Physical Distribution in a Digital World a Study of the Gaming Industry

Physical Distribution in a Digital World A study of the gaming industry

Bachelor Thesis in: Business Administration

Author: William Lehmus (830416-2434) Mikaela De Young (900711-4227) Viktor Sundqvist (881204-2417)

Tutor: Naveed Akhter

Jönköping May 2012

Bachelor’s Thesis in Business Administration

Title: Physical Distribution in a Digital World

Author: Mikaela De Young

Viktor Sundqvist

William Lehmus

Tutor: Naveed Akhter

Date: 2012-05-17

Subject terms: Consumer interaction, Disintermediation, Distribution, Gaming industry Horizontal integration, Net- work theory, Strategic networks, Value chain, Value creation, Value network, Vertical integration, Value constellation

Abstract

Purpose: The aim of this thesis is to explore the impact that increased availability of digital distribution has on physical distribution. The focus is on the effects that digital distribution has on the value creating processes of game developers with regard to distribution alternatives, strategic networks and consumer interaction. Additionally we examine if there is a future for physical distribution of games in an increasingly digital market.

Background: It is estimated that only the online gaming market alone will turn over more than $13 billion in 2013. In terms of market potential this means that video gaming has already surpassed the movie industry and is closing in on the music industry (Jöckel, Will & Schwarzer, 2008).

Digital distribution is gaining ground in the game industry (Cook, 2012), and access to high-speed internet connectivity is also increasing at a rapid pace. This creates a choice for game developers to adapt their strategies to the new ways of distribution. The previous view of the market was a linear value chain where developers must use intermediaries to reach an end consumer (Williams, 2002). The network dynamics appear to have changed, consumers have an impact on development and there are more complex interactions between the actors in order to generate better value.

Method: The thesis uses an exploratory qualitative research method by conducting semi- structured interviews with developers on how the distribution channels have changed. Sec- ondary data concerning the value chain, networks, and value constellations and was gathered to support the empirical background of the market.

Conclusion: The value chain has been reconfigured from the classical value chain to a value constellation as increased online availability has changed the distribution possibilities allowing reciprocal relationships and user co-production as well as disintermedation of middle-hands. Value is created for the game developers through three different paths in our own value constellation: portals, direct sales homepage, and through publisher. In all three paths consumers play an important role through user participation in the value creation through user created content and user feedback through community and fan-base activities.. Our conclusion is that the future of physical distribution in the current format is threatened by digital alternatives, and will likely be discontinued in the long run and/or radically changed to include more physical value adding content.

Table of Contents

1 Introduction ...... 5 1.1 Background ...... 5 1.2 Gaming industry – Actors and arenas ...... 6 1.2.1 Game developer ...... 6 1.2.2 Middleware ...... 6 1.2.3 Hardware manufacturers ...... 6 1.2.4 Publisher ...... 7 1.2.5 Portal ...... 7 1.2.6 Distributor ...... 7 1.2.7 Retail ...... 7 1.2.8 Consumer ...... 8 1.2.9 Arenas ...... 8 1.2.9.1 Offline sales/physical Stores ...... 8 1.2.9.2 Online sales ...... 8 1.3 Problem ...... 8 1.4 Purpose ...... 10 1.5 Research question ...... 10 1.6 Delimitation ...... 10 1.7 Thesis disposition ...... 10 2 Frame of Reference ...... 11 2.1 Value creation ...... 11 2.2 Consumer value ...... 11 2.3 Consumer interaction ...... 12 2.4 Value chain ...... 12 2.5 Value network ...... 14 2.5.1 Value network as a service ...... 14 2.6 Strategic networks ...... 15 2.6.1 Networks as a mode of organization ...... 16 2.6.2 The use of networks ...... 16 2.6.3 Negative effects of strategic networks ...... 17 2.7 Value constellations ...... 17 2.8 Vertical integration ...... 18 2.9 Horizontal integration ...... 20 2.10 Disintermediation ...... 20 3 Method ...... 22 3.1 Qualitative research ...... 22 3.2 Data collection: ...... 23 3.2.1 Primary data ...... 23 3.2.1.1 Contact method ...... 23 3.2.1.2 Interview ...... 24 3.2.1.3 Question types...... 25 3.2.1.4 Interview table ...... 25 3.2.2 Secondary data ...... 25 3.2.2.1 Review of literature...... 25 3.3 Problems & weaknesses ...... 26 3.3.1 Self-reflection on the research methods used ...... 26 4 Empirical findings...... 27 4.1 Scope and size ...... 27 4.2 Companies included in the research ...... 27

4.2.1 Massive Entertainment ...... 27 4.2.2 Paradox Interactive ...... 28 4.2.3 Boldai ...... 28 4.2.4 Anonymous interviewees ...... 28 4.3 Specific overview and details of the market and its actors ...... 28 4.3.1 Developers ...... 28 4.3.2 Outsourcing/middleware ...... 28 4.3.3 Publishers ...... 29 4.3.4 Distributors ...... 29 4.3.5 Retailers ...... 29 4.3.6 Consumers/prosumers ...... 30 4.4 Distribution strategies ...... 30 4.4.1 Current distribution ...... 30 4.4.2 Webpage distribution ...... 31 4.4.3 Physical retailers/publishers ...... 31 4.4.4 Portal distribution ...... 32 4.4.5 Downloadable content ...... 32 4.4.6 Benefits and drawbacks of download/ shelf copies ...... 33 4.4.7 The future of distribution ...... 34 5 Analysis ...... 35 5.1 How value is created for game developers ...... 35 5.1.1 Developer ...... 35 5.1.2 Publisher ...... 36 5.1.3 Portals as a value network ...... 37 5.1.4 Distributor ...... 37 5.1.5 Retailers ...... 38 5.1.6 Consumer/prosumer ...... 38 5.1.7 Disintermediation ...... 39 5.2 From value chain to value constellation ...... 40 5.2.1 Porters value chain ...... 41 5.2.2 Our model for value adding activities ...... 41 5.2.2.1 Portal distribution ...... 42 5.2.2.2 Webpage distribution ...... 42 5.2.2.3 Publisher distribution ...... 43 5.2.3 The value constellation ...... 43 6 Conclusion ...... 45 7 Discussion ...... 47 8 References ...... 48 9 Appendix ...... 53 9.1 Appendix 1- Porters value chain ...... 53 9.2 Appendix 2 – Value chain of Online-Distributed Digital Games ...... 53 9.3 Appendix 3 – Model of game engine ...... 54 9.4 Appendix 4 – Model of a Portal ...... 54 9.5 Appendix 5 – Swedish internet trend ...... 55 9.6 Appendix 6 - Interview questions ...... 55 9.7 Appendix 7 – Value adding physical content ...... 56 9.8 Appendix 8 – The changing value chain ...... 57 9.9 Appendix 9 – Linear value chain ...... 57 9.10 Appendix 10 - Our proposed model ...... 58

Acknowledgements We would like to thank the companies (Massive Entertainment, Paradox Interactive & Boldai, as well as our anonymous interviewees) and individuals who made this thesis possible by taking part in the interviews.

We would also like to thank Naveed Ahkter for guiding us through our work!

Mikaela De Young Viktor Sundqvist William Lehmus

1 Introduction The background will first introduce the game market and how technological innovations such as digital distribution affect the market. In the next part the gaming industry and its actors will be explained in detail for a better understanding. The chapter will come to its end with the problem discussion regarding the networks and the need for physical copies and the time discrepancies between market and research.

1.1 Background Jöckel, Will & Schwarzer (2008) states that it is estimated that the online gaming market alone will turn over more than $13 billion in 2013, where about half of the revenues come from in-game advertisement, item sales, subscription fees and online sales. In terms of market potential this means that the online gaming industry has already surpassed the movie industry and is closing in on the music industry. Just as the movie and music industry, computer and video games are suitable for online distribution since they are already in digital format and do not need to be converted (Jöckel et al. 2008).

“The removal of constraints through technological innovations creates choice” (Normann & Ramirez, 1994, pp 13). This enables choice for developers in the market to adapt their strategies as new ways of distributing become available. Game developers are not only releasing their products through retailers but they can also release games through other channels such as their own webpages or through online based distribution portals (Cook, 2012).

According to Porter (1985), the value chain model describes the different activities a company has to take to reach the end consumer (Appendix 1). Porters value chain has been criticized as being too fond of the traditional concept of industry, while not having the same fit for service oriented companies (Normann, 2001). Instead, network models are better at describing the exchanges between the actors in the market as exchanges include more than just products (Stabell & Fjellstad, 1998). Networks allow input from multiple stakeholders and allow for new product/service combinations and bundling, which can effectively lead to superior product offerings for the consumers. Networks can also enable more extensive interaction between different actors (Normann, 2001). In the gaming industry, utilizing the participants of the network can include actions such as outsourcing non-core activities including minor character creation, small in-game items and environments; allowing the company to focus on their core operation such as story- line creation and producing the game engine (Jarillo, 1988).

Digital distribution has certain benefits compared to physical retailing, for example reduced shipping costs as well as cutting out intermediary margins. However, there are some impediments to digital distribution related to user readiness such as personal service and the shopping experience (MacInnes, Kongsmak & Heckman, 2005). Digital distribution opens up certain possibilities for the game developers, for instance enabling disintermediation of the value chain, which basically means cutting out the middle-man (Berghel & Hal, 2000).

Increased access to the internet and broadband connectivity has led to that users are now easily able to produce and share content with other users, making the consumers a mix between a consumer and a producer: a prosumer (Appendix 2). In practice this means that users are actively being a part of the development and after-market-service of a game, through forum participation and even content customization and creation (Jöckel et al. 2008).

1.2 Gaming industry – Actors and arenas

1.2.1 Game developer According to Williams (2002) game developers are the content creators on the supplier side of the market. They create the game mechanics, graphics, story and animations among other activities needed to deliver a playable game. The game developers in turn can outsource tasks to other game studios specialized in certain parts of virtual media creation. Game developers do not only create the game but usually also supply game updates and customer service. The updates can be bug-fixes of errors in the game or even brand new content to the game. Game developers can be either independent or tied to a publisher. Independent developers have the freedom to choose how they want to distribute the game; while publisher tied developers will have to rely on the publisher to reach the end customers. Independent developers do however have to take all the risks and costs involved with game development that the publisher would otherwise cover (Ibid).

1.2.2 Middleware Creation of games today has become so costly that some developers choose to modulate their games. A base for the game is created and this module is called the game engine (Appendix 3). The middleware can be either the whole game engine or just some mod- ules of the game engine relating to for instance: the physics engine, artificial intelli- gence, renderers and lightning (Gamemiddleware 2012; OECD Report, 2005) The game engine is “written for a specific game but general enough to be used for a family of similar games” (Lewis & Jacobsson, 2002, pp 28). Creating middleware and then licensing it to others is a way for the developer to regain some of the money spent on developing the game in addition to regular sales. Similarly, other developers can license the engine and save money by not having to develop their own engine. Some developers have specialized on just creating middleware that they license to other game developers (Lewis & Jacobsson, 2002)

1.2.3 Hardware manufacturers Hardware manufacturers are acknowledged by the Organization for Economic Co- operation and Development (OECD) as a part of the value chain since they supply the hardware for which the games are being developed. Hardware includes all gaming consoles and personal computers (OECD Report, 2005).

1.2.4 Publisher A publisher’s main task is to identify and market titles. Publishers often co-operate with game developers, either by having in-house production studios or by licensing games from third party developers. Third party developers are often offered funds to help with development costs and the publisher purchases the intellectual rights for their games (Williams, 2002). The publisher is involved with: marketing, funding, product management, pricing and inventory management (OECD Report, 2005). According to Wil- liams (2002) publishing is a high risk, high profit business. This is because the rights to a game is purchased from the developer and then the publisher needs to market and get the game out to the end users through either digital or physical distribution channels. They take over the financial risk from the developer, expecting that the game will be successful enough to cover their expenses and generate a profit (Williams, 2002).

1.2.5 Portal According to Shaikh, Sahu, Rosu, Shea & Saha (2006) portals are online distributors/retailers that aggregate and sell digital copies of games. Portals can either be online based or require a software client to be downloaded, and enable the user to instantly access and download all of the games purchased through the portal from any computer. Instead of a game being tied to a single computer the games are now tied to individual user accounts that can be accessed from any computer. Portals usually provide their users with a wide variety of extra services such as recommendations based on previous game purchases and a virtual community where the users can interact. Portals also enable the developers to have control over their material and allow them to easily update and maintain their game (Ibid). The structure of a portal is shown as a model in Appen- dix 4.

1.2.6 Distributor The distributor is the connection between the developer/publisher and the retailer (Wil- liams, 2002). Larger publishers often have their own channels of distribution. Publishers use either in-house distribution or license distribution through other distribution firms. Distributors handle the manufacturing of physical copies and have the networks needed to reach the retailers. Distributors also handle the storage of produced games before they reach the retailers. Distributors can make alliance with retailers to become their exclusive distributor, forcing publishers and developers to have to go through them to reach the retailer (Ibid).

1.2.7 Retail Williams (2002) describes retailers as a physical or online store that sell physical copies to the end users. The retail business is divided up between pure game stores and large retailers that also sell games. Specialized game stores usually offer in depth service for their customers, helping them with finding the correct game for them and assisting them with any inquiries they might have. General electronic retailers often compete based on prices instead of service. Online retailers are another source from which the users can obtain the game. The game is ordered and delivered to the customer. Online stores do

7 not have the same expenses and can offer a wider variety of games than a physical store (Ibid).

1.2.8 Consumer The consumer is the end user of the games. The consumers can be divided into two sep- arate groups, “the so-called ‘hard core’ or ‘avid’ gamers and the more casual gamers” (Williams, 2002, pp 50). The ‘hard core’ gamers expect the most from their games and are often frequent buyers of games. They provide the gaming companies with feedback and thoughts as well as help create new content for games. The more casual gamers spend less time with the games and tend to buy new ones less frequently (Williams, 2002).

1.2.9 Arenas 1.2.9.1 Offline sales/physical Stores Offline sales are usually physical trading of the boxed games carried out by retailers who in turn buy their products from distributors and publishers. The benefits of offline sales include: physical presence which gives the customer a sense of security since customers can talk to the people representing the company. Familiar brand names and a proven track of records also adds to the sense of security compared to online shops, who have a harder time due to not being present in the market that long. Another benefit is the shopping experience of being able to physically walk around in the store and browse for products and instantly bring them home after paying. Some of the drawbacks include: high infrastructure costs, high costs to expand geographically for facilities, ware- house and transports. Other drawbacks include limited opening hours related to legisla- tion about working hours and costs of having open on little frequented evening or night hours (Enders & Jelassi, 2000).

1.2.9.2 Online sales Online sales can be both ordering physical copies, as well as digital download, carried out by retailers, distributors, publishers or directly from game developers. The benefits of online sales through internet based shops or portals include: access to online product information, browsing for products, placing orders, payment, and in some cases instant download of the game. Internet based sales also comes with a number of benefits such as a wide geographical reach, low costs, low requirements on infrastructure, high scala- bility and the ability to take orders at all time of the day. Some of the drawbacks include: no face to face contact with customers have effect on how long it takes to build up trust and brand name. Customers cannot usually get instant help or advice from sales people, and if a customer wants to return a product they will have to re-wrap and send it back to the store and wait for the refund to arrive (Enders & Jelassi, 2000).

1.3 Problem The increased availability of digital distribution alternatives is changing the market for physical goods. In the year of 2010 above 90 percent of the population in Sweden was using the internet on a daily basis, a number that has increased exponentially since 1996

8 when only ten percent of the population used it (See Appendix 5 for graph). The technological advancements within broadband internet connectivity have made digital distribution more commercialized. Through using the internet for distribution it enables companies to have instant access to their customers and they can keep the distribution expenses to a minimum (MacInnes, Kongsmak & Heckman, 2005). Distributing physically is both an expensive and a time consuming activity, therefore many companies now shift their distribution methods towards digital distribution. Some prefer to have a physical copy on their bookshelf while others prefer a digital one that they can access from anywhere and that cannot be lost. Retailers are losing sales to digital alternatives (Cooper, 2012; Lunden, 2012). The value consumers get from the different distribution methods differ with the individual user (Eggart & Ulaga, 2002). Retailers on the other hand can provide a customer with personal service specialized for each individual consumer which is difficult to archive online. The changes in the industry are not only because of changes in the technological platform but also in the network dynamics (Jöckel et al. 2008).

The gaming industry is growing rapidly and adapting to the changing technical environment. This makes it a good industry to study the effects that the introduction of digital distribution has on the market. Retailers are no longer the developer’s only method of reaching customers, digital solutions have enabled them to cheaper reach their customers directly, either through the use of portals or directly through their homepages. This has put strain on retailers like The Game Group plc. (Game) which in March 2012 closed 277 stores in the UK and Ireland (Cooper, 2012; Lunden, 2012; MacInnes, Kongsmak & Heckman, 2005).

Because of the rapid growth and change in the gaming industry, research in this area quickly becomes obsolete (Zackariasson & Wilson, 2012). There are multiple articles and thesis that handle the topic of distribution, disintermediation in the value chain but none to go into the specifics of the implications for developers (Berman-Grutzky & Cederholm, 2010; Jöckel et al. 2008; Williams, 2002; Berghel & Hal, 2000). The OECD report from 2005 is an analysis on the following topics in the gaming industry; drivers and barriers to growth, as well as value creation and market structures. Jöckel et al. (2008) refer to participatory media where consumers/end users are in some extent, allowed to modify, reconfigure or upgrade the media beyond its original state. They show this by adding the prosumers to the original value chain model created by Porter in 1985 (Appendix 2). Normann (2001) proposes that customers should be incorporated as a part of value creating activities; the customers can save time and costs and simplify problems. There are multiple aspects within the gaming industry that are changing and retailers are having a hard time competing with the digital alternatives.

In order to understand the potential for digital distribution and physical products the networks and the actor’s positions need to be re-evaluated, furthermore we believe that an in-depth study of the gaming developers is needed in order to understand their opportunities and reasons behind their choices of distribution. Understanding the developer’s choices is the key to understanding the future of the distribution of physical copies.

1.4 Purpose The aim of this thesis is to explore the impact that increased availability of digital distribution has on physical distribution. Our focus will be on the effects that digital distribution has on developers, distribution alternatives, networks and consumer interaction in the gaming industry. Additionally we examine if there is a future for physical distribution of games in an increasingly digital market.

1.5 Research questions 1. How is value created for the game developers in the contemporary gaming business? 2. How has digital distribution affected the value chain in the gaming industry? 3. What influence do digital networks have on developer’s choice of distribution?

1.6 Delimitation In this study we will exclude the following:

- Video game consoles (Xbox, PS3, and Wii) as their online distribution is severe- ly restricted at this point. Their proprietary distribution networks are heavily regulated for third party portals. - The secondhand market for games, because even though the physical second hand market is large, there is virtually no second hand online download market available at this point. - Illegal distribution of games, such as piracy, which we cannot adequately measure or evaluate. - We apply the research to the Swedish market, but the research can be applied to any market with a sophisticated enough internet infrastructure to support digital distribution.

1.7 Thesis disposition The thesis is written in a logical order of reasoning and begins with the frame of reference which presents a rather extensive and in-depth dive into value creation, the value chain, and value networks. These all closely tied to each other and explain how, and for whom value is created. The different value models are linked to the theories about vertical and horizontal integration as well as theories related to disintermediation which together attempt to explain how the value chain is changing with increased availability to new IT technology. The method used is an exploratory study where the primary sources are five semi-structured interviews with Swedish gaming companies. The findings are supported with secondary theoretical material presented in the frame of reference. Em- pirical findings are divided into three main categories: companies, the market and results of the interviews. An analysis of the primary and secondary data is presented in the next chapter and compared to the value chain. The thesis ends with a conclusion that the market has changed with digital distribution. Lastly, there is the reference list and the appendix.

2 Frame of Reference In this chapter the theoretical frame used for the research is presented. The chapter starts with the theories related to value creation which is a major part of this thesis. Theory behind value creation will be presented both from the supply as well as from the demand side from the market. These are then tied together with the sub-chapter ‘consumer interaction’ which introduces consumers and participants in the value creation. After that, theory on the value chain and value network models are presented as well as strategic networks and value constellations, which are similar on different tiers of corporate strategy. Finally vertical and horizontal integration and disintermediation will end the chapter.

2.1 Value creation The ultimate goal of any economic activity is to create value (Normann & Ramirez, 1994). Value is an estimate by comparing the utility benefits from acquiring a product/service less the total costs (Lancaster & Walters, 2000). The processes of creating value are often referred to as a value chain, which is a set of value adding activates that together generate value for an organization, its stakeholders and customers. By combining the supply side of the organization and the demands of the market, an organization can configure value adding activities and processes which can improve the efficiency and output of the organization (Rayport & Sviolka, 1995). To clarify, information is not value adding by itself, it is rather how the information is used and gathered. What is considered value is not only monetary resources, but also knowledge and intangible as- sets such as brand name and customer loyalty (Allee, 2000). The perspectives have changed as products and services are losing their physical aspects and becoming more virtual, leading to a new interest in the concept: value network (Peppard & Rylander, 2006). A value chain has a more logistic and linear view while a value network can run parallel with other actors/activities and create more of an infrastructure consisting of multiple instances. To use Allee’s own description: “a value network generates economic value through complex dynamic exchanges between one or more enterprises, customers, suppliers, strategic partners and the community” (Allee, 2000, pp 1).

2.2 Consumer value The value of a product is determined by the buyer purchasing criteria (Porter, 1985). Variations in the buyer purchasing criteria are what lead to differentiation in the market; the better the match with the product and the buyer, the better price of good can be attained. The value of a product for a customer is an appreciation of the additional production that the product can give to the customer, or the decrease in cost. Grewal, Mon- roe, Krishnan (1998) believe’s that customer perception of value is due to the physical packaging, technical support and the services that are included. Customer perceived value is the difference between perceived benefit and the cost, it is a cognitive process and cost is not necessarily a monetary value. The perceived value changes when the customer compares it to competition or a superior alternative (Eggart & Ualga, 2002).

2.3 Consumer interaction Companies could change their focus from relieving a customer towards enabling a customer, and seeing them as a co-producer. Enabling is expanding the scope of what the customer is able to do rather than a focus asking them what they want. Customers can form their own community constellations where their interactions and cooperation are more of barter transactions than business transactions, but they still exchange value (Normann, 2001). Value which is strategically incorporated into activities of an organization though the value chain (Lancaster & Walters, 2000).

Jöckel et al. (2008) acknowledge consumers as participants in of the value creation, making them a mix between a consumer and a producer; they call this new category of participatory consumers: ‘prosumers’. In practice this means that users are actively being a part of the development through beta testing, supplying suggestions and feedback as well as after-market-service through participation in social media and forums related to the game. Some users even take their participation as far as creating content for the game to personalize the game experience. Game content can come in the forms of user created modifications (mods) and add-ons (Jöckel et al. 2008).

2.4 Value chain The value chain is an analysis tool that divides the organization into activities that are strategically important to maintain or create a competitive advantage and to understand which activities add value and cost (Lancaster & Walters, 2000). The activities that generate value generally have a strong focus on costs, cost drivers and they evaluate whether the monetary value created surpasses the monetary cost. The value chain en- compasses the organization, its suppliers and customers as part of the activities that create maximum value for the consumer and satisfies stakeholders. To utilize the value chain for competitive advantage an organization needs to identify their target customer’s priorities and adapt their processes according to them (Lancaster & Walters, 2000; Porter 1980).

Porter (1985) believed that the history of a company affects its processes and activities. Value chains exist everywhere: in all organizations, in consumers’ homes, in the market and industry. The linkages between the different participants are what connect the different value chains together. Correct exploitation of linkages, both from within a firm and outside of the firm contributes to competitive advantage. Linkages within a firm are the different processes and if they are difficult to imitate, they become valuable resources that can greatly improve the output and competitive advantage of a firm (Porter & Millar 1985; Porter, 1985).

There are nine identified activities, though they may be independent in the organization, are tied together through linkages as one activated process affects the next, which in turn, affects the outcome.The activities of a value chain can be divided into two categories, the first one is the activities that create value for the customer, the second set of activities are those that improve the performance of the first type of activities, also known as the primary and support activities (Porter & Millar 1985). The five primary activities are those involved in creating the product/service until the finished good is in customers hands, the processes are generic and can be applied to almost anything. The first activity is inbound logistics, which is about gathering and storing all parts needed to construct the product. Operations are transforming product inputs into finished products. Out- bound logistics covers everything regarding packaging and shipping the finished product. Marketing and sales enables and induces a customer to purchase a product. The last activity is service, which is to enhance or maintain the product/service, for example in- surance or a product warranty accompanying the product. The five primary activities are a collection of inbound logistical operations, main operations and the outbound logistics. The support activities encompass the entire firm, but they can also be applied specifically for the primary activities, with the exception of infrastructure. With each activity there are three subcategories of activities: direct activities which are involved in the production. Indirect activities which enable the direct activities and finally quality as- surance which controls the activities and products (Porter, 1985).

Each activity has a physical and information component. How they are integrated and what ratio of each component is integrated is individual to the businesses. The two functions: human resource management and information management have the greatest in- fluences on the value chain. These functions are involved in every activity in the value chain together with some sort of technology (Porter, 1985).

The model of a value chain is migrating from a physical to a virtual version. Different parts of a value chain are specific to different markets and organizations, a value chain can be individual to firms. Jöckel et al. (2008) proposed an alternate value chain for online distribution of digital games. Their basis is that consumers at the same time can

13 be producers making them ‘prosumers’. Consumers are allowed to alter the content but not parts of the underlying software such as the physics engine and the source code. Their reasons for modifying the content are usually for their own value adding to increase the experience of the game, which is often shared with the gaming community surrounding the game. That is why there is a loop between the prosumer and content and value added services. These linkages are what form a network and the value of the service that a network can provide should not be underestimated (Jöckel et al. 2008).

(Jöckel et al. 2008)

2.5 Value network The value network like the value chain can be within an organization and an organization can be part of a value network. Therefore an organization is not a value network; however it can provide or hold a service network, linking individuals to each other. An organization however, can also be part of a value network which will from now on be referred to as value constellation (Stabell & Fjellstad, 1998).

2.5.1 Value network as a service A value network can be a service, like a phone, the value of the service is determinant of which the service can provide linkage to and if the customer can reach their desired end. A value network is a system of interconnected layered activities designed to mediate for a consumer, if faulty the system breaks down and loses its value for the consumer. The value network functions also as mediation to other corporations, not as a supplier or customer but as a tool for co-operation. A value network also has to work with both horizontal and vertical integration and its strategic position determines its focus. Participants in a value network need to have relationships with both their competitors and consumers; a co-operative relationship is the nature of a co-producing system (Stabell & Fjellstad, 1998).

According to Stabell & Fjellstad (1998) the three primary activities of a value network are to first; gain customers though promotion and managing the contracts to ensure received value. Secondly, service provisioning which includes maintaining, verifying and

14 terminating links to customers. It is important that the links are confirmed and secure for the customer. Lastly maintaining infrastructure operations which are the activities required to keep the service functioning, which vary depending on industry and service provided (Ibid)

There are two value opportunities with the service; a customer who uses a mediating service for both the opportunity of being able to link up to other services and also when using the actual service itself. Therefore it is important to have compatibility with a large proportion of the market, to ensure more users (Stabell & Fjellstad, 1998). Katz & Shapiro (1985) found a relationship between the size of a firms networks and the impact of their willingness towards compatibility, large networks tend to be against compatibility while smaller networks tend to be for product compatibility as it extends their network. Smaller networks become more popular if they have higher compatibility, however larger networks do not have the same need.

The value network treats all users as if they are customers even if they sometimes are suppliers, because all users are intermediaries of a service (Stabell & Fjellstad, 1998). A value network generates positive externalities through the amount of users it has; as the demand of the network increases it positively affects the service (Shilling, 2002; Katz & Shapiro, 1985). As the value of the network is determined through the amount of users, it is often initially setup as a free service to lure in users and then eventually it might require fees, which at that point will hopefully not offset the value generated for the consumer due to higher transaction costs (Katz & Shapiro, 1985). Shilling (2002) further develops that a large installed base leads to a larger user network which attracts developers of complementary goods which leads to a larger amount of options available to the consumer. Furthermore, a larger base of complementary goods attracts consumers to a network which is directly correlated to a networks perceived value. As Stabell and Fjellstad propose ”Size and composition of the customer base are therefore the critical driver of value in the value network” (Stabell & Fjellstad, 1998, pp 431), indicating that the size of the network is not the only value driver, but also the composition of the customer base emphasizing the importance of correct marketing segments and user scope. Another important aspect to consider is the relationships between the firms in a network and how they can be used to a strategic advantage.

2.6 Strategic networks ”Networks are seen as complex arrays of relationships between firms” (Jarillo, 1988 pp 32). Competition today is more about positioning a company in a network and in the market than attacking competitors. Jarillo (1988) describes strategic network as a long term arrangement between a company and other companies in the same market, which enables them to gain a comparative advantage against companies outside the network. Companies in a network are helping each other to gain an advantage but they are not completely dependent on the other companies. Essential to the strategic network theory is that one company sets up and maintains and works as a central hub in the network (Jarillo, 1988). It is difficult to place networks in the basic business models as firms are usually described as complete entities, operating in an environment usually defined as everything that is not the firm (Jarillo, 1988).

2.6.1 Networks as a mode of organization Jarrillo (1988) states that in a perfect market there would be no firms, instead the market would consist of small entities that all specialized in their own small part of a product, like workstations in a production line. By having a company focused on and specialized in producing one sub-component, the total production costs will decrese. This is however not possible, as transaction costs between all parts would make the products too expensive. Same goes for companies in a market, having other companies producing all the subcomponents of a product will be more expensive than producing the components on their own. Transaction costs at this stage are: “opportunism, early-mover advantages and other strategic decisions” (Jarillo, 1988 pp 33). Companies usually avoids subcon- tracting vital parts of their production as this would leave them too vulnerable and dependent of the subcontractor.

Networks arise “if an entrepreneur is able to lower the transaction costs” (Jarillo, 1988 pp 33). This lower transaction costs enables the company to outsource a component of their production to another company without making the production process more expensive. The company can also focus their attention on perfecting their own production process making it more efficient and less costly. The assumption that entrepreneurs can change the transaction costs of a company is the base of the concept of strategic networks (Jarillo, 1988).

Strategic networks are usually loose, long term agreements between a company and its suppliers. Contracts are seldom made because the cost of switching between different suppliers is usually high due to specialization of the supplier. The supplier specializes and learns what the company needs from them. This specialization is time consuming, which makes switching supplier expensive. This codependence between the companies is what links them in a strategic network even though no formal contract is written between the two parts (Jarillo, 1988).

2.6.2 The use of networks According to Jarillo (1988) in order to understand the benefits of networks as a mode of organization, companies first have to be broken down into smaller pieces. As described above Porters (1985) value chain is a useful tool for this. The ability to optimize every part of the value chain is what makes networks valuable. Every part of production has its own explicit production costs also a transaction cost that adds up to the total cost of producing a product. If an entrepreneur can cut down on these explicit cost to the point where it is no longer cheaper for the company to produce the component itself, the company will subcontract out that part to the entrepreneur. The value for the company has now increased passed what they could achieve if they produced everything themselves. As more and more companies are able to underbid the main company more parts will be subcontracted to them, resulting in a raised value of the main company. This will generate a competitive advantage for the hub company against companies that are not in the strategic network (Jarillo, 1988).

Strategic Networks allows the company to focus on those parts of the value chain in which they have a competitive advantage. Specializing on the essential parts of the

16 company will further increase their competitive advantage as no focus is wasted on parts that are can be done better by others. Other companies in the network specialize in producing compentents of which they have a compentitive advantage over in producing these components. Strategic networks are built upon trading terms between the companies. These terms can be about price, quality, quantity, delivery times and more. As soon as these terms of trade change, both companies are free to look for better alternatives. This helps make the terms of trade fair and no company will want to use their position in order to benefit on the others expense. Having an integrated production gives the company less flexibility and keeps them from focusing on the core parts. When comparing production made by an outside source to producing it internally, the company needs to look at not only the production cost but also how it affects the efficiency of the entire company. That cost is often why companies decide to create these strategic networks (Jarillo, 1988).

According to Jarillo (1988) to create and sustain a strategic network, the network has to; just like a successful company, be efficient and effective. A company is effective if it is able to reach its goals and efficient if it does so with less work put in than what value is generated. So in the case of Strategic network, the companies must reach their goals with less effort than the original company would have to put in. “The critical component that makes a relationship take place of a strategic network instead of a typical market is the high degree of perceived opportunity for joint value creation between the two organizations” (Jarillo, 1988 pp 36).

2.6.3 Negative effects of strategic networks Strategic networks can in some cases have negative effects on the company. If the company has a niche and is proud of producing their products by themselves then subcon- tracting would then lead to a damaged image and a potential loss of costumers (Jarillo, 1988).

2.7 Value constellations A value constellation is complex interaction among actors in an industry, where the actors partake in value adding activities to in the end increase the value outcome, the relationship can be reciprocal relationship and co-productive or just actors bundled together in a new way to create a value offering (Normann & Ramirez 1994).

Value constellations are partly about reconfiguring and re-organizing value creating activities into new configurations and new constellations, often much more complex and hard-to-imitate than normal value chains or networks. According to Normann (2001, pp 107), creating a value constellation is to “Identify economic actors and link them together in new patters which allow the creation of new business that did not exist previously” or to “radically change the way certain types of value are created” (Normann, 2001, pp 107). A value constellation is not just about merely reconfiguring activities, but also about combining activities and actors to create a new output such as involving customers in the process (Normann, 2001). Value in such constellations become more

‘dense’ in the sense that more value is packed into the offerings and is then is more superior to other offerings (Normann & Ramirez, 2000).

The outcome is not necessarily a singular product, but also the services that surround the product and complementary goods which increase value for the end product. Normann & Ramirez (2000) explain how companies such as IKEA successfully have reconfigured their whole value network beyond its initial state and purpose to become more of a value constellation, involving both vertical and horizontal integration into the value creation activities. They shifted their activities from supplying the costumer a good, until they enabled the customer to create their own end product (Normann & Ramirez, 1994). The customers can buy high-quality-low-cost furniture if they are will- ing to become a part of the value chain by having to pick up, transport and assembly the products by themselves. The value creation carried out by customers is simple, through supplying them with free pens and notepaper and tape measures as soon as they enter the shop. The shops are designed to make it easy to buy complete solutions for a whole room, and free trolleys are supplied as well as access to lend or buy automobile roof- racks at-cost for transportation. Even the suppliers have access to IKEA’s own technical center which helps their suppliers with training, contacts and even lease of modern production equipment, making them not only suppliers, but also customers (Normann & Ramirez, 2000).

The format of the product or service offering is what changes the value input from the firms. To achieve a specific end goal inputs are combined in new ways, or reviewed in new ways. IKEA changed their baseline view from production to customers which al- tered their strategy. Consumers are considered informed and place higher demands and therefore their input is important into the value creating process. A firm should review the returns that they get from consumers (Normann & Ramirez 1994). As you can see, the different actors involved co-create value together, customers take part of for example a logistical process and gain other benefits in return. This reciprocal relationship can result in value created in several ways as: a monetary way, knowledge sharing or a risk sharing change. In the gaming industry the risk changes between developers and producers when they co-produce, they move the risk from pure developers to a producer as well (Normann & Ramirez 1994).

Due to the complexity of value constellations Normann & Ramirez (2000) argues that it is the offerings themselves that compete, rather than the companies behind the activities. As the variation and complexity of the offerings increase, so does the requirements on the relationships necessary to create them. Often complex offerings are co-produced by the involvement of suppliers, business partners, allies as well as customers, creating a value-system where the final customer is the ultimate arbiter of success or failure (Normann & Ramirez, 2000; Normann 2001). A value constellation can be used through outsourcing and strategic integration of different activities for an organization.

2.8 Vertical integration Vertical integration is the diversion of activities between an organization, its suppliers, and buyers (Porter 1980). Vertical integration is the process of make-or-buy decision, a

18 way to increase the value adding margins with different kinds of activities. An organization can diversify their activities and function internally or externally through merging and acquiring or outsourcing, the organization is still in control of the actions. Further- more, a firms integration should be made to suit their strategic needs (Harrigan 1985). Reasons for outsourcing may be that they are unable to do it themselves, others knowledge/production may be superior, it may be more cost efficient to let others do the activities, but the firm is still in control of activities. Vertical integration is not the same as a market exchange or a contract; it is a deeper relationship (Porter, 1980).

Firms may use vertical integration to create entry barriers by restricting trade for new entrants. Economies of scale is not the dominant reason when companies make a make- or-buy decision, it is the high transactions costs which prevent them. A firm can decided produce their own parts and reap the benefits of economic of scale as their supplier could, however, designating the resources to do so results in opportunity loss which is the high transaction cost (Argyres, 1996). In contrast vertical integration can also be applied to overcome barriers of entry, joining ventures, gaining new knowledge without having to sacrifice large resources to obtain them (Harrigan, 1985). Harrigan (1985) proposes that there are different stages of integration and these stages are dependent on the number processes. The different stages can integrate in two different directions; backwards which is upstream integration, and forwards which is downstream integration. Upstream integration is your supplier, while downstream integration you supply to. The integration can also vary in breadth, which is the activities that a firm performs simultaneously, in-house during a stage of integration. Breadth integration if overused can cause loss of economies of scale because there are too many different products and not enough volume of each produced to be cost effective. It can also be the loss of the opportunity from buying a product at a cheaper price from others. Further variation is the degree of integration a firm has. If a firm purchases most of its components it must have a good fit with the different activities, other units within the chain should have the same size or else they have to supply to others to fix their capacity, otherwise they could else excess or deficit production and be more harmful than costly in- house production for themselves. Thirdly, the form of integration can vary, a firm does not need to own or have complete control over an activity to have a functioning integration. There are various methods for control to the extent that will suit a firm's strategic goals with vertical integration (Harrigan, 1985).

Typically the form and extent of integration will vary on several factors. Vertical integration and the degree in which is its incorporated is affected by several economic and market factors. Firstly the phase of the industry, if it is in its infancy or mature phase affects the need for integration. A firm needs to decide if it will be a first mover or if it will avoid the early risks in favor of a later entry security but then with barriers. At the early stages a high degree of vertical integration can be difficult as the market can be volatile and there may be need to restructure activities for a firm. Further reasons is that the output is not high enough for a firm to specialize in a specific production which leads to that firms vertically integrate and diversify their activities rather than purchase (Argyres,1996).

Secondly, the volatility of competition will affect integration. A less competitive environment means competitive pricing which can be good for purchasing because it transfers your risk to others. If the environment is hostile then integration is risky due to higher possibility of price wars, a higher degree of competitiveness leads to volatility and uncertainty in the market as competition is fighting for market share (Harrigan, 1985).

Thirdly bargaining power affects the willingness to transfer activities or risk ownership as the firm is in a better position to negotiate than other firms. The firm with the power can outsource low value adding processes. The degree of bargaining power is dependent on 3 market conditions; how high the costs of switching suppliers/customers are, the availability of suppliers/customers in the market and what degree the competitors have upstream or downstream integration (Harrigan, 1985).

Fourth, the strategic objectives of the firm will naturally affect the interaction. If the market is mature, forward strategic integration will help to penetrate the market. De- pending on the strategic needs the company can be flexible or inflexible to integrate and add value activates as knowledge, integrity and quality. The level of flexibility the strategy has affects to effect of integrations and which integration strategies can be used (Harrigan, 1985). A different integration strategy is to horizontally integrate into new market.

2.9 Horizontal integration Horizontal integration is when a company expands its operations with the help of the surrounding environment, either through releasing existing products in new markets or through strategic mergers with similar companies in the same industry (Adelman, 1955).

Horizontal integration in the form of mergers helps the company to gain a position of power within the market while on the same time decreases the costs by utilizing the best parts of two production networks. Being a stronger actor in the market enables the company to put more pressure on its competitors and gives them the advantage of being a bigger actor in that market (Adelman, 1955).

Distribution of existing products in new markets is also a form of horizontal integration. New markets are not only different geographical markets but anywhere where the product has not been distributed before (Adelman, 1955). New products in a new market can lead to disintermediation in the old market.

2.10 Disintermediation “One of the greatest benefits of electronic commerce occurs when physical processes and products are replaced with digital ones” (MacInnes, Kongsmak & Heckman, 2005. Pp 1). The boundaries of organizations are becoming harder to define as technology allows them to create new links between them such as electronic data integration, electronic markets, strategic alliances and networked organizations. As new organizations and alliances arise from these links, the value chain also transforms. These linkages be-

20 tween companies enables mediating roles such as distributors, retailers and wholesalers, but with increased IT-availability and broadband connectivity, producers can now reach customers directly by eliminating, or replacing intermediaries (Kling & Wigand, 1995).

Today, customers and suppliers are often directly linked without agents or intermediaries. Value networks such as online market places utilizes common carriers such as game portals and allows for low cost, almost instant, mass distribution to large target groups (Kling & Wigand, 1997) “In its current use, it applies to any and all contexts where one eliminates the middleman. Such environment is said to be disintermediated” (Berghel, 2000 pp 1)

3 Method The research process of this thesis will be explained in the following chapter. The method explains how the research was conducted, processed and validated. An important part of the method is detailed descriptions of the steps taken to find and process the empirical material. A number of sampling methods were considered to ensure that the chosen methods would result in as accurate and relevant research as possible. Based on the research questions, we chose an exploratory research method. The exploratory method allows for deeper understanding of the problem through in-depth interviews with people involved in game- development and –publishing (Quinn, 2002).

A holistic view of how the value chain is created in the gaming industry was needed to know what data to collect, and how to gather the information. A qualitative research study was undertaken through collecting primary information in the form of interviews with people working in the business regarding their strategies. Secondary data was gathered through articles, and the homepages of both game developers and distributors. Previous academic research was also analyzed to gain information on the current status of research within the field.

3.1 Qualitative research Qualitative research is exploratory; it is the science of observation and interpretation. Intense studying of a relatively small number of observations in depth will give a better perception of the problem. The method is used for exploratory research, when the researcher is not sure of what variables to examine. Depending on the information required, the research methods can be adjusted through utilizing different methods of data-mining and information gathering such as interviews, field-work and observational approaches (Quinn, 2002).

Qualitative data depends very much on the individual conducting the investigation; relevant background experience help prepare the minds to correctly investigate the data, as well as to make educated assumptions about the empirical material. Qualitative data is also sensitive to the objectivity of the authors. The data is then interpreted by the authors and Personal experiences can cause bias depending on the selection of information (Quinn, 2002).

It is necessary to have a holistic perspective when researching the video game market. This, because the value and networks of game distribution are interdependent and cannot be reduced into a few variables (Patton, 2002). In order to understand the success of different distribution methods one must understand the context in which they occur. The conditions have changed since the introduction of online distribution platforms in the early 90’s, which is why a holistic view is needed. The qualitative study will go in depth about the aspects of value chain creation as disintermediation in the gaming market as well as, examining the corporate strategy revolving around these issues.

According to Johnson (1997) there are three ways to ensure validation to the data. De- scriptive validation, which is witnessing descriptive events, observations, which implies that if more witnesses are present it will lead to a more accurate representation of the ac-

22 tual occurrence. To ensure that our primary information is correct, we intend to conduct several different interviews based on the same questions.

Interpretative validity refers to the interpretation of the descriptive events; the participant’s reactions to your interpretation can function as a measure of accuracy. To improve the accuracy of an interpretation outside sources can read though the interviews and confirm events, however as we three people are collaborating we already have three different points of view from different backgrounds and this should result in a non-bias interpretation (Johnson, 1997).

Theoretical validity, concerns the fit of the theories and the gathered data. There is a risk that a researcher eager to confirm their own theories can select or ignore important information to be able to confirm their hypothesis. To counter that peer reviewed literature and negative case studies will challenge our research so that there is an actual fit between the theories and the collected information, rather than in an imaginary or forced fit. To counteract that, the process of data collection will also be described in detail in the following part, this ensures so others can replicate and validate the research (John- son, 1997).

3.2 Data collection: Primarily text analysis is derived from the sources through interviews and the research is supported by secondary theoretical and empirical data.

3.2.1 Primary data The primary data was collected from direct sources of people who make decisions concerning game distribution in companies. These people have the relevant insight to give appropriate responses. The first step was to establish a criterion for our selection of companies. They should be Swedish game developers; they should develop games for PC and not flash games, or free games. After establishing the criteria we found a few lists, gamedev.se, and ‘Swedish Publicly listed Game Companies’ from Nymission.se. Following the list, every company was evaluated through a visit to their homepages to see if they fit the profile of the established criteria, through this a new list was created. The first version of the complied list had 18 optimal companies varying from firms of 1- 3 employees to large organizations such as EA, DICE and Valve. Our own previous experience has shown a strong reluctance from large corporations to participate in thesis projects. Re-evaluating to a more realistic point of view, there is a low probability of some companies to become engaged and help out, and the list changed into more ap- proachable 14 company list.

3.2.1.1 Contact method Contact was initiated through a standardized email which informed the receiver of the purpose of our research, our background and how the research will contribute to them. The information would be gathered though interviews. Some contacts required several e-mails and some phone calls, but once a reply was received either we sent the questions beforehand for them to examine or we just set up a time for an interview. E-mailing the

23 questions in advance allowed the participants to prepare themselves to supply better formulated and thought out answers and also allowed them to redirect us to somebody of better knowledge of the subject, if necessary. Emailing them the questions beforehand did however lead to that some interviewees decided to answer the questions and email them back to us instead of going through with the interview.

3.2.1.2 Interview The difference between quantitative interviews and for example a survey, is that the participant is considered to be a meaning maker, a person with significant input (Jaber, Gubrium & Holstein, 2001). The purpose of the interview is to gain a personal interpretation and not simply a list of facts. Qualitative interviews are intended to be exploratory and open ended questions are better suited for the purpose of simultaneously guiding the subject but also to let the interviewee interpret the questions as they see fit (Jaber et.al 2001). The questions are based on a relevant theoretical background ensure suitable results. They are also varied to cover all relevant aspects such as disinter-mediation and different distribution methods. The questions are to be simple and easy to understand but still accurate and informative to help us reach a conclusion. The interviews were semi-structured with open ended questions allowing for the interviewee to freely elaborate on the questions while being pointed in the right direction through the questions. Examples of open questions asked were: -How do you distribute your games today? With the follow up question, -Why? Questions were grouped into three different categories regarding; strategy, value creation and disintermediation (see Appendix 6 for the questions). Furthermore, it is also important for the interviewer to remain flexible during the process as new information may change the questions and render some obsolete. Some interview questions might have to be explained further and then it’s important to do so without forcing an answer onto the interviewee (Jaber et.al 2001). Interview may bring up sensitive information of a personal or professional matter, it is important that all parties are informed concerning what the interview will involve, so that there is no confusion later. A consent form may be needed also anonymity agreements to protect the interviewees and the delicate information.

The interviews were carried out through phone or Skype which allowed a broader interpretation of their tone of voice. The tone of voice can give away clues as: confusion, hesitance, reluctance, uncertainty and also positive tones. The tone of voice helps de- termine whether or not the interviewee needs a further explanation of the question or if they have more to add. It also helps avoid invalid answers that can occur when the interviewee decides to answer a question without fully understanding the question. Unfor- tunately some two of the interviewees didnot have time for phone interviews, but instead answered the questions through e-mail.

Since all the interviewees were native Swedes, the interviews were carried out in Swe- dish and their answers were then translated to English. Caution was taken during the translation to avoid distorting the information.

3.2.1.3 Question types Except for the questions categories of strategic, value creation and disintermediation the questions can be categorized by hard or soft questions. Some questions start with the phrase ‘what do you think’ and are categorized as soft questions, meaning that there is no definitive answer to those, but rather requires the respondent to freely elaborate on the answer based on his or her Personal experience and beliefs. While the hard questions consists of answers such as ‘how many people are working in the company’ and ‘has your distribution strategies changed with the availability of online distribution channels’, which can easily be answered by most representatives interviewed. A soft question can result in a broad scope of answers which are more of a personal opinion. Moreover, a soft question can result in an insight from a professional within the industry rather than an insight of a professional concerning their firm’s activities in the industry, one can observe their unrelated Personal opinion detached from that of their firms.

3.2.1.4 Interview table

Name Company Title Date Method Dura- tion

Martin Hultberg Massive Entertainment Head of communications 2012-04-19 Email - and user research

Suzana Meza Paradox Head of public commu- 2012-04-24 Phone 32 min nication and marketing

Thomas Ahlström Boldai Chairman in charge of 2012-04-23 Skype 26 min business and marketing strategy

Person Y - - 2012-04-17 Personal Com- 54 min munication

Person X - Executive in the gaming 2012-05-02 Email - business

3.2.2 Secondary data The observations made from the primary data achieve validity through the secondary data, while the theoretical background of the thesis gains validity from peer reviews on the articles used. The secondary data is the empirical study background; it is the evidence of the problem which is viewed through magazines and gaming websites and ac- ademically viewed through literature concerning value chains and strategic networks.

3.2.2.1 Review of literature The literature was chosen based on what will contribute to answering the research question. Literature found in academic journals and books function as a basis for the theoretical framework which purpose is to support and challenge the qualitative information.

The literature was gathered from the Jönköping University library but also journals and articles from other universities through the University proxy server. Google Scholar was the primary search engine used to find journals and literature. Some non-academic articles contained exceptional research with valid sources for this thesis. Results were sort- ed based on relevance and peer reviews. Keywords for searching theoretical background include: Value creation, value chain, value networks, decision making under uncertainty, intermediation/disintermediation theory, networks, strategic networks, and gaming as well as combinations of each. Some empirical material had to be recent to capture current or historical trends for the background; gamastura.com contains many articles about gaming which are relevant for this thesis. News announcements from the game developer’s websites also gave important information regarding their distribution strategies which we then could ask about in the interviews. Basic background of the market was gathered through the developer’s websites as well as other sites and online news magazines covering the topic.

3.3 Problems & weaknesses There were some difficulties with the primary data gathering. For instance: Our first interviewee had been involved in developing a major game title as a 3D-artist, but could not basically reveal any information about the title, nor disclose much information about the company, since he had signed a confidentially agreement which prevented him to disclose any information regarding their work. This meant that some questions re- mained unanswered at the end of the interview, but we had still received a lot of good information about the market and its actors.

Another problem was the lack of updated registries of Swedish game developers; many links to the company’s websites were broken. Some companies simply didn’t respond to our attempts to contact them through e-mail, to negotiate this problem we contacted more companies than actually needed, to get a sufficient number of interviews. The companies that did not answer on the first e-mail were contacted a second time through e-mail, and also through calling them, though many phone numbers stated on their websites were invalid or not working.

3.3.1 Self-reflection on the research methods used In qualitative research methods there is always a risk of personal bias based on the researcher’s previous experience. We believe that the risk of bias in this thesis is low since we are three people writing it, all with different backgrounds and experiences. Should bias occur, it will be identified through cross-examination of each other’s con- tributions and then eliminated through comparing gathered empirical data with secondary data, through critical reading and analysis.

During the first interview, we became aware that we will not be able to receive answers on all questions from all interviewees, depending on if they were prohibited to share certain details due to a confidentially agreement with their employer, their position in the company or their knowledge of certain areas of the business. Overall though, we believe that the answers we received were relevant and helpful for our research.

4 Empirical findings To get an in-depth understanding of the strategic options available for Swedish game developers, five persons representing five different game developers where interviewed and questioned about their strategies and the reasoning behind their ways of distributing games. The companies represented in the research include:

1. Massive Entertainment 2. Boldai 3. Paradox Interactive 4. Anonymous company #1 (Person Y) 5. Anonymous company #2 (Person X)

Some interviewee’s did not want us to publish their, nor their employer’s names. To re- spect that some primary research data will be referred to ‘Person Y’ or ‘Person X’. The section below will summarize the empirical information gained from the primary sources and secondary sources categorized by subject focus.

4.1 Scope and size The size of the companies interviewed spanned from three people in smallest company, to about 230 people in the largest company. The companies’ activities can roughly be divided into four categories including app-creation for mobile devices, computer games, video games for X-box and PlayStation 3 as well as middleware. The interviewees experience from game development include: pre-production of major game titles, small independent game developers, programmers, business developers and 3D-artists.

4.2 Companies included in the research Below are the companies included in the research. Two of the interviewed companies represented in the primary sources wanted to remain anonymous.

4.2.1 Massive Entertainment The game studio Massive Entertainment is a part of Ubisoft Entertainment and employs about 230 (Hultberg, 2012) people from over 20 different countries (Massive Enter- tainment, 2012).

The company was founded 1997 in Ronneby, Sweden, by a group of entrepreneurs directly out of university. They were initially funded by capital from venture capitalists, but early on decided to go for internal financing. Their first game Ground Control, released in year 2000 won a number of both Swedish and international game awards including multiple types of ‘Game of the year’ awards (Massive Entertainment, 2012).

In year 2008, Massive Entertainment was acquired by Ubisoft Entertainment (Massive Entertainment, 2012) which is a global distributor of video- and computer -games (Ubisoftgroup, 2012).

4.2.2 Paradox Interactive Paradox Interactive is a Swedish gaming company founded in 1998. They are world re- nown for their strategy catalogue and hold a strong presence in both Europe and the United States. Beside developing and producing their own games, Paradox Interactive has close cooperation with three game developers and work as a publisher for their games. Paradox has offices in both Stockholm and New York (Paradox Interactive, 2012).

4.2.3 Boldai Boldai is a recently started middleware company within an incubator program; it consists of three people who are experienced in game/software development whose purpose is to change the market with new AI technology. They produce software that allows developers to construct games without having to know programming; this software runs on different platforms such as smartphones, PC, and Mac (Boldai, 2012).

4.2.4 Anonymous interviewees Anonymous interviewee #1 (Person Y) worked as a 3D-artist for a gaming company but did not give consent to use either the interviewees personal name or the name of the company.

Anonymous interviewee #2 (Person X) has allowed us to reveal that he is an industry executive but prefers the identity of self and the company he represents to remain anonymous.

4.3 Specific overview and details of the market and its actors

4.3.1 Developers Developers have several ways to construct a game other than developing it all themselves, they can outsource and they can buy licenses from middleware producers. The developers are those who have the highest proportions of earning when selling a game, however they also bear the most risk. Developers can either operate indipendantly or work together with larger publishers (OECD Report, 2005). The role of the publisher and the developer are interconnected, often publishers have in-house developers, or the developers need help of the publishers to reach out to the end customers. The development of a game is a gamble because it requires a large commitment of resources and that is why co-operation occurs. The reason for co-operation with a publisher is to min- imize risk or to gain access to the resources a publisher has; such as monetary- or knowledge -support (Ahlström, 2012).

4.3.2 Outsourcing/middleware There are often multiple instances of game studios involved in large production. Larger game studios can outsource parts of the production to direct their own resources towards the core activities. The design of for example, phone booths, trashcans or minor characters can be outsourced to other companies are parts that are expected to be in the game

28 but the shape and design of them is of minor importance. Outsorcing enables the company to use their time more efficient without increasing the cost of development too much. There are many game studios specializing in developing this type of content for other larger game developers (Person Y, 2012).

4.3.3 Publishers Publishers can acquire games from either in-house development or from purchasing licenses from independent developers. The publisher undertakes a large role in the distribution process and is often large companies with large resources. A publisher minimizes their risk of a producing a title through having a wide spread of different titles (OECD Report, 2005) Publishers who have in-house development carry the risk of development differently than a publisher who does not have in house development and just has to identify potential games rather than initially constructing them. They can do the funding of a game, the marketing of a game, producing a game either through outsourcing to production companies or in-house production. “If the publisher likes the game they can ask the company to expand and provide a lot more content, in return they will compensate them economically to cover the costs of developing the extra content” (Ahlström, 2012). Once a publisher has acquired the game, they make all of the decisions and the original developer has no say in it (Ahlström, 2012).

In the past a developer had to be in contact with a publisher in order to reach a market. A lone developer had no chance of contacting a retail chain or to raise the funds to produce a physical copy of a game. The publishers were a pool of tacit knowledge and had networks that developers needed (Meza, 2012).

4.3.4 Distributors The distributors are the link between publishers and retailers; their main area is the sales agreements and the logistics. The distributors have connections to retailers and vary in production size and facilities but are generally large and do not cater specifically to one company or industry (OECD Report, 2005). Publishers can have in-house distribution, or license the distribution of physical copies (Meza, 2012).

4.3.5 Retailers Retailers are physical or web based stores that sells physical copies of games, hardware and accessories. Today, many intermediaries that were previously vital in the value chain such as distributors and retailers are no longer necessary (MacInnes, et al. 2005). Physical copies has previously been the main sales channel for developers. Retailers such as the UK based retailer Game which was forced to close 277 stores in the UK and Ireland due to declining sales (Cooper, 2012; Lunden, 2012). Physical copies are today sold as CD’s or DVD’s, but they both are fragile formats which can easily become scratched or damaged, suffers from slow loading times and can easily be lost or dis- placed (Ahlström 2012).

4.3.6 Consumers/prosumers The consumer is the final user of the product, but they can also be a part of the content creation through user created content (UCC). Users can engage in similar activities content creation as the game developers and customize their game experience through UCC which they then can share with other users (Jöckel et al 2008).

There are even games that have started out as mods of other games, such as the game ‘Counter-strike’ which initially was a mod to the popular game Half-Life. The mod was created by a group of consumers knowledgeable in game development, but later was bought up by the developer to the original game. The game was then released as a full, freestanding game (Meza, 2012).

4.4 Distribution strategies Below, the four different distribution strategies used by the companies interviewed will be discussed starting with their current distribution strategies. First, Webpage distribution is discussed. After that physical retailers will be discussed together with publishers since they are interconnected in the distribution chain. Portals are up next and treat another growing online phenomenon that new IT technology has made possible. In the last part of the market overview downloadable content, and the benefits and drawbacks of download vs. physical copies will be presented ending with the interviewees opinions on the future of distribution.

4.4.1 Current distribution Meza (2012) explains that their distribution strategies have changed from only a few percent of their distribution being digitally and now mostly digitally distributed. Ac- cording to Ahlström (2012) at Boldai, their distribution possibilities are limited because of the size of the company; however this does not affect their preferences. Boldai prefers digital distribution; they believe it to have many advantages. Paradox Interactive also recognizes the advantages of digital distribution and all of their content is distributed digitally through various portals to reach as many consumers as possible. They are the founders of the large portal Gamersgate but they are also working with 23 other portals and have multiple contracts that they are considering. They also license the right to sell the games in a physical copy to other distributors and partners (Meza, 2012). Person X (2012) explains that their own internal projects they chose to distribute digitally, however when they are hired for projects it is the client who picks the distribution method.

Currently Boldai has a few different games and programs on the market, they are all digitally distributed but in different forms. The different distribution forms vary depending on the platform that they are released to. The brain builder program is released to PC, Mac, Web, iOS and Android. To release to iOS (the operating system for Apple’s mobile devices) they had to go through ‘Appstore’ as their distributor, while “android is not as restricted and there are many different third party portals available besides an- droids own Google play portal” (Ahlström, 2012). Their own website http://boldai.com hosts the games and programs so you can either play them or use a trial version. Their website also sells their products, except for those for the iOS. Free-to-play is a future

30 distribution strategy, where the user downloads the game and plays it for free but has to pay for additional content such as extra levels, tools and accessories. Meza (2012) explains that Paradox Interactive does not use free-to-play but does still have in mind that additional content and ‘in-game stores’ are a future market opportunity. Moreover, additional content can be developed and shaped after the customers feedback to give them the experience they expect from the game (Meza, 2012).

4.4.2 Webpage distribution Distributing through an own homepage enables the company to instantly reach a global market. It is an open channel where anybody with an internet connection can publish their own material. There are no explicit costs for publishing or for the individual copies of the game. This way of distributing also enables the company to have full control of the product and they can keep all the profits for them self. However there are also drawbacks: ”Publishing a game through a publicly unknown website is like placing the game behind a bush in the forest and expect people to go there and find it, even if it is there for anybody to grab, not that many will find the game” (Ahlström, 2012).

4.4.3 Physical retailers/publishers To distribute in physical stores with physical copies, a distributor/publisher is almost always used (Meza, 2012). Physical copies involve more risk because there is a cost of producing every individual copy. This cost is usually too big for an individual game developer to handle which is why publishers are used. Publishers go through the content provided by the game developer and analyze it (Person X, 2012).

Game developers using a publisher usually have to partially surrender the rights and credits for the game to the publisher and the game developer will no longer have any control over their game as the publisher controls everything. The publisher is also the ones who take the strategic decision of what method to publish through (Person Y, 2012).

The process of getting a finished game into stores usually takes a long time. Retailers can control what content they decide to distribute in their stores, which might leave the company with a finished game without any means of getting it to the consumers (Meza, 2012). This risk is also a reason why publishers are used and why game developers choose this method of distribution. Physical distribution also means that the game will have to be released through different channels depending on geographic location. Each location will have its own set of rules and regulations which will have to be followed which also further increases the time it takes to get the game to the end (Meza, 2012).

Physical copies of the game give access to gamers that maybe did not enter the store to buy just your game and creates opportunities for spontaneous purchasing. Physical distribution does also attract the in-experienced audiences that are less familiar with the internet and also gives them a place to go to where they can get personal service and get help with finding the correct game for them. Collector’s editions and extra physical content is another reason to get a physical copy (Meza, 2012).

4.4.4 Portal distribution Distributing through a portal like Steam or Origin gives the developers access to all of the portal’s users. According to Meza (2012) for example the portal Steam has millions of users which are all potential buyers. Steam also offers a safe and well known way of purchasing the game. Users of steam has most likely used this method of payment before and through that built up a trust that might be missing if the product is distributed from another online source (Person X, 2012). Like physical stores customers can make spontaneous purchases because they find the game by chance. They do not have to look for that exact game to be exposed to it since searches can be done by type of game or specific functions such as multiplayer, or category such as, action or adventure (Ahlström, 2012).

A portal can offer more competitive deals than a physical store (Meza, 2012). A portal can offer trial games or one day deals and have a more aggressive pricing strategy that physical stores cannot. Portals may also have different pricing systems, the payment methods can vary, meaning that purchase of game can be a single cost, or a fee based on time played for instance hourly or monthly rent. Renting a game allows you to test the game for a cheaper price than purchasing the entire game (Meza, 2012). Portals usually provides userstatistics and feedback from the customers.

Portals allow a company to create a game according to feedback from consumers. Por- tals allow more control of a game and its in-game content, as well as more efficient use of resources. A game can be released without much initial content, so that it is just the beginning of the game such as a few levels and some story then depending on the consumer’s feedback the developers may continue the project or abandon it. (Meza, 2012).

Releasing through a portal also means that the game is instantly available globally. “A Person in Zimbabwe can access the game just as easily as a Swede which was not possible with physical distribution, where some games did not reach all regions” (Meza, 2012). Portals offer a wider marketing reach, which is something most developers have difficulties in achieving. Portals are also a ready-made and proven technological solu- tion and thus eliminate the need of investing in new technology of distribution (Person X, 2012).

4.4.5 Downloadable content Downloadable content (DLC) is not previously released content that is made available online, for an existing game. Developers can use DLC to update a game without having to release a retail expansion pack. DLC can come directly from the game developers or from users contributing with their own content for the game. UCC is usually free to download and can come from many different sources, such as forums and fan pages. DLC can also be a shortcut to get content that is already in the game. With a small payment, content that might be difficult to locate or get in game can be bought. According to Meza (2012) the most important thing with DLC is that it does not give players that bought it an unfair advantage to players that have not, for example, if users who have not bought the DLC stand no chance to beat those who have. Another important factor

32 is that the content should not divide the players but all should be able to play together (Meza 2012).

Developers can provide their players with continuous updates to always keep their content seem fresh and keep the consumers playing their game for a longer period of time. Some content can also be attained through micro transactions. This content can range from everything such as a new hat for your in-game character or a whole new world to explore. Pricing is usually set in accordance to the complexity of the content in the DLC (Meza, 2012).

Meza (2012) suggests that DLC can also shorten the development time of a game. By not having to have all content ready at the launch of the game companies able to release it earlier. It is important though that the customers perceive the game to be a finished product and that the DLC is new added content instead of being parts that are missing to make the game complete. Feedback from releasing the original game can also be used to see what the players like and create more of that content. Costs for the developer can also be cut as they can divide their resources better and have a main team working with completing a game and smaller teams that provide extra DLC. They will not have to keep this big team after the game is completed and these can focus on future projects instead (Meza, 2012).

DLC has divided gamers into two teams. Those who are for DLC and think it is great that they are able to get new content for a game they like and those who feel like they buy a slice of the game and have to pay a lot extra to get a game worth playing (Meza, 2012).

Many of the game developers now use DLC and according to Meza (2012) this amount will increase in the future. Developers want their games to last longer and attract a larger audience of players and also the micro transactions gives the company a stream of revenues to finance future projects or future DLC (Meza, 2012).

4.4.6 Benefits and drawbacks of download/ shelf copies “Downloadable games are more for hardcore gamers, while for instance parents that buy games for their children prefers to buy physical copies” (Person Y, 2012). Ahlström (2012) also agrees that people who do not understand how to use internet gain advantages from purchasing physical copies as it is a system that they understand. Even though, limited editions with value adding content such as maps, action figure etc., might attract hardcore gamers to buy physical copies. He believes that just through being able to actually hold a physical copy of the game it adds value; it might be hard to appreciate the value of something that you cannot actually touch (Ahlström, 2012). Several interviewees refer to that the digital distribution benefit the developers through faster distribution, lower distribution costs, as well as well as other cost benefits such as not needing to print manuals (Person Y, 2012; Person X, 2012; Meza, 2012; Ahlström, 2012). Ahlström (2012) adds that there is greater value with digital copies because they are faster, will not break and easier access for those who use them. Digital files take no physical space; they cannot be lost as easy as physical copies and are easy to carry around. Person X (2012) believes that digital copies have less bound resources and fast-

33 er payment methods. “Some customers just like to have the game standing on their bookshelf and others value the extra content that comes with buying the physical copy” (Meza, 2012). Meza (2012) believes that physical copies add value through their tangi- bility, by just being able to hold a physical copy as well as other extra material that can be sold with the game.

4.4.7 The future of distribution There are various views and speculations of the future form of distribution. Ahlström (2012) believed physical distribution would not disappear, but CD’s will be replaced by something else, like memory cards, or download codes. This, because “CD’s are noisy, slow, easy to misplace and can get scratched” (Ahlström, 2012). Person Y (2012) provides another view “I do not believe consoles will support physical copies in the future, purchasing will be based on download only while PC market might persist longer” (Person Y, 2012).

Person Y (2012) believes that there will be more distribution portals for computer games in the near future due the lower cost of distribution, but does not see how it would work for console based portals. As it is now, console based portals are using proprietary virtual markets and does not allow for third party markets on their networks (Person Y, 2012). Meza (2012) agrees that the amount of portals will continue to increase, but that they will need to compete against each other through specialization. The portals themselves will need to change and compete through selection, different format and additional offerings. Person X (2012) also predicts an increase in portals and direct consumer distribution, their company has been developing strategies since 1996 for new methods and the new video game consoles might introduce new changes.

Meza (2012) believes that physical game stores will have a difficult time to operate in the future as she believes more will become digitalized and as an example she suggested Game’s collapse. She explains that a physical store cannot compete with digitalized ones on competitive pricing and special deals. Meza (2012) suggested that the stores need a new advantage, a niche to either become bargain bins which sells older games cheaply or find a niche like the sci-fi bookstore located in Stockholm (Meza, 2012) which is a store that offers a wide variety of products that could be found in other places or online but it is difficult to find them. Their niche is to provide their customers with extensive service and help them find something they like without them specifically en- tering the store to find that product. Besides the actual products they offer a wide range of complimentary goods to give their customer a complete experience. For a store to survive in the future it needs to offer its customers something extra that they cannot find in a digital store (Meza, 2012).

Ahlström (2012) took the game Skylanders: Spyro’s adventures as an example for a future business. The game uses physical action figures of in-game characters which can be placed on a portal to switch in game character. All save games related to that character are stored in the action figure allowing the player to bring the character to a friend’s place and use it in-game (Appendix 7).

Meza (2012) believes that DLC is a future revenue stream for developers and also added value for consumers. Further, the future revenue streams for developers will be purchas- able add on content from in-game stores that are seamlessly integrated within the game.

5 Analysis The analysis part will start with an overview of how the value is created for game developers throughout the value network. The links between the different actors will be further elaborated on using the theories and models presented earlier, as well as information from the interviews. The paper will then present a re-configured model for value creation in the gaming industry.

5.1 How value is created

5.1.1 Developer A developer’s part of the value creation is derived from different inputs and interactions. Games generate value for the customer through a meaningful gaming experience. Different inputs for developers are both external and internal. External inputs come from related actors in the industry while internal inputs are from the company’s own activities (Rayport & Sviolka 1995). The value to gain for a developer is dependent on the distribution method, if they have a higher equity share of the game, more revenue will belong to the developer. However if they use a publisher, the percent of income per game will be smaller but the total revenue can become larger because of increased marketing, exposure and sales (Ahlström, 2012). Value can also be gained from different actors in other intangible forms. The external inputs are from actors in the company’s network; subcontractors which can co-produce or take on outsourced production. Out- sourcing can allow a company to remain focused on developing the core of a game rather than the details and is part of its strategic network (Argyres, 1996; Jarillo, 1988; Person Y, 2012).

Internal inputs for a developer are the processes which handle feedback, different areas of production, and marketing and finance. To develop a game of value for a consumer, consumer feedback in necessary, and there are several methods to attain this feedback. It can be either directly from the consumer or by going through a publisher, who has more experience (Normann & Ramirez 1994). Downstream integration through a publisher also transfers the risk away from the developer and liberates otherwise bound resources (Harrigan, 1985, Meza 2012, Ahlström, 2012). Internal inputs are also derived from competence and knowledge. If employees have the particular knowledge concerning areas within marketing and finance a publishing house might not be necessary to use in order to produce a larger game (Ahlström, 2012).

Developers also generate value for themselves when developing games that go along with their strategy, for example free-to-play and DLC, or releasing smaller versions of games as episodes rather than a fully developed one (Meza, 2012). The strategy of the developers is dependent on size factors which affect their capacity and needs (Harrigan, 1985). The strategic objective of a developer might be to have constant stream of reve-

35 nues from smaller add-ons such as DLC’s rather than larger irregular revenue, achieved through updates and DLC or rather than just a large game (Meza, 2012).

5.1.2 Publisher The publisher generates value for a developer through their exchanges, for a consumer a publisher can be a measure of quality control. The publisher is dependent of someone to develop games, and their role is built on adding their expertise or resources to others. A developer can approach a publisher with a draft of a game, which might be incomplete due to the capacity of production for a small company, designation of resources, and knowledge limitations (Harrigan, 1985). A publisher can financially support the developer in exchange for the license (Ahlström, 2012). The publisher helps the developer overcome the entry barriers by joining in a venture. After purchasing the license to the game and releasing it, the publisher will take care of customer support of the game and updates which is the service offering accompanying the game (Meza, 2012; Harrigan, 1985). A possible benefit of selling the license to publishers is that game developers do not always have to designate resources to provide a support service which can mean less costs for developers whose resources can be designated towards new product development instead (Person Y, 2012). A large cost is to maintain bandwidth and services support for consumers (Shaikh et al. 2006)

The publisher can fit in Porters (1985) value chain as the last three or four of the five primary activities, depending on if they purchase a complete game, have in-house development or fund external development. The publishing house can vertically integrate both upstream and downstream making them also developers, distributors and/or retailers at the same time. Publishers can also outsource seamlessly in the market, giving them control of the activities from development to distribution through their value adding processes and networks. The linkages between the publisher and other actors can have positive externalities such as economies of scale, strategic bundling of resources, as specific teams designated for specific tasks and recombining processes to generate more value. Downstream integration into distribution can give them the production advantage of economies of scale. Outsourcing to middleware firms increases the efficiency of production presumed that it does not risk the quality (Argyres, 1996). Publishers are generally larger companies and have a more diverse knowledge than the game developers, meaning that they can aid the developers with intangible resources as knowledge and networks connect. A publishing company can add knowledge that game developers typically do not have (Meza, 2012).

A publisher specializes in marketing and sales. The value added by releasing through a publisher include access to larger markets through their distributors, marketing, network of retailers, customer support as well as publisher branding which can increase the perceived quality and value of the product, making the product more visible for customers if they recognize and acknowledge the publisher (Ahlström, 2012; Allee, 2000). The exposure is a result of horizontal integration strategies where the publisher finds as many different markets and channels to distribute their products (Harrigain, 1985).

The publisher will also function as a mediator, linking the developer’s product to retailers and distributors, because they have connections that developers usually do not have. Through combining their activities a developer and a publisher together can produce a better output, either more effectively or increased value (Normann & Ramirez, 2000).

5.1.3 Portals as a value network Portals such as Steam and Gamersgate are mediating services to and for consumers. The portals function for a developer is to reach consumers, and thus the portal also becomes a distributor. A portal is also a retailer because it sells games and is a network for all of the services it provides. The portal as a network service derives its value from the user base. The user base is in term determined by several factors: game library, amount of users, payment forms. Similar to Stabell & Fjellstad’s (1998) three steps that are part of the infra-structure of a value network, these activities are value adding to the network service provided. The gamers are attracted to a portal that has a large and diverse library, the more available titles to play on the portal the more likely it is to become used. The more users a portal has, the more people will want to use their services, which in turn attracts more developers and publishers (Stabell & Fjellstad, 1998). Portals are social platforms where the users interact, not only in-game but through chats and commu- nities where the users exchange information. This network enables the users to easily recommend games to each other and developers receive free marketing through word of mouth. Lastly different payment forms might seem more attractive to some and will affect the choice of a portal depending on the gamer’s style of playing (Grewal, et al. 1998). All of the value adding services that surround the product and complementary goods in the end increase the products final value (Normann & Ramirez 1994).

The network service function is to mediate, both for consumers and for suppliers, the larger the network the more value the network generates and the more input it will have vertically and horizontally (Normann & Ramirez, 1996). A portal integrates horizontally through being able to link with other networks and being compatible with different suppliers and the larger the portal is the more attractive it appears to consumers and suppliers to join (Shilling, 2002). Katz & Sharpiro (1985) supports that larger companies does not need the integration that smaller companies do. This because the larger companies already have a big enough game to attract users without being a part of the network.

5.1.4 Distributor Distribution is a low margin business where most value is generated through the network of connections between the distributor and the retailers (Williams, 2002). Out- sourcing production leads to that less resources have to be devoted for the production (Jarillo, 1988). A pure distributor has an advantage over a logistically incorporated distributor as they have economies of scale, but they also have more risk as they are not diversified (Argyres, 1996). Paradox interactive licenses the right to physical distribution which allows them to have the advantage of high and diversified exposure without extra costs and risks that physical distribution has (Meza, 2012). Some distributors have contracts with different retailers to be their exclusive distributor of game which can re-

37 duce transaction costs or serve as a protection in a volatile market. This gives the distributor bargaining power over publishers and developers looking to release their game at those retailers. Distributors also add a logistical value by storage of finished goods before shipping them to the retailers (Harrigan, 1985).

5.1.5 Retailers Value for a retailer is monetary sales and activities that positively affect perceived product value or company value. The value that the retailers generate for the developers is through sales and service to the end customers as well as shelf space for the products. There are several methods of retailing, physical, digital sales of physical products and digital sales of digital products. Additional value that a physical retailer can generate is assistance of purchase, spontaneous purchase, simplicity which appeals to customers less familiar the digital distribution (Ahlström, 2012; Porter & Millar, 1985). According to customer perceived value a consumer evaluates a product before purchase based on its packaging, technical support and services (Grewal, et al. 1998). Retailer then adds value for the specific segment of consumers that prefer a traditional purchasing methods; because that is how they perceive information regarding the game. A store can also sell complimentary products that cannot be digitally downloaded (Meza, 2012; Porter & Millar 1985).

A retailer can add value for a developer by advertising, a copy on a shelf is more acces- sible and appealing than the more anonymous counterparts in virtual stores. Offline retailers allow consumers to easily find the games in the store, see the screenshots and information on the box, and bring the game home right away if they decide to buy (Person Y 2012; Ahlström, 2012; Enders & Jelassi, 2000). A retailer typically only has games that will sell well and are already advertised through other sources, so called AAA games which are the main income of game stores. To reach a retailer one needs a good network or else it is unlikely that a smaller title will end up on the shelves (Meza, 2012).

5.1.6 Consumer/prosumer As the end receiver, a part of the value is generated for the consumer. However the consumer can also generate value for developers through feedback and user created content (UCC) (Meza, 2012). Stabell, Fjellstad (1998) proposed that the more users a network have the more positive externalities it will generate. Mods and user created content can be a positive externality, they generate more value for the users of the game because there is more content which in turns will attract more users. The developers can choose to allow and make it easy for users to create and install UCC, which makes consumers a part of the value creation (Normann, 2001). The value that a consumer can generate is not included in Porters value chain (1985); there the consumer is just the end receiver of a product rather than a value adding participant.

Prosumer are consumers that participate in the value creation (Jöckel et al. 2008). Whether game developers endorse it or not, popular games tend to get a fan-community that creates everything from support- and -discussion forums to user created game content such as mods and add-ons.

Customers however, remain an important part of their value chain since their focus is on creating software for game production. If their customers create games that receive good reviews and attention from the players and reviewers with they will benefit from it through increased positive exposure towards other potential customers. The customers work as ‘prosumers’ in the sense that they are consumers to Boldai, but at the same time producers for their consumers. Loyalty from good games are created by Boldai’s customers and then passed up again back to Boldai (Ahlström, 2012).

For companies with value creating intermediaries such as publishers, distributors and retailers, a fair amount of value is added to the product in the network through the services they provide (Stabell & Fjellstad, 1998). For indie game developers and other game developers that do not use intermediaries, the end-users play an even larger role. Value for the product is added by each member participating in the network and without intermediaries, either the developer must add more value to the product, which can be costly, the second alternative is that the developer mobilizes and uses its fan base by en- couraging them by making it easy for them to participate in the value creation. End users can create content within the game and share it with other users. If a game created with the help of their engine gets popular, so will the engine it is created in. Users can in this way create value for the company by using their product and sharing their work (Normann, 2001).

5.1.7 Disintermediation An important aspect of the changes in the value creating activities is how the products are being delivered to customers. All companies interviewed offer digital download through either portals or own homepage which to some point means that they have by- passed one or more parts of the linear value chain. Person Y (2012) stated that the time it takes between the game is finished in production and until it hit the shelves is about six months, one of the benefits skipping the physical distribution is shorter release time as well as cost related benefits by eliminating the need of printed manuals. Meza (2012) stated that this time could be cut down to about two or three weeks instead, with the use of digital distribution. For companies without distributors and other middle-hands this creates a low-cost environment for getting their games fast out on the market.

Boldai sells their software both through their homepage and through Android market and Apple’s app store. With the sales from their homepage they have by-passed the retailer, distributor and the retailer parts of the value chain (Ahlström, 2012) Paradox In- teractive conducts their distribution through digitals sources but they also license their physical distribution to other sources in order to keep their focus on digital distribution which is their strategic preference (Meza, 2012). Massive Entertainment is owned by the Publisher Ubisoft Entertainment they have access to sell their games as physical copies in stores as well as downloadable versions from Ubisofts online shop and through the portal Steam (Hultberg, 2012).

For Boldai, there might be larger benefits from not using a publisher since they are partly focusing on a niche market with their game tools software (Ahlström, 2012). For other companies publishers are a resource for them to reach larger audiences.

Physical copies of a game generates value through being able to reach customers less familiar with digital alternatives as well as being able to provide customers with specialized service, extra physical content and complementary goods. Due to the fact that physical distribution is a costly and time consuming process for a developer, therefore many of the interviewed companies has focused their attention more towards digital alternatives. As the market has changed and technological advances made the digital distribution both fast and secure the benefits of using a retailer does not cover the neither the extra time it adds to production nor the monetary expenses of it. “For a store to survive in the future it needs to offer its customers something extra that they cannot find in a digital store” (Meza, 2012). They need to niche themselves and provide their customers with a wide range of complimentary goods and a complete experience.

5.2 From value chain to value constellation Porters (1985) model of the value chain works does not nearly capture the complexity of the modern computer games business due to its linearity. The OECD (2005) report shows two different models for value creation between the developer and the customer but none does acknowledge consumers that participate in the value creation (see appendix 8 and 9). Jöckel, et al, (2008) includes consumer value creation in their model but does not capture the interactive complexity and disintermediation in the gaming industry. The best model would be one that is a combination between all of them. One that has the simplicity of Porters (1985) model that acknowledges ‘prosumers’ added by Jöckel, et. al. (2008), but also includes the complexity of intermediary interaction such as the OECD (2005) report.

To understand the motivation for our own model (see appendix 10), one must first understand the circumstances of the changing industry. Formerly there where large entry barriers for developers, costs for developing were high as the trend was high-tech games. The costs for publishing and distribution were even higher. The industry phase was mature for development and hardware, there where large established actors who controlled the market (Argyres, 1996). The large corporations had all the bargaining power and a developer had to join in ventures in order to produce. The retailers also had much bargaining power as they were the ones who decided what products to include in their stores (Harrigan, 1985; Meza, 2012). The transaction costs where high due of the high costs of physical distribution, once a game had been developed much resources were dedicated to endorse, produce and distribute. This also meant high risks for the publishers who produce the games and carry the costs (Harrigan, 1985; Normann & Ramirez 1994). The industry was vertically integrated according to Porters (1985) value chain.

The internet created a new distribution channel eventually enabling high-speed access to world markets, making it a viable option for digital distribution and streaming. Sudden- ly there is a new option for developers; all of the interviewees agreed that there are lower distribution costs and virtually no entry barriers with the new network dynamics. De- velopers are now able to produce and distribute games, regardless of their size and are not forced into co-operation with a producer (Ahlström, 2012). The new networks bring the developers closer to the consumers allowing the possibility of feedback and UCC

(Meza, 2012). The new network dynamics are complicated webs of value adding activities from multiple actors and resemble a constellation rather than a value chain (Normann, 2001).

5.2.1 Porters value chain The value chains objective for value creation is to identify target consumer priorities and then adapt accordingly (Porter & Millar, 1985). The target consumer is demanding, some of them create and modifies their own content which developers think is helpful. We think that the value chain does not take into account this service, and that a developer or producer might find this activity involved in the process.

The evaluation method is to appreciate what monetary value is created and if the costs are less than revenue. Each activity adds value but also has a cost as developing in house or purchasing. A monetary oriented method might focus on that in house development is cheaper, while purchasing is more expensive, without taking into considera- tion how it affects quality or a company’s designation of resources (Lancaster, Walters & 2000).

According to Porter the 1985 model has its five primary activities, when applied to the current market and its actors a good fit is difficult to find. To begin with placing the actors in the value chain, the developers supply the publishers who go through a distributer to produce and ship the game to retailer who then sells the product to the consumer. Developers are inbound logistics and operations, the publishers role is less fitting as they do not directly manufacture anything but are a part of the end product anyway. Outbound logistics is then distribution, physical or digital. Finally retail is the sales aspect and marketing, although the developer and publisher are also part of marketing. If digital distribution is used then sales can also be covered by the developers or the publishers. Service is done by a publisher if a publisher is used, if not it is the developer who provides the service. Multiple distribution channels are available (Porter 1985).

The structure of the value chain in market is somewhat unclear; however, individual company’s value chain can clarify the situation of their own networks. Generally multiple forms of integration are used and it becomes more breadth integration than vertical because of the need for exposure in the market place (Harrigan, 1985). We believe that the traditional value chain cannot capture all of the different interactions between multiple actors and activities which are involved in creating one of many aspects.

5.2.2 Our model for value adding activities By analyzing previous models we realized that a new model needed to be constructed to better fit the current value adding activities for game developers. The new model has a better fit with the current distribution possibilities for a developer and shows how information and value is added at each part of the value constellation.

The arrows in the model shows how information and value is being passed from one part of the constellation to the next, interacting with intermediaries in between. The developer has three different paths to take when it comes to distribution, through portals, their own webpages or by using a publisher.

5.2.2.1 Portal distribution The developer can choose to distribute their game via a portal to get the game to the end consumer. The portal gathers usage statistics from the end users as well as additional feedback in the forms of reviews and comments of the game and its content which is then transfers it back to the developer. The developer can use this feedback to develop additional content or general updates to the game based on the customer’s wishes and feedback and then distribute the updates through the portal to the consumers. The additional content goes through the same process and creates a cycle where value is added for the customer and the developer in each part of the value constellation. This also means that some intermediaries become by-passed and their value creation has to be made by the portal and the developer instead. Disintermediation can be carried out through bypassing both retailer and distributor, or even the publisher as well, meaning that the game developer puts their games directly up on the portal.

5.2.2.2 Webpage distribution Webpage distribution is a more direct form of distribution in which the developer can independently release their games directly to the consumer bypassing the traditional value chain and other actors. The link between the consumer and the developer is through the webpage where the consumer can buy, pay and download the game instantly. This is the most disintermediated form of distribution and requires the consumer to find the game through other means than the marketing usually done by portals, publishers and distributors. This also means that other activities normally carried out by the in-

42 termediaries has to be done by the developer itself. Such activities can include: Market- ing, distribution, customer support, game patching, user statistics gathering and financial activities.

5.2.2.3 Publisher distribution A developer can distribute via a publisher. The publisher purchases the license of the game, usually they compensate the developer to add additional content and thus there is some cooperation between the two actors. The publisher then has the option to distribute digitally though a portal, a webpage or through a distributer who produces physical copies which are sold to the end users via retailers. The publisher has to have the resources and connections in order to use all channels. Going through the retail channel requires more resources, more connections and larger risks but it reaches a different segment than digital distribution.

5.2.3 The value constellation A value constellation is better at capturing the value which is created through interactions between different actors in the market. The interactive network with relationships and co-productions creates more value for a consumer (Normann, 2001). Our model explains how interactions between the different actors help create value throughout the value constellation, something that Porters model does not. The changing technical environment has enabled customers to be a part of the development process as their input and feedback can be transferred to the developers instantly.

The changing technical environment has enabled deeper interaction between the developer and its customers, which are now a bigger part of the development process. Ac- cording to Meza (2012) games today are not just finished products but more as projects of which new content is added continuously to prolong the lifespan of the games. By listening to the end users, the extra content can be specialized to better fit their wants and needs (Meza, 2012). New combinations of actors are what create new value (Normann, 2001).

Consumer interaction is the largest change in the constellation versus the value chain. The new technological environment allows developers to get direct feedback and interact with their end users to shape content after user needs, this in form of extra added content to prolong the life cycle of existing games (Normann, 2001). Being able to add more content at a later stage also shortens the development process as the game is continuous process that can be terminated when deemed unprofitable. The risk decreases as the developer can monitor the market and avoid having as large initial investments (Harrigan, 1985). DLC also gives the company a constant stream of revenue from micro transitions that are charged based on how extensive the new content is (Meza, 2012).

According to Jarillo (1988) outsourcing is the decision to either make or buy smaller parts of the finished product. The company is the main hub and decide to outsource mi- nor but necessary parts of the development process to focus on core activities. Some developers have niched themselves in creating minor content for large developers. They have a competitive advantage in creating this minor content as they are able to focus

43 their resources and utilize economies of scale (Argyres, 1996). In the same way the developer that chooses to outsource gains from it by being able to focus on its core activities. The cost of outsourcing is more than just the transaction cost it is also the loss in productivity by having to divert resources from more crucial parts of the development (Jarillo, 1988).

Horizontal integration is that the same product, a game, is expanded into a new markets or new ways to get into existing markets (Adelman, 1955). This is what is happening in the game market, publishers and distributers can expand their reach and developers can now reach end consumers without any intermediaries. Not being part of a large concern lifts restrictions for developers of publisher demanded content (Kling & Wigand, 1995). By having less entry barriers in to the market more developer can afford to enter which leads further competition in the market (Harrigan, 1985). Competition in turn leads to that more varied content is provided, spurred by innovation.

6 Conclusion The aim of this thesis is to explore the impact that increased availability of digital distribution has on physical distribution. Our focus will be on the effects that digital distribution has on developers, distribution alternatives, networks and consumer interaction in the gaming industry. Additionally we examine if there is a future for physical distribution of games in an increasingly digital market.

1. How is value created for the game developers in the contemporary gaming business? 2. How has digital distribution affected the value chain in the gaming industry? 3. What influence do digital networks have on developer’s choice of distribution method?

We believe that game developers create the value together with the rest of the actors in the value constellation, where each adds their own expertise to the product. Value is generated for developers through user feedback and user participation. The companies in our report favored portals as they gave access to a large user base and still allowed control over the content. Portals add value through an interactive community where its users are encouraged to participate in the value creation. Publishers add value for the developers because they add knowledge and expertise that developers generally do not have, leaving the developers to focus on the development of the game. We believe that the value for the developer is created through its interactions with different actors in the market creating new content. Digital distribution enables value to be added continuously through the lifespan of the game. New content is based on and shaped after the user’s needs and this provides great value for both developers, because it creates a longer lifespan of the game, as well as consumers that gets a game that better fits their preferences.

A reconfiguration in the value chain has occurred because of the online distribution changes. Digital distribution has enabled new and more cost efficient methods of distribution. The intermediaries can be removed and which allows developers to have direct contact with the consumer. This has led to that distribution methods have become more oriented towards reciprocal relationships and co-production as they are more suited for the new market dynamics. In our model, the game developers have three different distribution methods to reach the consumer. One of the most important aspects in the model was that the consumer can also contribute to the developers, which has a large impact on value creation for the developers.

According to our model there are three different networks that influence the developer’s choice of distribution. The first way is through portal distribution which allows for direct contact with the customer. Secondly, the developer can release content through their own or other webpages directly to the consumers, though this method will most likely be more difficult to succeed in due to exposure difficulties. Thirdly they can use a publisher which will then choose the distribution method; this is usually the only way to

45 get physical copies out to the stores as the publishers have the distribution networks and capital for that. Developer’s distribution choice is based upon an evaluation of their possibilities combined with what will generate them the most value. The companies we interviewed acknowledged the benefits of portals such as: tried and tested technology, large customer base, user forums, easy to put DLC’s up on sale. One of the issues though is that the title can be lost among the multitude of other titles on the portal. For webpage distribution, it is not easy for customers to find web pages if they do not specifically look for it but is the cheapest way to reach the customers and also allows developer to upload changes, add-ons or even bring down their game anytime. Publisher distribution provides value to the developers in ways they are unable to do themselves. Publishers have access to networks of distributors, portals, physical stores and activities related to physical distribution such as mass production of CD/DVD’s, game boxes etc., they can also assist with marketing and funding. Publishers are usually full service pro- viders, but also cost more.

To conclude, we believe that the value constellation in the computer gaming industry has increased in complexity. In this thesis we have only been looking at the PC gaming industry, but for many developers the environment is far more complicated due to the need of reaching multiple networks and usually also on multiple platforms. All distribution options have their pros and cons, but according to our interviewees digital distribution is likely to be the future for game developers because of its cost efficiency, geographical reach and large customer base. We believe that physical copies will have a limited place in the stores in the future, probably in the form of special editions or bundled with other value creating extra material.

In the next part we will discuss some of our findings along with self-reflection on the research and suggestions for future research.

7 Discussion We believe that we have confirmed our purpose; in the context of the companies included we have been able to draw conclusions on how the value chain has been reconfigured as the distribution strategies have changed, as well as the future for physical distribution. As for many other products that are readily available for digital distribution, disintermediation in the value chain seems to come with increased broadband connectivity. Games today are usually large and require fast internet connection to be able to either download or stream, which probably explains why there has been such a boom in new digital distribution services as more people gain access to broadband internet.

Based on the interviews, we believe that that many developers consider that the main advantage of physical/retail distribution is to reach the segment of users that don’t have access to fast and reliable sources of digital distribution, or simply don’t know how to use digital distribution. There are speculations in gaming magazines and online gaming forums, that the next generation of consoles will only provide digital download of games through their own online portals, one reason is for security and another is to re- move secondhand sales of games which the developers earn nothing from.

The method of the interviews was a good way to gain empirical information on the subject, however not all questions were answered by all the companies. Some interviewees stated that they do not have a professional opinion on the topic of the un-answered question. We believe that the reason for that is that some interviewees represented companies and would not answer questions where personal opinions could be mixed with the official opinions of the company. A larger sample size and in-person interviews would strengthen the research and help clarify some questions for the interviewees.

We have several recommendations for future research within the gaming industry. The academic society as well as the actors in the market would benefit from more research on the topic of disintermediation within the gaming market. It seems as the role of for instance publishers, as well as retailers, are under threat from disintermediation.

A second related research topic would be to look at the impact of games for mobile phones and their impact on the gaming industry. Game group plc. expressed concerns about the effects of mobile gaming market in their annual report the year before they went bankrupt (Gamer Group annual report 2011; Lunden, 2012).

A third issue would be to look at how developers can create cash-flows from user created content. Such content does usually not generate cash-flows for the developers since they are shared for no cost among players today.

Lastly, in game advertisement was predicted to be a new source of revenue. A study could be conducted to se how in-game advertisement affects the gamers experience.

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9 Appendix

9.1 Appendix 1- Porters value chain Source: Porter, M.E. (1985) Competitive Advantage

9.2 Appendix 2 – Value chain of Online-Distributed Digital Games

Source: Jöckel, Will, Schwarzer (2008)

9.3 Appendix 3 – Model of game engine

Source: Lewis & Jacobsson (2002)

9.4 Appendix 4 – Model of a Portal

Source: Shaik et al. (2006)

9.5 Appendix 5 – Swedish internet trend

World Bank. (2012, March 30), Internet users in percent of population from 1996-2010, Retrieved 2012-05-06, from: http://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&ctype=l&strail=false& bcs=d&nselm=h&met_y=it_net_user_p2&scale_y=lin&ind_y=false&rdim=region&idi m=country:SWE&ifdim=region&tstart=- 303703200000&tend=1305669600000&hl=en_US&dl=en_US&ind=false

Sweden blue line, World red line

9.6 Appendix 6 - Interview questions The interview questions are organized by three main topics: Strategic questions, questions regarding disintermediation, and finally questions about value creation.

Questions to game developers Name of interviewee: Name of company: What is your role in the company? How many people are working in the company: How do you distribute your games today? -Why?

Strategy has your distribution strategies changed with the availability of online distribution channels? What do you think are the benefits/cons of releasing games in stores/online/download? What do you think of digital distribution portals such as steam/origin/gamersgate etc? - What do you think they bring to the market? Any drawbacks? What do you think of the future of distribution portals such as steam/origin/gamersgate etc?

What do you think about the role of distribution companies, (such as EA, THQ?) Has online distribution changed your launching strategy? -How?

Disintermediation What do you think is the future of physical copies? -Will physical copies still be sold in 10 years from now? Do you think that you will be able to skip the use of portals/distributers eventually? and sell the games directly from your homepage instead? Will we see a surge of new gaming portals in the near future or will developers release their games by themselves?

Value creation What value does online distribution add for the consumer? What value does a physical copy add for the consumer?

What value do you gain from distributing the games as you do? - not only monetary, but networks, promotion

Ending questions Do you have anything more you can tell us about the market as such? Do you want a copy of the finished research once it is done? Do you want to remain anonymous? Can we name your company in the research?

9.7 Appendix 7 – Value adding physical content Below is an image retrieved from the game Skylanders official homepage showing how the physical action figures are placed on a portal that is shipped with the game. The action figures can be bought separately and also contains memory slots to remember in- game progress, save games etc, making the characters not just physical depictions of in- game characters but also makes the characters vital to game play.

Skylander, Official home page, Retrieved, 2012-04-17, from http://www.skylanders.com/sky/game-features

9.8 Appendix 8 – The changing value chain

9.9 Appendix 9 – Linear value chain Below is the value chain for the gaming business created by the organization for economic co-operation and development. It shows a single line from the game developer through the intermediaries to the end customer. The hardware manufacturers are not considered in our research while middleware developers are acknowledged as suppliers for developers.

Retrieved from www.oecd.org/dataoecd/19/5/34884414.pdf (2012-04-19)

9.10 Appendix 10 - Our proposed model