPeripheralsOSMicro-processorPeripheralsMicroprocessorSystemsSoftwareandSystemsIntegrationApp/S/WOSNet-worksMicroprocessorOSAppS/WClient(1)DesignServer(2)DesignPeripheralsComputerDesignApp S/WApplication S/WPeripheralsComputer DesignComputerDesignComputerDesign Computer DesignComputerDesignClient-ServerSystemsRemote Services Remote ServicesRemote Services 27. Emergence of Vertical Disintegration Enabled smaller scope of activities, lower developmentcosts and thus reduced barriers to entry And thus impacted on business model In combination with other changes (e.g., changes invalue capture, changes in lead customers, dimensionsof performance), led to dramatic changes in theleading firms 28. The Computer Industry: 1980Top 10 Public Companies in US Computer Industry(Area reflects market capitalization value in constant US $)Services SPSystems Integration ERRApplications Layer Y D CVCMiddleware Layer U H EOperating Systems IBM N P CSHardware Y XRCSAMPComponentsTI IntelXRC: Xerox; Source: Source: Carliss Baldwin and Kim Clark 29. The Computer Industry: 1995Top 10 Public Companies in US Computer Industry(Area reflects market value in constant US $)ServicesFirst DataSystems Integration EDSOracleI CAApplications Layer B MSFTMiddleware Layer MOperating SystemsHardware: Printers HPHardware: Servers IBMHardware: Routers CiscoComponents IntelMicronSPERRY D CVCU H EIBM N P CSY XRCSAMPTI IntelAbbreviations: CA (Computer associates); EDS (Electronic Data SystemMSFT (Microsoft); Source: Carliss Baldwin and Kim Clark1980 30. The Computer Industry: 2004Top 10 Public Companies in US Computer Industry(Area reflects market value in constant US $)Services First DataADPSystems IntegrationOracleApplications Layer IBMMiddleware Layer MSFTOperating SystemsHardware: Printers HPHardware: PCs DellHardware: Servers IBMHardware: Routers CiscoComponents Intel TIAbbreviations: ADP (Automatic Data Processing); MSFT (Microsoft);Source: Carliss Baldwin and Kim Clark 31. Market Capitalization in 2007 Microsoft - $264B Google - $210B New to list Cisco - $189B Apple Inc. - $162B New to list IBM - $159B Intel - $155B HP - $112.57B Dell - $45.09BSource: http://en.wikipedia.org/wiki/List_of_information_technology_companies_by_market_capitalization 32. Rank Company Name July 1, 2010 July 15, 2011 August 1, 20122 Apple Inc. $228 2 $332 1 $5663 Microsoft $201 7 $227 3 $4029 IBM $158 9 $213 7 $22217 Cisco Systems $121 73 $ 87 62 $8721 Google Inc. $109 24 $171 14 $19925 Intel $108 42 $122 35 $12826 Oracle $107 23 $172 27 $14730 Hewlett-Packard $101 88 $ 7672 Sap AG $54 97 $ 73 79 $7381 Amazon.com $48 62 $ 99 49 $103Source: http://www.tracked.com/list/biggest_companies_by_market_caphttp://www.corporateinformation.com/Top-100.aspx?topcase=bMarket Capitalization (US$B) in 2010, 2011, 2012 33. New Additions to Top 10 Firms Benefited from Emergence ofVertical DisintegrationYear Firm Vertically disintegrated layer1995 First Data, EDS Remote servicesOracle, ComputerAssociatesApplication softwareCisco Routers, emergence of InternetMicrosoft Operating systems2004 ADP Remote servicesDell Personal computers2007/2010Google Internet and search enginesApple Internet: computers and contentSAP AG Application softwareAmazon.com Internet and Internet content 34. Vertically Disintegrated Layers Continue to Emerge Many are part of utility/cloud computing Software as a service Rent/lease software at monthly fee Salesforce.com Infrastructure as a service Rent/lease infrastructure at monthly fee Amazon.com Storage as a service Rent/lease storage at monthly fee Drop-box Platform as a service Rent/lease a platform from which other services are offered for monthly fee IBM, Microsoft, Google 35. Why Big Changes in Leading Firms Because change creates opportunities for new firms Changes in Technology: mainframe, mini, PC, portable Changes in lead customers from accounting departments to scientists and engineers to mobile professionals Changes in methods of value capture from leasing and/or selling them with a sales force to selling them through a retail outlet to licensing software Changes in levels of vertical disintegration Challenged incumbents and enabled many firms to co-exist 36. Why are Some Firms Most Profitable Controlled key interfaces now or sometime in past IBM: interfaces in mainframe computer Microsoft and Intel: operating system and microprocessor inPC Cisco: IOS in routers Benefited from Network Effects, Switching Costs, andsome Lock-in IBM in mainframe; Microsoft and Intel in PC Cisco: in routers; Google in search Oracle and SAP: application software for big clients Apple in i-pod, i-phone, and i-pad Next week, we talk about Method of Strategic Control 37. OutlineDefinitions/Review Scope of activities Value configuration: chains, shops, networksExamples Computers Video Consoles/Games Music Mobile Phones 38. Video Consoles and Games Vertical disintegration has also emerged in videoconsoles But Less vertical disintegration in video consoles than in PCs And manufacturers make more money than do software(game) providers Why these differences? 39. ConsumersDevelopersTools andMiddlewareProvidersConsole MakerPublishersContentProvidersValue Network for Video Consoles and GamesGamesConsoles& GamesRoyaltiesContentFinancingGamesGames 40. Business Model for Video Game Consoles Value proposition Until recently: provide graphic intensive game consoles Recently: motion-related games (e.g., Wii) Customer selection Until recently: high-end graphic-loving users Recently: Nintendo found new users with Wii Scope of activities Vertically disintegrated: e.g., other firms provide software Value capture Console manufacturers take most of revenues including portionof independently sold game software revenues (see subsequentslides)Source: Pong, Chapter 6 in Invisible Engines 41. Method of Value Capture for Video Game Firms Video game console manufacturers Include authentication chips in the games in order to prevent unauthorizedgames from being played Take a portion of game revenues (20% ?, $3-$9 per game) on their games Discount sales of consoles by >$100 to attract customers and gamepublishers Game publishers and developers Revenues from sales of games Divided up between publishers, developers, and content providers(e.g., basketball players image) Tool providers Sale of tools But must pay a licensing fee ($12,000) to console suppliers for technicalinformationSource: Pong, Chapter 6 in Invisible Engines 42. Why are Manufacturers and not OS and IC suppliersdominant in Video Games? Vertically disintegrated layers of operating systems andmicroprocessors have not appeared in video consoles Graphic performance of games depends on integral design ofoperating systems, processors, and other ICs Compatibility between users (which comes from standard OSs)is not as important as with PCs Pricing strategy is also different discount consoles and chargesoftware providers a royalty fee (razor blade strategy), partlybecause users buy a large variety of software Games played on PCs (including online games) undergoa different set of competitive dynamics than those onvideo consoles 43. What do you think would happen if a console suppliertried to introduce a business model like that found in thePC industry? Open system? No royalties Instead pay for software that is loaded onto computer? 44. Issues for Game Console Suppliers Not just good consoles are important Relationships with suppliers of game software Percentage of game revenues to be given to game softwaresuppliers Licensing fee to tool providers By giving more revenues to game software or toolsuppliers, can attract more games and thus provideusers with better games This is one reason why leading suppliers have changed overtime: from Sega to Nintendo to Sony (maybe to Nintendo again but this time due to new valueproposition and customer selection) 45. Nintendo Found New Market Segment (Customer Selection) and offersnew value proposition with Wii Remote One-handed primary wireless Wii Controller Inexpensive accelerometer and optical sensor Build-in speaker and vibration feedback New and refreshing gameplay of movement and pointing Memory chip for saving configuration data But cheaper (slower) processor and (smaller) memorySource: Group 6 in Spring 2008 MOTI Class 46. New Method of Value Capture for Wii RemoteWii CombatPackWii ZapperGuitar HeroGolf and tennisWii wheelSource:Group 6 inMOTI Class 47. OutlineDefinitions/Review Scope of activities Value configuration: chains, shops, networksExamples Computers Video Consoles/Games Music Mobile Phones 48. Old Business Model for Music-Related Firms (1) Value proposition For many years music companies bundled songsfrom top-name artists into record, tape, CD. Nowtry to sell singles over Internet Manufacturers focused on quality, design, and pricebut sales of special audio players are dropping Customer selection mostly young people 49. Old Business Model for Music-Related Firms (2) Scope of activities Vertically disintegration between music andplayers and vertical integration within players andwithin music Value capture Music companies take large percentage of musicsales through long-term contracts with artists Hardware manufacturers use production businessmodel but special purpose players aredisappearing 50. Apple Changed Scope of Activities & Value Capture forMusic: It sells both players and music and subsidizes musicMusicCompaniesMusicCompaniesConsumersConsumersOld Value ChainNew Value ChainDesign, MakeMusic Players& ComponentsRetailRetailRetailComponentsDesignandRetailApplePlayers MusicArtistsComposers 51. As an Aside, Apple and Other Firmshave Created Retail Outlets Creating retail outlets is one way of enhancing brandimage Many phone manufacturers and other suppliers ofconsumer electronics (Sony) have created retail outlets These suppliers now compete with traditional retailoutlets (Best Denki, Harvey Norman, Courts) that alsosell products from these suppliers Can anyone think of a clothing manufacturing brand? Lets go back to Apple 52. But Apple Buys all the Components Storage: Intel micro hard disk / memory chips Battery: Sony Lithium polymer technology Connectivity: Firewire standard Software: ARM architecture Microprocessor: Cell phone processor User Interface : Pixo, a cell phone software developerSource: Group 5 in past MOTI Class 53. Apples Scope of Activities Represents a completely different level of verticaldisintegration, i.e., scope of activities, from previoussolutions More investments in retail outlets than inmanufacturing Thus, return on investment depends more on level ofinvestment in retail outlets than in manufacturing Other firms are replicating this business model Amazon with Amazon Kindle, B&N with Nook Nokia, Sony, and others in retail outlets Google with Google TV 54. What is Future Method of Value CaptureFor Music? (1) Online sites Will vertically integrated suppliers such as Apple dominatemusic? Or will vertical disintegration emerge and enable independentInternet sites (and suppliers of technology such asRealNetworks) to survive and prosper? Music Companies Continue profiting from CDs? Or from individual songs on on-line sites? 55. What is Future Method of Value CaptureFor Music? (2) Artists Continue with music companies? Sell music directly through on-line sites? Give away music and make money from concerts? Hardware Manufacturers Disappear as PCs and phones provide playback capability? 56. New Revenue Streams for Music Industry For bands, concert income rose from $1.5 to $4.6 B between1999 and 2009 prices rose from $26 (35 in 2009 dollars) in 1996 to $63 in 2009 partly because age of attendees rose more merchandise sales and money from corporate sponsors Music companies receive more money from television Royalties rose from $5B in 1998 to 7.5B in 2009 These royalties supplied 29% of EMIs revenues and 45% of its profitsin the year to march 2010 Older people still buy CDs People aged 12 to 19 accounted for 16% in 2002 and 12% in 2008 Over 60 rose from 9% to 14%Whats working in music, The Economist, October 13, 2010, pages 81-84 57. Social Networking Sites: Facebook, MySpace, YouTube, Mvine, OurStage,Blogs, P2PArtists Website: Stand-alone home pagesOnline Store: Soundclick, iTunes, AmazonOther Possible Changes to Music Value Chain:Where will People Purchase Music?Source: Modified from Group 5 in past MOTI Class 58. Microsofts OS MySpaceGoogle YouTubeOld newspaper FacebookIBM Linux Code Linux KernelWikipediaBlogging sitesIn-house Community-DrivenValue CreationValueCaptureEco-systemCompanyAnother Look at Future of Music and other MediaSource: Chesbrough and Appleyard, 2007 59. OutlineDefinitions/Review Scope of activities Value configuration: chains, shops, networksExamples Computers Video Consoles/Games Music Mobile Phones (operating systems) 60. Mobile Phones Two weeks ago, discussed method of value capture Last week, discussed mobile phonestandards, i.e., air-interface standards Analog: AMPS Digital: GSM 3rd Generation: W-CDMA In many class sessions we have talked aboutchallenges of creating workable mobile Internetservices and how such services require agreementson interface standards 61. These Standards and thus Workable Solutionshave also Depended on Technology Change Technology change facilitated change from integral tomodular design Initially low processing power and memory capacityrequired integral design of systems and phones by serviceproviders to maximize performance (only done in Japan) Improvements in processing power and memory enabled easier modular design of systems and of phones access of content that was developed for PC emergence of Apple and Google phones 62. i-Phone and Google Phones Both enable third parties to develop applications/contentfor phones They have different scopes of activities Apple develops phones from externally available modules Google licenses its OS and other technology to phone providers They have different methods of value capture Apple makes money from phone sales and some content Google makes money from advertising Both provide new alternatives for service providers that previously could not create services ontheir own content providers that previously could not get on serviceprovider menus 63. Lets talk about these issues in terms of scope ofactivities/vertical disintegration in order to provide adifferent perspective 64. BatteriesOne Way to Think About Competition Between OperatingSystems is to Consider How Users Access ContentPhoneManufacturersDisplaysInterface defined by air-interfacestandards such as GSM and CDMAChipsSoftwareServiceProvidersBase StationsSwitching EquipmentNetwork SoftwareRetail CustomerContentPortals orSearchEngines 65. Scope of Activities for Apple and GoogleActivities inValue ChainApple SymbianGoogleAndroidMobile PhoneDesignSome?OSDesignLinux KernalDesign and OfferServicesContent and AppDevelopmentSomeinitiallyA lot byNokiaUser Interface 66. Openness and AlliancesFirms in ValueChainApple Symbian Google AndroidMobile PhoneSuppliersClosed to otherphonemanufacturersMost decisionsmade byAppleOpen to SymbianFoundation, butdominated by Nokia?Open HandsetAlliance (OHA)OSSuppliers Closed to other OS Open to Linux KernalServiceProvidersOnce exclusivealliances withselected SPsOpen to all SPs(through SymbianFoundation?)Open to all SPsthrough OHAContent andAppDevelopersWork withdevelopers onad hoc basis(just openAPIs)Work with developersthrough SymbianFoundation (open APIsand standard settingprocess)Work with developersthrough OHA(open APIs andstd settingprocess)Final Users Not applicable Not applicable Not applicable 67. Global Smartphone Sales 68. Share of worldwide 2011 Q2 smart-phone sales by OSSource: "Gartner Says Sales of Mobile Devices in Second Quarter of 2011 Grew 16.5 Percent Year-on-Year;Smartphone Sales Grew 74 Percent". Gartner. 11 August 2011. http://www.gartner.com/it/page.jsp?id=1764714. 69. 2Q12UnitsMarketShare2Q11UnitsMarketShareAndroid 98,529.3 64.1 46,775.9 43.4iOS 28,935.0 18.1 19,628.8 18.2Symbian 9,071.5 5.9 23,853.2 22.1RIM 7,991.2 5.2 12,652.3 11.7Bada 4,208.8 2.7 2,055.8 1.9Microsoft 4,087.0 2.7 1,723.8 1.6Others 863.3 0.6 1,050.6 1.0Source: Gartner (August 2012)Worldwide mobile device sales to end users by OperatingSystem in Q212 (Thousands of Units)http://www.engadget.com/2012/08/14/gartner-q2-2012/ 70. How Strong are Network Effects? (1) If network effects are strong for mobile phoneOS, how did Apple and Google overcome thesenetwork effects and become the leaders? What constitutes the network effects of mobileOS? How do or how are the indirect network effectssupposed to be working for mobile OS? Were they or have they ever worked for Symbian? 71. How Strong are Network Effects? (2) Symbian didnt offer an app store or many apps Few people used apps on their Symbian phones Thus, although Symbian had large installed base, few users benefited from Symbian few app developers benefited from Symbian OS iPhone eventually offered a far superior valueproposition to users than did Symbian phones Android also eventually offered superior valueproposition to phone manufacturers than did Symbian 72. How Strong are Network Effects? (3) Are network effects stronger with current smartphones than when Symbian was dominant? If so Why? and who is winning? 73. Number of Applications as of March 2011*Apple iPhone Google AndroidNumber of AppsAvailable425,000 200,000Number of Apps EverPublished500,000 300,000Percent of PublishedApps Removed15% 32%*425,000 apps were available for Google Apps as of June 2011Source: http://www.pcmag.com/article2/0,2817,2386629,00.asp#fbid=_x993FaCGWn 74. http://www.guardian.co.uk/technology/appsblog/2012/aug/16/android-winning-apps-china-smartphone 75. But App Sales Tell a Different Story Current sales for top 200 grossing apps Apples store generates $5.4m every day Googles store generates just $679,000, or about 12% Total revenues for app developers $4bn in case of Apple, more than $700m in 4Q 2011 $210m in 2011 for Google Reasons for difference include iPhone provides better value proposition for app users(seenext slide) iPhone attracts users interested in using apps iPhone suffers less fragmentation 76. http://www.localytics.com/blog/2012/app-user-loyalty-increasing-ios-beats-android/ 77. http://www.localytics.com/blog/2012/app-user-loyalty-increasing-ios-beats-android/ 78. Fragmentation (2) Very difficult to create a best-of-breed app becauseof fragmentation, and because people are less likelyto have latest version of [Android] software. Youhave to build to lowest common denominator,rather than using latest features. Example of Unsponsored Standard, covered earliertoday other examples include Unix and Linux. Although Google sponsors Android, manufacturerscustomize Linux for their phones and customizationrequires app suppliers to develop a different app for eachphone. This reduces value proposition for both users anddevelopers 79. Conclusions (1) Emergence of open standards and other changes (such aspolitical and regulatory changes) can reduce transactioncosts Reductions in transaction cost lower costs of having work done by multiple agents importance of integrative capabilities and thus facilitate emergence of vertical disintegration (andentrepreneurial opportunities), i.e., a new scope of activities A new scope of activities represents a new businessmodel and it may require changes to other elements ofthe business model 80. Conclusions (2) Vertical disintegration, which enables a different scopeof activities, provides challenges for incumbents becauseit reduces barriers to entry, and thus facilitates new entry makes new methods of value capture possible Evidence of challenges to incumbents could be seen in Entry of new firms and changes in leading firms incomputer/IT sector and in mobile phone sector Evidence of relationship between method of valuecapture and vertical disintegration can be seen in Differences between personal computer and video gameindustries 81. Appendix 82. Example: Business Model For Newspapers (1) Old Business Model Value proposition and customer selection: Local newspapers: local news National newspapers: broad news Specialty newspapers: business news Scope of activities For many years very broad (from reporting to printing) but needhi-volumes to support high fixed (printing presses, trucks fordistribution) costs Slow emergence of vertical disintegration over many years forprinting and reporting (AP, UP) Value Capture: subsidize readers with profits fromclassified ads 83. Example: Business Model For Newspapers (2) Emerging Business Models Value proposition and customer selection: Local newspapers are doing better than national ones National newspapers continue to reduce coverage of international events Specialty online newspapers: huge growth in these sites as new segmentsin emerge by political philosophy, interest, age group Scope of activities is narrowing as more news is bought fromthird parties Method of value capture is disappearing Classified ads moved to the Internet Subscription and daily sales are falling as readers move to Internet 84. Future Challenges for Newspaper, Magazine Industry Publishers How to integrate print and online versions? Raise subscription fees for all or some? Reduce scope of activities and increase dependence on outsidewriters such as Blogs? Wire services such as UP and AP press? Writers Fewer opportunities as full-time employees of newspapers? More dependence on blogs to attract readers and becomeknown? 85. Business Model for Radio and Television Value proposition Manufacturers focus on quality, design, and price Broadcasters and cable companies focus on novelty, branding, relevance Customer selection: different programs and to some extentdifferent broadcasters focus on a different segment Scope of activities Following temporary period of vertical integration (in U.S. in 1920s andelsewhere much longer), large amounts of vertically disintegration haveappeared Value capture Broadcasters: advertisers pay for program or air time at local or nationallevel Cable and satellite companies: subscriptions Program production companies companies: more complex contracts withbroadcasters, cable and satellite companies Hardware manufacturers: mostly production markup 86. The Evolution of Vertical Disintegration in the Broadcasting IndustryReceiversProductionRetailProgrammingDeliveryDistributionProductionFinancingConsumersLocalbroad-castingstationsownedbyproducersorretailersofradiosRadio Television RecordedEarly 1920s 1920s-1940s From 1950s 1940s-1050s From 1960s Cable Satellite MoviesIndependently Owned Local Broadcasting StationsRadio and Television NetworksNational and local advertisersRevenues from consumersand advertisersRating and Research AgenciesEntry by film companies, programpackagers, other content suppliers andincreasing vertical disintegration (next slide)Local GeneralCable andCompanies Satellite SpecializedCompanies RetailersSatellitesProducers of radios, televisions, set-top boxes, satellite dishes, video playersVarious retailers with increasing concentrationAdvertising Agencies, Networks,and Music CompaniesAT&Ts telephone network, later satellitesMSOsMSOs: Multiple System Operators 87. FilmCompanies(563, 709, 1473)Increasing Vertical Disintegration in Movie and Television Program Production(Number of Firms in Parentheses for 1966, 1974, and 1981)ArtistsRepresentatives(242, 359, 344)FilmProcessing(43, 76, 55)Recording/Sound(20, 33, 187)Lighting(2, 16, 23)Editing(4, 31, 113)PropertiesFirms(66, 33, 184)RentalStudios(13, 24, 67)MarketResearch(3, 5, 24)Total1966: 9561974: 12811981: 24701999: 9500Source: Storper and Christopherson, 1987 (for 1999 figure: Scott, 2002) 88. Change in Value Capture For Music Old method of value capture Music companies bundle music into albums Sign up artists to long term contracts in which a small numberof artists support the music company Changes brought about by Digital Media Most music is obtained illegally Online sites try to sell individual songs Some sites are more vertically integrated than others Apple uses vertical integration to partly subsidize music servicewith profits from hardware What should music companies do? 89. Digital Media (Audio & Video) Players (1) Necessary Elements of a Digital System Compression/decompression software (codec) Container File/Digital rights management (DRM) On-line store and hardware that are compatible with the codecand DRM Alternative systems Microsofts multimedia developers kit Apples Quick Time RealNetworks Adobes FlashSource: Dangerous Intersections, Chapter 8 in Invisible Engines 90. Comparison of New Value Chains in MusicComponentSuppliersPlayers Music ContentConsumersMusicCompaniesRetailSony Minidisc,WalkmanApplei-TunesReal MusicConnectMusic StoreOther sitesMSN MusicIndependentSuppliers(use Helixand WMDRM)i-Tunes s/wSony SonicS/WReal PlayerWindowsMediaApplei-Pod 91. iTunes S/WFully Integrated Semi-Integrated Un-integratedAnother Comparison of New Value Chains in MusicSony SonicStage S/WiTunesMusic StoreRealPlayer Windows Media(WM) PlayeriPodMinidisc,WalkmanConnect MusicStoreReal MusicPlayerWM DRMStoresInteroperable (same company)Interoperable through licensingInteroperable through reverse engineeringWMDRMHelixDRMWMDRMiPodMSNMusicStore 92. Sources of Revenues for Digital Media PlayersMediaPlayerS/WServerS/WCon-tentPro-vidersAppDevH/WsalesCon-tentsalesOS MajorprofitsApple - 0 0 + + + + H/W,OSRealNtwk- + + + 0 + 0 ContentMicrosoft- 0 + + 0 + + OSAdobe - + + + 0 0 0 Servers/wSource: Dangerous Intersections, Chapter 8 in Invisible Engines