UNIVERSITY OF NEW YORK IN PRAGUE European Business Administration Observation and Analysis of Freemium Business Model with Strategic Implication for the Czech Business Market. by Philipp Solovyev 2017 PATTISON William I, Philipp Solovyev, declare that the paper entitled: Observation and Analysis of Freemium Business Model with Strategic Implication for the Czech Business Market was written by myself independently, using the sources and information listed in the list of references. I am aware that my work will be published in accordance with § 47b of Act No. 111/1998 Coll., On Higher Education Institutions, as amended, and in accordance with the valid publication guidelines for university graduate theses. Prohlašuji, že jsem tuto práci vypracoval/a samostatně s použitím uvedené literatury a zdrojů informací. Jsem vědom/a, že moje práce bude zveřejněna v souladu s § 47b zákona č. 111/1998 Sb., o vysokých školách ve znění pozdějších předpisů, a v souladu s platnou Směrnicí o zveřejňování vysokoškolských závěrečných prací. In Prague, 19.12.2017 Philipp Solovyev Table of Contents 1. Introduction 1 1.1. The world before The Fourth Industrial Revolution 1 1.2. Adapting Business Model 2 1.3. The structure of the thesis 5 1.4. Methodology 6 1.5. Personal motivation 7 2. Literature review 9 2.1. Business model of free 9 2.2. It is all about services 10 2.3. Consumer Behavior 11 2.4. Business model canvas 12 2.4.1. Customer segments 13 2.4.2. Value propositions 15 2.4.3. Customer relationships 16 2.4.4. Channels 16 2.4.5. Revenue streams 18 2.4.6. Cost structure 19 2.5. Applicable framework 19 3. Case studies 21 3.1. Dropbox case study 21 3.2. Riot Games 24 3.3. Spotify 29 3.4. Qihoo 360 35 4. Analysis and comparison with literature review 42 4.1. Customer segments 42 4.2. Value propositions 43 4.3. Customer relationships 44 4.4. Channels 45 4.5. Revenue streams 46 4.6. Cost structure 47 4.7. Analysis summary 47 5. Interview 48 5.1. Analysis 49 5.2. Observations 52 6. Conclusion 54 6.1. Best practises 54 6.2. Next steps 56 Bibliography 57 Abstract This paper explores freemium distribution method within software industry. With claim that disruption in business world is significant, author hypothesizes the following question: “Is it possible to use distribution practices of freemium digital products in order to create a unique and diverse business model applicable for the industries outside of IT?” Firstly, analysis of academic sources is conducted in order to understand what freemium is and how it works. Then, case studies of established freemium firms are compared with theory. Next, findings are evaluated by comparison with personal interview conducted in freemium pioneer firm, Avast. By analyzing academic sources, comparing them to case studies and consequently evaluating findings by personally interviewing corporate manager of freemium firm, author presents reader with best practices applicable for future freemium practitioners. 1. Introduction 1.1. The world before The Fourth Industrial Revolution In the era of the digital world, new technologies play an important role in the business development and maintenance. Truly, it is significant for a successful business to communicate with the customers via various social networks, distribute services and products with mobile applications, and convert prospects into new leads through simple landing page websites. Using such advantageous digital tools is essential for businesses prosperity. Technological breakthroughs also put emphasis on classic business theories behind the functionality of newly-emerged tools. As an example, Web 2.0 appearance and consequent enhancement of business’ ability to interact with people and gather critical resources from the customers indicated how is feedback, transparency and brand value worthwhile in the business world. Inarguably, only by introducing new alternative ways to how basic websites could be used, business managers’ perception and awareness of stated business tools reshaped and arose drastically. However, innovation is followed by the disruption that makes once stable practices unusable and require firms to be flexible and adaptable to changes in order to have a sustainable and competitive business. KPMG’s global CEO survey-study (2016) greatly supports that claim in the scope of upcoming The Fourth Industrial Revolution that unimaginably merges digital, physical and biological areas, stating that it is necessary for organizations “to develop incredible agility to stay ahead of the disruption caused by the fourth industrial revolution”. 1 As of the competitiveness, KPMG’s study also concluded that “to remain competitive, manufacturers will need to innovate and invest in new technologies, which CEOs believe will have the biggest impact on the growth of their companies over the next three years.” Some older studies also reveal the same tendencies amongst CEOs. IBM (2008) global enterprise study declared that technology is one of the top three CEOs main concerns regarding the possible external impacts on their firms as well as the fact of a drastic gap between required change and current state. That said, it is crucial for companies to adapt new know-hows and technologies to be able to generate profits. Both studies suggest a number of ways to overcome these issues and both of them point out that business model renovation plays one of the biggest roles in that transformation, but what reasons are behind that? 1.2. Adapting Business Model A variety of case studies from previous years proved that enhancing firm’s business model in the context of new innovative implementation exponentially strengthens up positioning along competitors on the market as much as it strengthens its core value proposition. One of the most vivid recent examples is Netflix and Blockbuster case, in which the latter was mostly driven out of the market by the first. Back in 1997, Netflix used to have an insignificant market share and overall weak competitive power. The company had rather straightforward value proposition - by request, a customer was able to order any movie he wanted and Netflix would deliver a DVD by mail; however, this core competency is what made Netflix a worldwide brand. Blockbuster neglected even the slightest possibility of such firm to play a role of their competitor, seeing Netflix as a “very small niche business.” (Del Rowe, 2017) 2 Regardless of that, Blockbuster had an attempt to replicate and create similar service for their customers, but this experiment in 2005 was too belated in comparison to Netflix that practiced this method for 7 years and by the end of 2007 was already shifting its core competency, making deliveries of movies instantaneous via digital environment. (Del Rowe, 2017) Partially, it was because of the status quo on the market and “mainly because of the resistance of digital transformation” (Del Rowe, 2017), Blockbuster could not adapt and has gone forever. Now, Netflix is the most recognizable streaming cinema service, which once “embraced digital transformation and succeeded while Blockbuster fought it and failed.” (Del Rowe, 2017) Not only Innovation of business model can add to initial value proposition of the product or service but it also expands its ability to capture the value. One famous example of that might be seen in Apple’s combination of iTunes and iPod. By creating a software solution (iTunes) for comfortable music purchase and introducing it together with iPod, Apple achieved certain advantages from the perspective of business model: “the company built a groundbreaking business model that combined hardware, software, and service.” (Johnson, Christensen, & Kagermann, 2008) As a consequence, this greatly-tied combination of shiny hardware and innovative software granted firm the ability to consistently extract value from customers for a long period of time. At the time of release, the combination itself was only repeatable with the devices from the same manufacturer, meaning that a person could only access his iTunes library from an iOS-powered device only. And since communicating the value to the customer was never an issue for Apple, such approach made firm’s “...market capitalization catapult from around #1 billion in early 2003 to over $150 billion by late 2007.” (Johnson, Christensen, & Kagermann, 2008) 3 The authors of the Harvard Business Review article on the reinvention of business model draw a great comparison between stated above Apple’s model and so-called “razor and blade” model, pointing out that in the essence, first model is a reversed version of the latter. (Johnson, Christensen, & Kagermann, 2008) The definition of “razor and blade” model sheds light on that connection: “[firm] offers a durable product (i.e., the ‘razor’) at a low price (even at a loss) and more than makes up for the initial subsidy by charging a high price for the consumable complement (i.e., the ‘blades’) over the lifetime of the durable product.” (Dhebar, 2016) However, in Apple’s model complementary product and durable product are switched over as Apple charges a high price for the hardware product (e.g. iPod) and makes access to additional digital content relatively cheap. (e.g. iTunes music) This example shows that such model can work the other way around, charging a high price for the initial product and asking for lower payments for the complementary product. However, let us return to “razor and blade” model. As it has been noted above in the definition, the main product should be distributed “at a low price (even at a loss).” (Dhebar, 2016) This part of the definition provoked the author to ask the question - what if a company chose to distribute such product for no price, for free? After a brief research session, the author of this thesis realized that the hypothesized question has a definite and concrete answer. Such practice exists and thrives in the software industry with prevalence in mobile applications market where it works precisely as bequeathed by “razor and blade” model.