Developing Business Models in the Video Game Industry An evaluation to strategic choices made by small and medium-sized development studios Master‟s Thesis within IT & Management Author: Christiaan Visser Peter Zijlstra Tutor: Andrea Resmini Jönköping June, 2012 Master‟s Thesis in IT & Management Title: Developing Business Models in the Video Game Industry Author: Christiaan Visser & Peter Zijlstra Tutor: Andrea Resmini Date: 2012-06-06 Subject terms: Video Game Industry, Independent Business Model Development, Digitalization, Paradigm Shift Abstract Digitalization has given rise to new opportunities for small and medium-sized video game development studios. No longer bound by physical products and creative restrains, the de- veloper has been empowered with independency. This qualitative study is aimed to under- stand how a development studio develops their business model and how underlying strate- gy is formulated. Additionally we evaluate the degree of innovativeness of the business model in terms of radical and incremental innovation according to Damanpour (1991). To achieve this we present a comprehensive literature review as to gain a more theoretical un- derstanding of industry mechanics and to be able to comprehend reasoning behind existing business models. We structure the dynamics of the business model by analyzing nine busi- ness model aspects as suggested by Osterwalder, Pigneur and Clark (2010). Following our theoretical framework we gain practical input from four separate case studies. An interpret- ative research method is used to gain better understanding of reasoning and choices made. We interpret our findings following a narrative approach which shows that the digitaliza- tion has preluded a paradigm shift in the sense that development studios have started to adopt activities otherwise performed by key partners. As barriers dissipate small and me- dium-sized development studios try to make sense of the current industry, but struggle in doing so. Having to reinvent themselves we conclude that a focus towards creating thicker customer relationships is considered and the idea of seeing games as a service is acknowl- edged to depict the future of the industry. The conclusions of this study contribute to both academic science and industry practice. Acknowledgements Reading this chapter implies that our thesis has come to an end and with it our time here in Jönköping, Sweden. We would therefore like to use this opportunity to express our grati- tude to everyone who has been involved in the realization of this thesis. Thoughts go out to our family and friends who continuously gave their support, ideas and inspiration. Our supervisor, Andreas Resmini, who provided structure, feedback and creativity in times of uncertainty. “Do not get lost in semantics!” are truly words of wisdom that put things back in perspective. In addition, we would also like to thank our opposition group and coordina- tors/examinators for their continuous feedback and for encouraging us to write such an entrepreneurial and international thesis topic. We hope to have represented the heart and mindset of the university. Also, a special thanks goes out to four great inspirational leaders who, despite their limited time, voluntarily allocated precious time to this thesis; the interviewees. Thank you Oskar Burman from Easy Studios, Rickard Blomberg from Fatshark, Remco de Rooij from Tri- angle Studios, and Björn Larsson from Legendo. We also kindly thank Kars Alfrink from Hubbub who shared a completely different light on our thesis. Despite deeming the field of pervasive and applied gaming to be of particular interest, it did not fit the scope of our study and was therefore not admitted in this final version. Finally, we would like to collectively thank Jönköping University, and especially JIBS, for giving us, being international students, the opportunity and environment to grow not only as a professional, but as a person as well. We have truly enjoyed this journey and literally could not have done it without you! Christiaan Visser & Peter Zijlstra Jönköping University, June 2012 Introduction This document depicts a master‟s thesis in IT & management at Jönköping University. Chapter one is written to introduce our research study. The background regards a clear problem statement and elaborates key concepts to better interpret our purpose. We intro- duce two research questions to help give a clear view of what is researched. Perspective and delimitations are defined to give a realistic scope and to allocate the position of our study. Chapter two highlights the methods used, where we chose to follow a qualitative study with an interpretative approach. By describing how we gather data and review existing lite- rature we hope to warrant the validity and reliability of the thesis. An in-depth literature review is given in chapter three. Structured by Osterwalder, Pigneur and Clark (2010), we discuss nine aspects of the business model as to gain a better under- standing of the industry whilst creating a framework to help evaluate practical implications in a structured way. Following the theoretical framework results an interpretation of four different case studies. These development studios have committed themselves to aid in better understanding the industry and the strategic choices made by small and medium-sized development studios. Additionally we evaluate in what sense studios can be considered innovative and what in- duces the necessity to actually innovate. Chapter five concludes our study by answering the suggested research questions. We dis- cuss implications for future studies and practitioners in chapter six: discussion. Finally, we include appendices after the six thesis chapters. The next page represents a reader‟s guide which we urge you, the reader, to consider as the presented thesis has a breadth use of specific terminology, abbreviations, and definitions. Reader’s guide This thesis is written to also be comprehended by readers not familiarized with the video game industry or game studies. Illustrated below is the list of abbreviations and definitions used in this paper. With small aid from Wikipedia (2012) we aim to give concise descrip- tions of terminology used whereas most terminology is better explained in specific sections of the thesis. Note that we purposely exclude concepts such as development studio and video game industry as they are more comprehensively discussed in the Key Concepts chapter 1.3. Abbreviation Description ESA Entertainment Software Association IGDA International Game Developers Association MDF Market Development Funds MMG Multiplayer Games MMO Massive Multiplayer Online MMOG Massive Multiplayer Online Game NDS Nintendo DS PSN Playstation Network VG Video Game XBLA Xbox Live Arcade Definition Description Amazon Example of a retailer selling products via the Internet. arcade games Used to refer to a video game that was designed to look like a classic ar- cade game (adopting an isometric view, 2D graphics, scores, lives, etc.) but instead released on platforms such as XBLA or PC. brick-and-mortar A traditional "street-side" business that deals with its customers face to face in an office or store that the business owns or rents. business model canvas Tool introduced by Osterwalder, Pigneur & Clark (2010) to describe a business model. console games Video games offered on the console platform such as the Playstation 3, Nintendo Wii and Xbox 360. contractual development Video game development performed by a development studio according to a contractual agreement with another party (e.g. investor or publisher). digital distribution The offering and distribution of video games via digital channels such as Steam, PSN and Xbox Live. digitalization The adoption of digital distribution for development studios. E-commerce E-commerce (electronic commerce) is the buying and selling of goods and services on the Internet, especially the World Wide Web. episodic content Video game content that appears in the form of episodes, usually released by the video game developer in addition to the original game. fire-and-forget The video game depicts a typical short product life cycle. As such the vid- eo game is „fired‟ on the market, played, and „forgotten‟ (Teipen, 2008). free trial The customer is allowed to try the product for free. free-to-play The video game is free to play. game design studies Studies regarding game design, which is towards designing and building a video game. game psychology studies Studies in the field of psychology regarding the implications of playing video games GameStop Example of a retailer selling products via a physical store. game Interactive product used on PC, MAC, handheld or console aimed at providing digital leisure activity (synonyms in our context include: video game title, title, and product). gamer The typical consumer of a video game (synonyms in our context include: player, user, customer, and consumer) game engine System designed for the creation and development of video games. handheld Mobile console to play video games on. For example the NDS. independent (indie) The state of being independent from other parties‟ (creative) influences in the production process of a product. in-house development Type of development with which every step of the video game produc- tion process is organized by the development studio itself (Teipen, 2008). microtransactions Revenue model depicting the sales of so-called virtual goods. mobile phone games Video games offered on the Smartphone such as the Apple: