Business model
innovation in the Film
industry
Abstract:
In the last decade, emerging technologies and processes now pressures incumbent firms who have relied on their traditional business model to sustain their competitive advantage, forcing them to reevaluate their resource allocation and business processes. The film industry specifically, has been affected, where peer-to-peer networking is used as the main distribution platform. Through a literature review this study attempts to demonstrate the relations between technological and business model innovation. By first providing a general framework, followed by case study of the film industry, a comparable discussion is provided of what is largely regarded as business model innovation and the process of a specific industry. This study used the academic database EBESCO as the main source for the articles and included additional ones outside the database, through extensive reading. In end result it was generally found that incumbent firms are more inclined to follow and incremental process of adaptions, in the face of new emergent technology and tend to analyze to a point where the initial benefit of the new technology will have been surpassed. This study contributes to current studied my applying the study of business model to a specific industrial context.
Alexander Huitema 10457844
29/06/2015 2014/2015
Supervisor: S. von Delft The business model concept: Recent developments in different management disciplines
Statement of originality
This document is written by student Alexander Huitema who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Table of content
Statement of originality 1
1. Introduction 3
Research Question 4
2. Literature Review and conceptual model 5
Business models 5 Technological Innovation 7 Film Industry 9 Conceptual model 11 3. Methodology 12 4. Discussion 14
Technological innovation influence on competitive advantage 14
Technological innovation effect on Business model Innovation 16
Business model innovation effect competitive advantage 17
Case study analysis 19
Film Industry 20 Music Industry 29 5. Conclusion 32 6. Bibliography 34 Article Sources 34 Internet sources 38 7. Appendices 39
1.Introduction
With the fluctuations of nations’ economies and the irresolute nature of consumer preferences, there has been a greater need for companies to establish their source of competitive advantage (Johnson, Christensen and Kagerman, 2008). One strategic path to further their competitive advantage is to develop their current business models through business model innovation as Johnson et al. argue that business models are a new source of competitive advantage (2008). As stated by Zott, Amit and Massa since 1995, at least 1177 articles (pre-reviewed) have been released were the topic “business model” was addressed (2011). Furthermore the authors reference the economist intelligence units survey of 2005 where it was found that 50% of executives who took part of the survey said that business model innovation would be more important than product or service innovation (Johnson, et al., 2008). For a recent example, the mobile-app transportation company Uber has been commended in using an innovative business model as its source of its success. This further exemplifies the growing importance of technological advancement. Hence there is an increasing applicability of the study of business models (Najar, 2015).
However there are some discrepancies concerning business model. Mainly being definition and the limited understanding companies have regarding their own business models. (Johnson, et al., 2008). The problem of is one of the most prevalent topics. Some of the more frequently definitions come from Timmer (1998) and Amit and Zott (2001,2010), however, the authors agree in their papers that there is an inconsistency in definitions provided. Also important to mention is the topic of business model innovation, which Lindgardt et al. have described to be “valuable in the times of instability (2009, p. 2) which can also be beneficial in times of technological shifts.
Another problem is relative to the issue of practicality. Zott et al. stated that business models have become a “subject of growing the practitioner-oriented studies” (2011, p. 1019). Whilst the issue of business models has only recently been explored, more progressively since the establishment of the Internet (Teece, 2010), there has been a lack of practicality of the research. Only of late are studies being conducted to the test the relevance of business models to specific sectors, industries or discipline. An example of this is the study conducted by Coombes and Nicholson (2013) who examined the role of business models and the marketing discipline.
Specifically in the film industry it was described by Amir Malin of Qualia Capital that the "business model within film is broken" (The Economist, 2013, p. 1). This provides the opportunity for the business model research to be combined with the film industry. Furthermore, since the introduction of the Internet the profits of the major film industries have decreased, falling around 40% (The Economist, 2013). Hence, there is an obvious need for the industry to reconsider their competitive advantage enhancement.
With the inconsistencies explained above it is applicatory to attain further insight into the connection between the business model, which is described by Timmers as “an architecture of the product, service and information flows, including a description of the various business actors and their roles; a description of the potential benefits for the various business actors; a description of the sources of revenues” (1998, p. 2)and the insight into a specific sector so as to give managers a well-defined understanding of their business models. It therefore leads to the formulation of the research question:
“How do technological factors influence the business model innovation of incumbent organizations in the film industry?”
This study will aim to concern to a final answer concerning how the recent technological advancements have made an impact on the film industry which only lately have consider the important of a business model due to its long standing process, in which it relied on its core assets (the film itself) as the only source of competitive advantage (McGahon, 2004).
The study will be conducted as follows. Followed by the introduction will be the literature review and conceptual model, in which the relevant literature will be reviewed so as to come to conceptual distinctions and organize the findings of previous studies. Followed will be the research design, continued with the data analysis and results. After a thorough explanation of the results, this study will be finalized with a discussion and conclusion.
2. Literature review and conceptual model 2.1.Literature review
2.1.1 Business Model
With the emerging literature emphasizing the importance of business model but the lack of a solitary definition, it is necessary to display some of the views and clarification of business models. There has been an increased recognition that organizations do not comprehensively implement their business model in the time of competitive opportunities (Hamel, 2000), and that this action is due to organizations having a lack of understanding of business models facilitation (Casadesus-Masnell & Ricart, 2010).
There are a number of scholars who describe business models to be same a company’s strategy. Casadesus-Masnell and Ricart in their study described how the business model is ‘reflection of its realized strategy (2010, p. 205). In perspective, they describe that a company’s strategy and business model are identical, in terms of objectives and method of achieving these. Magretta coincides with view stating that the business model is the explanation of the intended strategy, so in a manner of speaking, its “story” (2002, p. 88).
In contrast, and perhaps more realistically, Shafer, Smith and Linder (2005) argue that the business model is the facilitation between an organizations strategy and its tactics, meaning the actual implementation. Osterwalder and Pigneur, support this, claiming that the business model is the ‘missing link’ (2002, p.77, Afuah & Tucci, 2001). Specifically Afuah and Tucci define the business model as “the method by which a firm builds and uses its resources to offer its customer better value and to make money in doing so” (2001, p. 3). Christensen argues that organizations have the ability to produce business models, which are distinct from their product market position (2001). As confirmed by Zott & Amit (2008), the business model design and product market strategy should be viewed as complements.
Another important notion is the relationship between business model innovation and the prospective performance of a firm. Giesen, Berman, Bell, and Blitz (2007), identified three variants of innovation being industry, revenue and enterprise. From their research they reported two key conclusions. Each innovation model has the potential to generate success and that innovation in enterprise model, which focuses on the external collaboration, is more relevant for incumbent firms.
There has also been a general consensus around the issues of value creation and the role of the customer (Chesbrough 2007). Johnson et al. states that a business model “consists
6
of four interlocking elements that, taken together, create and deliver value” (2008, p. 52). These four interlocking elements consist of customer value proposition, profit formula, key resources and key processes. Teece reinforces this and emphasizes how “a good business model yields value propositions that are compelling to customers, achieves advantageous cost and risk structures, and enables significant value capture by the business that generates and delivers products and services” (2010, 174). Hamel explains that to be able to cope in the “age of revolution (2000, p. 34), firms need to evolve their business model, in which a value network can be developed. In doing so companies could create a new standard for industries (Magretta, 2002). Therefore it is visible that there are some discrepancies regarding the definition of a business model.
Martins, Rindova, Greenbaum (2015) have recently discussed the topic of exogenous1 and endogenous2 influence on the business model innovation. They illustrate the difference of the exogenous and cognitive. The exogenous view, or rational positioning school described by Teece (2010) pertains that the environment is an influencing factor on business model innovation and henceforth viable to be examined in this study to gain a generalized view. Johnson et al. discuss how the American Management Association determined that only a maximum of 10% of innovation investment was spent towards the development of new business models (2008). Therefore whilst there is an increased interest in the new “start –up” businesses (Johnson et. al.) there is a still a need to determine the capabilities that enable established firms to innovate. As the technological advancements are fluctuating, causing companies to reassess and their business models. Tecce (2010) stated as, the business model and the technology strategy needs to be balanced, to attain a commercial viability.
As was stated above there is a lack of practicability in the theories tested. The film industry is an example case into short life cycle product market. Calatone et al. expresses how competition from “similar products…which …reduces distribution” (2010). Benghozi and Lyubareva (2014) reinforce this in their opinion that firms in the creative industries face an ever-changing competitive environment, and trough this try to
adapt through organizational arrangements and business models
(Benghozi and Lyubareva 2014). Also an important point elaborated by Calatone et.al. is the fact that film is influenced by uncontrollable factors that have the influence the balance when
1 Exogenous influence is an independent variable, which affects a business model. In this research exogenous
influence will primarily be the technological advancements.
2Endogenous variable is a dependent variable, generated within a model. For this research the endogenous
factors of the film industry will be regarded in terms how the industry reacts to the technological influxes. 3NCR is a computer company delivering communication products for businesses to contact their customers multiple ways.
2Endogenous variable is a dependent variable, generated within a model. For this research the endogenous
the market is “ready to receive new products” (2010). Value creation by Amit and Zott (2001) is considered to be more important than value capture. Value creation is one characteristic that is intertwined with business models. Zott et al. elaborate on this, clarifying how the value creation has become a prominent topic of the business model writings. According to Lepak, value creation can come from the individuals, the organisation and social structure. Of course for the benefit of the study a greater detail will be given to the organizational perspective. Henceforth, as can be discovered there is variability in the business model definitions that are available and hence an inconsistency in research that has been conducted so far.
2.1.2 Technological Influences
Concerning the technological influences on the importance of market dominance, scholars have anted the declining performance of incumbent organizations (Tripsas & Gavetti 2000). Hill and Rothaermel (2003) discuss that when it comes to radical technological innovation, there are certain factors such as economic incentives and forces of inertia within firms that tend to affect the overall performance of an organization negatively. This is mainly as a result of new entrants exploiting the progressive technology to their advantage (Trpasa & Gavetti, 2000). However the authors (Hill & Rothaermel, 2003) acknowledge when an incumbent firm is confronted by a major market disruption, some organisation can adept and regain the performance lost. Specifically, Rosenbloom (2000) explains the ability of the NCR3 Corporation, to adapt and dominate in the face of digital business computing. Hence illustrating that whilst that in the face of technological advancements, if organizations utilize their resources and adapt their business model, they have the possibility to pioneer radical technological innovations. Hill and Rothaermel define in their work the standard model, being the exposition of the process of innovation (2003, p. 257). Schumpeter furthers the discussion of technological effect on incumbent firms by introducing the notion of creative destruction (1942). Schumpeter states that in the long run, “the process of Creative Destruction is the essential fact about capitalism.... it is not [price] competition which counts but the competition from ... new technology... competition which strikes not at the margins of profits of existing firms but at their foundations and their very lives" (1942, p. 83-84).
3NCR is a computer company delivering communication products for businesses to contact their customers multiple ways.
Henceforth concluding that technological innovation has the potential to create new market opportunities whilst also creating situation that transform industries.
Dubosson-Torbay, Osterwalder, and Pigneur, (2002), exemplify in their work that the development of the Internet was a major technology shift that resulted in the creation of new competitions frontiers and environments, which meant innovative business models based on capitalizing on new opportunities. Teece confirms stating that “when an underlying technology changes, and an established logic for satisfying customer needs….is overturned, the business model must change too” (2010, p. 188). Chesbrough claims that even a “mediocre technology pursed within a great business model may be more valuable than a great technology exploited via a mediocre business model” (2010, p. 354).
Hill and Rothaermel (2003), go on to express how incumbent firms aim to maximize from technology that is already in place rather then expense resources in an attempt to dominate new technology, which attains certain uncertainty, especially considering the payoff. Another factor to consider is the conclusion of Henderson (1993), who states that if an incumbent firm is inclined to invest in new technological advancements and successfully utilize the technology, it will create a disequilibrium which will in end effect corrode any market dominance they posses. This process was likened by Hill and Rothaermel (2003) as the ‘Pandoras Box’ in the sense that the technology will be responsible for structural which will not advance the company individually but affect the entire industry to lead to situation where the companies best fit to adapt to these changes benefit.
Furthermore when looking at technological innovation it is optimal to distinguish from the concept of novelty centered business models and efficiency-centered business models. The former is related to the design of novel content or the authority to participate commercial exchanges, whilst the latter is defined as the restructuring of the boundary activity systemic in an effort to achieve a higher efficiency, (Zott and Amit, 2008, 2010). Related to these topics are the notions of exploratory innovation, which refers to the technological innovation that rely on new resource base (Jansen, Van den Bosch & Volberda, 2006). Also related is exploitative innovation, which is designed to improve the existing product placement in the market (Voss & Voss, 2013).
In opposition there are scholars who have argued that organizations configure themselves to maintain a stable environment. So when a new technological innovation comes along, the organization fails to analyze and respond to properly respond and hence fail to gain any further competitive advantage. Miller (1993), has also given a comparative view, stating that organizations have tendency to simplify their processes, so as to complement their core
competencies which were fundamental for their original success. This theme is also exemplified by Leonard-Barton (1992) who concluded that because of companies’ tendencies to work around their competencies, they are les able to deal with fluctuations in the industrial environment, namely a technological development.
Abrahamson and Fombrun, (1994) in their study conclude that macrocultural homogeneity 4, which create a network of processes are inflexible to allocate their network and so unable to adapt to a flux in the external environment. Christensen (1997) furthers this view and elaborates on how firms rooted initiation about its value network, hinders its ability in the face of a new technology, which potentially will replace the current technology. Christensen (1997) labels these as destructive technologies, concluding that firms have a tendency to ignore these technologies as they initially only serve a minor sector of consumer. However, the problem that organizations have is that they don’t recognize that technologies tend to progress at a faster rate than the performance improvements of technologies that are in place at the time. Henceforth there are valid arguments for the potential effect of technological advancements on the competitive advantage of firm, comes to question the impact and relation to business model innovation.
2.1.3 Film Industry
The film industry is one that has been in place for well over a hundred years. According to Hampton (1970) whilst the first feature film was “The Story of the Kelly Gang” from Australia in 1908, it’s the American film industry (Hollywood) that really epitomized feature film in 1922 with the creation of Nester Studios. Throughout the beginning 20th century the
studios that were erected based their productions and distribution on owning the theaters where the films were shown (Hampton, 1970). However the Paramount sentencing5 in 1948, led an overhaul of the business model, mainly affecting their distribution (Cucco, 2009). After the sentencing the studios, no longer owning the cinema theaters and hence focused in releasing a limited number of films with greater investment then before (Cucco, 2009). These
4 Shared beliefs about customers, business processes and other factors relating.
5United States v. Paramount Pictures, Inc., 334 US 131 (1948); was a United States Supreme
Courtantitrust case that decided on movie studios owning their own theatres and holding exclusivity rights on which theatres would show their films.
films were termed as ‘blockbusters’6 and according to Cucco used the “most advanced technology” (2009, p. 216) to differentiate from television, and identify itself as a high quality television. Cucco (2009) however goes on to reconcile how only during the 1970’s, the film industry business model, which is recognized today, was epitomized. This according to Cucco (2009) is because of the promotional strategies that were used. The business model of the film industry (more specifically the American film industry has been based since the tool of saturations marketing on the blockbusters.
Before the influencing development of the Internet, the business model of the film industry was characterized by distinct traits. First, according to high economics investment, Stringer (2003) argues that the end product of the film industries (blockbusters) are devised for maximum global utilization of the global market. Doyle (2002) furthers the argument stating that the blockbusters are meant to cover the expenses of other films that did not reach their estimated revenues. Doyle (2002) refers to these as ‘best-sellers’ and is meant to support the economy of the whole studio. Secondly, blockbuster films were based on the promise of ‘spectacularity’, marketing them along the lines of a ‘must-see’ film (Stringer, 2003). They have a sense of a need to surpass the previous film and hence also employ sequels to maintain a theme of the first film (Cucco, 2009). Lastly, the business model of blockbuster films was identified to supplement the original motion pictures with audio-visual sales and merchandising (Cucco, 2009). These extra receipts are used to either increase the value of films which did not perform as well as expected or increase the success of motion pictures that did (Cucco , 2009). Henceforth leading up to the introduction of the Internet, the film industries business model was epitomized around the concept of ‘blockbusters’ and wished to gain the largest revenue return possible.
Analysing the film industry it’s also important to look at a comparison, to have a more comprehensive insight into the affect of technological advancement on incumbent firms. The music industry in the development of the Internet has also experienced setbacks and barriers, making it a viable industry to consider for comparison. From the 1999 to 2002 alone the annual sales of the music industry declined by about 2 billion dollars, (Strauss, 2003). This was mainly because of the P2P7 file trading, as well as online piracy and a weakening
6 “The word ‘blockbuster’ has a military origin and was used to indicate the large-scale bombs used during the
Second World War. Later, during the 1950s, the word came into use in the cinematographic field to refer to a product whose distinguishing characteristic was its size” (Cucco, 2009)
7 P2P stands for Peer-to-Peer, which is a distributed application that partitions work loads between peers.
economy, especially in after 20088 (Strauss, 2003). The ‘traditional’ business model was considered by Hughes and Lang to be consistent of mass production and distribution of physical goods (2003). Meaning at the production of record label and the distribution through brick-and-mortar store outlay (Hull, 1997). The film industry gives the opportunity to associate the theoretical concepts of the business model to a particular industry to illustrate
2.2 Conceptual framework Looking at the research questions
“How do technological factors influence the business model innovation of incumbent organizations in the film industry?”,
this study will analyse how business environmental factors, specifically technological development will determine the capabilities of organisation in the film industry to adopt and reestablish their competitive advantage through the use of their business model.
Graph 1: Conceptual Model
8 The Global Financial Crises of 2007-2008 was considered by many economists to be the worst financial crises
3. Methodology
To explore relationship between technological advancement, business model and competitive advantage a thematic literature review will be conducted. This concerns that this literature review will focus linkage portrayed in the conceptual framework. First a general literature will be reviewed where I explain the impact technological innovation will have on the competitive advantage. Furthermore as discovered through the literature it is viable to assume that business model innovation will be a mediating factor on competitive advantage. After the results of the individual variables from diagram have been discussed a case study approach was conducted to give specific implication to the film industry. The reason for this is to first give a general framework as to what constitutes the relation of technological innovation and competitive and then compare to what extent the case study revelations complied with the findings of the general result. Furthermore after the case study of the film industry, a comparative section will be devoted to the music industry. It was discovered that the music industry has also experienced discourse in their business models due to technological advancements and hence there is evidence to suggest that the business models of the two industries are similar. Due to the substantial impact of the internet as variable itself I first considered articles that from the period of 2000-2015, because it is since 2000 (Teece, 2010) that the Internet became a factor influencing the entire design, process and performance of a company. However as the research continued, articles outside the initial time frame were discovered to have high relevance to the topic, especially in comparing and contrasting the evolution of the technology and the business model.
At first the practitioner-oriented such as the Harvard Business Review and MIT Sloan Management Review (MSM) as well as the Strategic Management Journal (SMJ) were considered due to the practicability of the articles would have on the topic. After gaining a general insight as to how business model and technological innovation were perceived by academic literature, I then went on to further the research by using the EBESCO database. This was due to the fact that the articles that were present in the practitioner-oriented articles were either too diverse in what was or the extent to their usefulness was limited due to the range of industries and or business the articles attempted to cover. I used the EBESCO Business Source Premier and the Academic Source Premier, which gave a combined database of approximately 7000 journals (Sonpar, & Litz, 2008). I used the keyword ‘business models’, ‘innovation’, ‘technological innovation’ and variation on the word innovation such as evolution. I also included the phrases such ‘film industry’ and ‘music/recording industry’.
All phrases were searched in the title, abstract and keywords of the database. Furthermore for each search I conducted I filtered the results by indicating the preference for academic journals. I then had to review the relevance of the articles that were found, from which I started from sample of an estimate of 200 articles. The criteria for the inclusion of the articles had to be that either the term business model or technological had to be clearly stated in the abstract and or the keyword presented in order to be included. There were some cases where I made exemptions, due to the fact that in certain cases the term technological innovation was not the term used to describe the phrase. Technological advances were also referred to as disruptive technologies and hence a number of articles were included using that keyword. After this stage I came to final sample of 70. When initiating the literature review, it was not uncommon, to find reference to other journal outside my initial time frame such as the work from Schumpeter (1942). Whilst there were a number of relevant articles discovered in the search, not all were included in the University of Amsterdam library and most would have had to be mailed from other libraries, which were often located at different universities in different cities. Due to the time restriction of study, there were limited opportunities for this research to consult articles that were not made available immediately.
Lastly it is important to discuss as to how the use of literature review will be relevant. This study, through a literature review will aim to assemble the scholarly articles present to support the link between business model innovation and the film industry. As both the topic of BMI and business models in the entertainment industry let alone the film industry is considered a relatively new topic, utilizing a literature review will give a sustainable platform from which future research can be based on.
4. Discussion
4.1 Technological Innovation effect on to Competitive Advantage
An aspect of technological innovation that needs to be considered is the managerial implementation when a new technology is presented in the marketplace. Reid, Roberts and Moore (2014), study the technological innovation impact on the early success of a company. First and foremost, the authors explain how there is a need for a technological vision, which imperative if a “sense of direction” (Reid, Roberts & Moore, 2014, p.605) is to be experienced. A company’s ability to capitalize on new technological opportunities through the firm’s technological vision helps the integration process of with its existing resources and fully optimizes the marketplace (Reid, Roberts & Moore, 2014).
An example technological vision playing an important role is in the development of the iPod (Lev, 2006). Steve jobs technological vision was able to innovate the already existing MP3 technology and develop the product to make its user friendly and in end become a must-want product (Levy, 2006). Furthermore, Levy (2006) explains how the managerial vision of the Steve Jobs was the communication platform for which the technological innovation could be fully utilized and implemented into the necessary infrastructure. Henceforth it is evident that a new technological innovation is not a factor of its own which will result in business model innovation. The managerial impact of when a new technological advancement is presented is to a certain extent more influential than the technology itself, as without the necessary communication tools in place technologic improvement may never be implemented.
The notion of disruptive technology is a specific predicament to the topic of technological innovation. Incumbent firms are generally described to adopters of the casual logic in which firms perform strategic planning and markets so as to develop their business models (Sarasvathy, 2008). Incumbent firms compelled to the institutional and political forces within an organization and hence convert to casual logic when a new technological advancement presents itself (Chandra, Yang, 2011). The start-up firms are more inclined to naturally adopt disruptive technology when it presents itself as with doing, the smaller scaled organization compared to that of the conglomerates will not be able to progress through the marketplace and establish their competitive differential (Aldrich & Auster, 1986). There is also the complication that incumbent firms experience the over-reliance on their resources and assets to target the largest size of the target market which can result in bias in the market
(Gilbert, 2003). Hence in other words, the incumbent firms intuitively overanalyze the market which prompts them to calibrate the disruptive technology in such a manner which enable them to target the mass of market, whist it would be more optimal to adopt the technology at timely manner and utilize it with its current resources so as to be specialize in the given technology and become a innovate of the technology rather adapter at a later stage. An example of the causal logic is the case of Sony Corporations. For a period of time, the CEO of the company, who would rely on his personal intuition to determine the resource allocation, determined Sony’s product development. (Christensen, Craig & Hart, 2001). Following the success of the company in the following decade the company implemented carefully market analysis. The end result was what Christensen, Craig and Hart (2001) described as one of the most successful companies to succeed at new market creation.
Another example of the causal logic is that of IBM. The firm hired consultancy firm to analyses the market in the minicomputer market, which resulted in a study displaying a zero opportunity (Gilbert, 2003). However, in years that followed the minicomputer market became a multibillion-dollar business (Gilbert, 2003). In another case AT&T also hired consultancy firm to investigate the emerging cell phone market in the 1980’s. Just as IBM, AT&T was informed not invest into the new technological development (Govindarajan & Kopalle, 2006). Again just like the minicomputer market, cell phones became a multimillion business that was optimized by Nokia, who for an emerging period became the industry leaders. Both examples illustrate how an incumbent firms formal decision making to new technological advancements can hinder it from fully utilizing it. Evidently is comes to show that it is not necessarily the technology itself that causes competitive advantage. Rather it is how an organization decides to analyze and allocated its resources so as to develop its own capabilities and be able to include technological advancements into their own competitive strategy. From the literature that was discussed the following are suggested:
Proposition 1a: Incumbent organizations are more likely to follow an incremental adaption to their business model. Henceforth in the face of a new disruptive technological innovation, incumbents will tend to overlook the potential benefits to their business model.
Proposition 1b: Start up companies will tend over adopt a new technological emergence, rather than analyze the market beforehand.
Proposition 1c: Incumbent firms that balance their response to disruptive technologies between formal and adoptive processes will experience a higher utilization of technology.
4.2: Technological innovation effect on Business model Innovation
Baden-Fuller and Haefliger (2013), argue that it is un-logical for scholars to argue that a given technological innovation will lead to competitive advantage. Rather it is through their implementation of the business model that will allow them to utilize a given technology. As a new technological innovation is developed, it rarely is without a co-integration of technology already existing so as to be able to create the intended value desirable (Baden-Fuller & Haefliger, 2013). This relationship has become more apparent with the development of more complex and the wider availability of technology. Hence it can be opinionated that it is the business model choices and hence to what direction and degree a company’s business model is innovated that will result in new technological emergence to be play an influential factor in a firm attaining and retaining its competitive advantage.
The issue of the relationship between technology and business models has prompted the question of two sided business models. Baden-Fuller and Haefliger (2013), illustrates this case through the video game industry. Either computers or gaming consoles such as the PS4 and Xbox One were traditionally used in the video game industry, however with the technological development video game developers have opted to distribute their products through various ways such as the Internet (Baden-Fuller & Haefliger, 2013). This has prompted the idea of two-sided business models where the players do not pay to pay the game and the company attains its revenue mainly through advertising and ‘freemium’9 pricing models. Henceforth managers need to analyze and allocate resources towards a new technology in either an experimental manner or (McGrath, 2010) or trough formal planning (Baldwin & Clark, 2006). They can approach these problems experimentally or by following recipes (e.g. Sabatier et al., 2010). Models also may help them expand their reasoning (Baden-Fuller and Morgan, 2010), and recognize the value of involving others such as the developer of technology in the design of the business model. Hence the question whether a new technological emergence will influence the competitive advantage of a firm will be dependent on how the technology is incorporated into the business model.
Exploring exploitative and exploratory innovation, Wei, Yang, Sun, and Gu (2014), demonstrate the connections between technological innovations with business model advancements through study of the emerging market in China. Foremost, it was discovered that exploitative innovation, which as mentioned above evolves around improving the current
9 Freemium is the definition term for which a game is offered or free but to gain extra features or goods
product position, had a negative effect on competitive advantage in the emerging markets such as China (Wei et al., 2014). Hence explorative innovation meaning a new technological base, enables to use business models as a value source and exploit the technological advancement. Furthermore in opposition to Schumpeter (1942), arguing that all technological innovation would result in a firm’s growth, the type of technology developed would be depended the organization itself for firm growth and the current economical situation that they are facing (Wei et al., 2014). Another aspect about technological innovation introduced was the notion of business ecosystem, which is the fit between the new technology and a company’s business model. Wei et al. (2014) argue that the two variable need to align so as to be able to create value from the new technology and hence result in an increase in competitive advantage. These arguments are an extension of arguments proposed by Teece (2010). Teece (2010) also states that a company that relies solely on business model innovation will not be able to gain a significant increase in growth, and hence managers need to fins balance that will result in the most optimum coordination between the business model and resources at disposable. Wei et al. (2014) illustrates this to be true showing that in China due to its low technological base, firms in the country should focus on exploratory innovation rather than business model design. In end effect the research conducted illustrates that in order to attain growth a firm needs to leverage technological innovation to make business model design have an effect. The following has led to the following propositions: Proposition 2a: A company that is located in an emerging market, an exploratory innovation has a higher potential to increase the value of the firm.
Proposition 2b: For a technological innovation to be a contributing factor into a company’s success the business model of a firm needs to be able to accommodate the technology.
Proposition 2c: Not all types of innovation will result in an overall increase in value for a company. Firms needs to appropriate their resources in such as manner that will aloe them to exploit innovative evolutions.
4.3: Business model innovation effect competitive advantage
Technological advancements have been deemed by scholars to have a limited impact if the business model is not fully coordinated in order to accommodate and adapt to the shifting resource allocation. Frankenberger, Weiblenan and Gassmann, (2014) elaborate, through the
case study of firms such as BMW and Nespresso, on the notion of open business models. As a result the study created a framework for managerial implications for creating value for the company and hence retain competitive advantage. The framework can be observed below. Frankenberger et al. (2014)
study coincides with the fact that open business model will
foster greater company
performance. This is considered to be even more relevant to the authors (Frankenberger et al., 2014) as they consider business model innovation to be a factor that comes from outside the industry, such as in the case of Apple in telecommunications (Iphone). Kim and Mauborgne (2005) reinforce the findings of the open business model, however state that there is no one-business model applicable to certain organization. Hence this comes to reason that a firm
would need to conduct regular analyses on their resource allocation and that of competitors so as to be able to adjust their business model. The indication of an open business model is, the structure will allow for the attainment cross-functional innovation. However this is a perspective that Frankenberger et al. (2014) says is invalid if an R&D executive does not manage the interdepartmental cooperation. In other words the authors proclaim that for innovation is influenced by the resources that can be placed towards a department, person, or project.
As was mentioned before competitive advantage through business model innovation has taken managers to consider ‘outside the core’10 projects as the source of value. When considering business model innovation it is important to consider the effects faulty
10 Outside the core innovation: Projects that are “beyond the familiar markets and competencies on which the
assumptions. DaSilva and Trkman point out that if a "business model's core stands on untested and speculative assumptions about the future, the firm is doomed to an uncertain outcome'' (2014, p. 3). This notion is supported and extended in the case study by Bertels, Koen and Elsum (2015), where it was discovered that there was a consensus that certain business model aspects of individual projects would be similar to the companies already incumbent businesses. The largest false assumption concerned the cost structure which were areas that which were more difficult to discover (Tripsas and Gavetti 2000). In end effect it can be considered that the variables were not adequately taken into considerationas initially they considered to have understood the concepts. In this regard, it can be attained that in order to gain value from business model, it is necessary to understand the individual components. Hence is false assumption are to be followed a firm will not attain their competitive advantage. For example in the case of the cost structure of a firm, it includes direct as well as overhead costs (Bertels et al. 2015). Whilst direct costs are more measurable and hence have a higher capability to be controlled, overhead costs are “difficult to change. So there's a strong impulse to start with existing overhead costs when devising the cost structure of a new business model. But that order is backwards; in the new model, the overhead must be determined by the requirements of the value proposition, not taken as a given" (Johnson, Christensen, and Kagermann, 2008, p. 36). In end result it would be expected to converse the effects of false assumptions that an organization would apply organizational learning. A proposed solution for this would be the introduction of senior leader who have the capacity to sustain business models whilst at the same time experimenting and learning on an incremental approach (Tushman and O'Reilly 1996). The effect that business model innovation has on the overall outcome of firm comes to question the managerial process of a firm. In other words, the efficiently of a business model seems to be linked to the extent the personnel of firm are able to understand and utilize the modification.
Proposition 3a: Innovation of the business model tends to be experienced from outside accustomed process of activities of a firm.
Proposition 3b: ‘Open’ business models have higher propensity to support innovation projects in a firm. This is due to higher resource transfer between departments and management cross-departmental leadership.
Proposition 3c: The role of managers determines the efficiency of a business model and is vital in the implementations adoptions to the business model.
4.4 Case study analysis:
4.4.1 Film industry
Currah (2006) explores the effect of digital sharing on the film industry through a period qualitative study spanning approximate 10 years. The author discusses the consolidation of film studios that were considered to account for more than 90% of the revenues of the film industry (Currah, 2006). Currah describes these consolidations as the “divisions within a broader circuit of copyright capital” (2006, p. 440), to form oligopolies within the film industry. Table 2, from the Curah illustrates this comprehensively.
Table 2: Corporate ownership and structure of the Hollywood studios.
Source: Curah (2006).
One major technological innovation identified by Currah, which entails the entire study is that of P2P (peer-to-peer) file sharing (2006). This network based system, which originated from the development of Napster (Leyshon, 2001), eventually was shut down due to copyright infringement, to the decentralized structure to file sharing of programs such as BitTorrent and the Pirate Bay. The OECD (2004) estimated that in 2004, the P2P file sharing was responsible for over one third of total Internet traffic. Currah (2006) shows that in 2005, the legal downloads in 2005 were estimated to have been 450 million digital songs, whilst illegally 24 billion songs were downloaded from P2P networks. Meaning that illegally more songs were downloaded each week (460 millions) than legally each year. Relating the number of downloads to the film industry, Currah estimates that approximately 2 billion
Hollywood films, which are owned by the oligopolies of the Hollywood, are downloaded each year worldwide (2006). The Motion Picture Association of America (MPAA) estimates the each download represents a loss for the studio of $142.9 million, which in 2004-2005 was the average cost for a film (Currah, 2006). Whilst the oligopolies are stating the that file sharing is a danger for the livelihood and stability of industry, looking at the Table 2, it clearly shows that in past 10 years from which the internet, the major studios have actually been able to attain larger profits and revenues than before.
Table 3: Studio market share and revenues 2001-2014
Source:Boxofficemojo.com
There is sufficient evidence within the study conducted to illustrate that whilst the benefits of legal file sharing, that executives are still inclined to “protect the existing spatial and temporal structure of ‘release windows’, which is currently dominated by a physical commodity form—sales of the ‘digital versatile disc’ (DVD) format” (Curah, 2006, p. 442.) Currah identifies that a major impediment of the development of the business model is that oligopolies, enforce a centralized approach to reproduction, which aims to hoard, defend and exploit intellectual property through legal instruments such as copyrights and trademarks” (Bollier, 2005,p. 3). Hence it is the evolution of the Internet, which is illustrating to be a
disruptive technology, and hence requires business model innovation to able to for firms to maintain their competitive advantage.
File sharing has already been tested in the music industries and now is considered to be main influencer in the business model of the industry. Benkler (2004) identifies, that movie studios determination to maintain their control is slowing down the process of which legal file sharing will have a competitive advantage for the film industry.
The movie studios have experimented with file sharing technology with its current business model, opting for centralized file-sharing services, such as Cinema Now and Movie Link (Currah, 2006). Movie studio Warner Bro. introduced the manufacture-to-demand (MOD) system to which introduced the large amount of content being made available quickly (Schauer, 2012). Warner archive released an estimate of 1300 films on its MOD system in a space of three years (Schauer, 2012). Furthermore with the MOD system, the average break-even point is only 70 releases, whilst for brick-and-mortar11, titles with a projected sales of less than fifty thousand were not considered to be included into their library (DiOrio, 2010). The MOD system of Warner Archive enables studios can help studios to build up their film as well as television libraries and make apparent some titles that otherwise would not be utilized or enjoyed to the greater public. However whilst these services would coordinate the file transfers between peers, studios have been reluctant to invest major in the technology, which will result in the overturn of their business model from which have relied on for the last 50 years and which seems to promise them a steady revenue inflow.
Licensing costs has a great influence on the movie studios decision not innovate their business model. Table 3 illustrates the amount of costs involved for the major oligopolies in the US to digitally distribute 50% of their oldest installments.
11 Business that relies on store fronts for marketing visibility and consumptions of its product or service.
Table 4: Projected cost of licensing and digitalizing studio film in (US millions)
Source: Currah (2006)
In total it would result in a cost of $1.7 billion, which at the current moment does not seem viable, considering that the studios were only gaining an estimate of $5 million from the current digital sharing system (Currah, 2006). Whilst there has been a substantial growth in the digital movies, Klepper (2002) describes how the actual growth of a new market is dependent of the establishment of the incumbents as they are the entities, which have vast assets as well as market power. The danger of this being that instead of commercializing in a technology that already has caused the growth in a new market, the movie studios could be risking criminalizing consumer where they are forced to illegally download movies from the ‘dark net’ (Fisher, 2004).
Netflix optimized the peer-to-peer file sharing process through endless adaptions of its business model. Originally starting mail order service founded by Reed Hastings, the company has become on the forefront of streaming films and televisions series over the Internet. The streaming service was launched as an adjunct to the company’s core DVD-by-mail offering. After experiencing great success in their DVD-by-mail-to-order service and moving towards a Video on Demand (VOD) framework, the company decided to invest in streaming services which eventually became an innovative influence to its business model layout as well as the industry as is demonstrated by the graph below.
Graph 1: Revenue of film industry by window of distribution
Source: Shih, and Kaufman, 2014.
Hastings justified the diversification of their business model by taking advantage of the company’s brand image and already heavily developed recommendation system12, as well as its immense subscription base of online customers (Shih and Kaufman, 2014). Hastings expressed how building and levering its brand identity and market share was the necessary path to differentiate itself from their competitors such as. Shih and Kaufman (2014) in their case study of the Web based entertainment provider, explore how the company was able to innovate their business model through the extension of their content, further personalization and development of a streaming infrastructure. First, due to its rapid expansion, Netflix extended its content through licensing deals and were able to gain deals with Starz Entertainment and other major studios such as Paramount (Shih and Kaufman, 2014). These deals provided the company with a in box office films and televisions shows to its library which enabled to its compete against ITunes and Amazon. However both competitors already had extensive experience for licensing and henceforth Reed decided to again innovate their business model by producing original content, and hence follow HBO strategy (Shih and Kaufman, 2014). Their first attempt ‘House of Cards’ starring Kevin Spacey became huge success and already in its first season became nominated for 9 Primetime Emmy awards. Now the company have increases their investment in an attempts to become a major
12 The Netflix Prize was a competition for the best collaborative filteringalgorithm to predict user ratings
production house (Bensinger, 2012). Netflix utilized its extensive technological database to provide a personalized experience, primarily through the recommendation system. However, since 2010 with the success of its streaming infrastructure, Netflix started to offer its services on Xbox and PlayStation game consoles as well on tabled such as the apple IPad and IPhone (Shih and Kaufman, 2014). Lastly and most evident of the companies technologies innovation, is the streaming infrastructure of the company. The firm already was developing its distribution process with DVD operation and became a disrupting influence, which resulted in the industry having to reconsider its strategy (Shih and Kaufman, 2014). However as Shih and Kaufman (2014) demonstrated streaming required that Netflix overturn their business model because of the immense data that was involved. The large amount of data reached the point where Netflix became the “largest source of traffic on the internet” (2014, p. 14). By 2011, Netflix reported that the majority of their subscribers were viewing more of their products through their streaming service (Netflix Form 10-K, 2011). Netflix has demonstrated that technological innovation can be the primary force behind the evolution a company’s business model. The company’s evolution of their business model has resulted their ability to attain a gross profit of approximately 1,75 billion dollars13 (Bloomberg, 2014).
Netflix’s immense success from their period of establishment to their breakthrough movie licensing deal has now resulted in the company being regarded as disruptive technology in their own right.
Following the progression of Netflix, the Independent Film Channel (IFC) and Magnolia Films will be examined. With the consolidation of the oligopolies of the American film industry, the smaller scale institutions needed to elaborate their business model in order to be able maintain a competitive advantage. IFC in the face of the technological innovated its business model through its distribution process. The main application as to how this was achieved was the synchronizing of the Video-on-demand and the theater exhibition (Hilderbrand, 2010). The main premises for this combination means that the film would be available for a longer time than in the theater. Since its introduction the company has extended the combination model by offering a more widespread collection of films, offering a larger number of titles than what it does in theaters (Goldstein, 2006; Dempsey, 2006; Kay, 2006). Similarly, Magnolia Pictures experimented with multi-platform releasing, and was named by variety as ‘frontrunner’ of VOD releases (McNary, 2009). The company founded in 2001 focused on documentaries and foreign film but decided to innovate its business
model by utilizing the independent market in the US. The distributor experienced similar growth to that of IFC that’s resulting in the VOD revenues matching or exceeding that of the theaters. Whilst, the evolvement of this business model, there is uncertainty as the wether this model produces the largest revenue benefit. Hilderbrand (2010) reports that after cable operators receive their earnings (sometimes as high as 50%) and the companies overhead costs are covered, IFC tends to receive a final net revenue that is approximately around the low thousands. Kaufman (2009) however states that as it is an independent company the revenues that companies such as IFC and Magnolia Pictures are receiving are generally justified considering that the theater distribution costs are exponentially higher. Video on demand has also altered the industry, on basis on release timelines. Whilst many studios are releasing their digital film at the time of DVD release, the independent production companies are now basing their release time on the same date as the theater release date (Hilderbrand 2010).
Examining a further case is that of the Australian film industry which have unable to utilize their film productions to the same extent to the same extent of that of the Hollywood production. Whilst the obvious reason stand to explain that Australia’s impeded success is a based on the lack of market majority and asset that US studios, Aveyard (2011) motivates that the process of distribution is a more hindering factor. MacCabe (2007) reinforces Averyard theory and describes how the lack of distributing capabilities of a film production means that in some cases a film title is considered to not even exits. Swift (2009), reveals that the film organization Screen Australia, for the years between 2009 onwards were not able to recover their initial investments on any projects, resulting in small to medium scale production (1-6 million $AUS) being the majority of feature films that are produced in Australia. Bowles states that the consequence of the impediments means that the local population have no interest in sharing the (2007, p. 246) “national cultural experience cinema”. Since the introduction of the new market of Internet file sharing, the Australian film industry has based their technological innovation on the enhancing the current distribution system. In end effect, the business model does not get evolved, it does not innovate, and rather it consolidates the current business model in an attempt to maintain their competitive advantage. Over the years, cinemas with standard cinema screens are being replaced with more advanced technology such 3D screens or even more recently the 4k projection screens (Averyard, 2011). The MPDAA14 (2010) states that by the beginning of 2010, an
approximate of 16% of Australian cinema screens were converted to digital projection. Specifically the Australia cinema chain Hoyts announced in 2009 that it would replace its entire 325 screens with 3D projections (Foreshew, 2009). Furthermore as the independent cinema around the country account for 30% of the national market, the Australian Film Commission, funded a project to install digital in a number of the regional cinemas (MPDAA, 2010). Hence as acclaimed by Aveyard (2011), the Australian film industry are focusing on ‘event film’, which come to describe why in 2009, the top ten films shown in Australia accounted for 30% for the total box office revenue, whilst only representing only 2% of the total releases that year. The problem with this technological enhancement is that they are based for big budget film production that as explained before is primarily financed by the Hollywood studios. Hence the comparatively low budgeted films have mostly been incompatible to the multiplex style cinema performance for the last 20 years (Verhoeven, 2010).
To gain a further perspective into the film industries attempt in business model innovation, this study will regard case studies undertaken on the UK independent film industry. The main barrier to the innovation process of the UK independent film industry is the similar problem of distribution and awareness experiences in Australia. The main initiative to counter these barriers is the use of digital media to harness the ‘value capture aspect’ of the business model innovation process. Franklin, Searle, Stoyanova and Townley (2013) conducted a case study of three independent film productions. The first film15 was a micro-budgeted production, which had a distribution spending allowance of only 50k pounds. The second film16 was a low budgeted film installment with an approximate of around 400k
pounds for distribution. Lastly the third film17, which was reviewed, was considered medium
budget of 3 million pounds and a distribution allowance of 150k pounds. Franklin et al. (2013), explore how the producers primarily used technology (digital media) as an ‘end consumer engagement’ device to provide marketing materials such as behind the scenes and directors blogs. Whist this employment of technology is not innovative in the sense of a new communication channel, it is in the current productions marketing strategies employed on a rare occasion. However as Franklin et al. expresses it is the “extension of such material in depth, volume and timeframe, in combination with an explicit strategy…(that) qualifies the activity as innovative” (2013, p. 326). The case goes on to describe how the adaption of the
15 Referred to as Film A
16 Film B 17 Film C
digital media aims at reducing the demand uncertainty that is often experienced in the film industry, especially for independent films (Hartley, 2012). For Film A, a social media campaign was conducted over the period of 6 months, in which movie and promotional content was released (Franklin et al., 2013). To supplement these efforts, the producers of the film also engaged potential consumers as well as potential consumer influencers through Twitter. The producers eventually were successfully to have the film screened at 14 more locations than was originally agreed upon (Franklin et al., 2013). Film B used a more direct method in elaborating its marketing focus onto a fan site for a franchise in which one of the actors in the film had a supporting role. Whilst initially this strategy was seen as a success, it was later discovered that the users of the site were not generally from the UK and hence its impact to seemed to less effective than what was initially considered. This same result was in seen in Film C, where the movie content and promotion were received generally Japanese citizens who were mostly underage (Franklin et al., 2013). All three films also utilized Facebook to analyze the demand for the films, and varied results were indicated. For example Film B experienced a greater number of ‘likes’ in comparison to Film C that had a larger production budget as well as a ‘star’ actor. The result of this was liable to thee marketing efforts of film, which attained larger attention and hence larger amount of consumers. Digital technology has evolved to represent a disrupting technology for the traditional film value chain and hence supported the notion towards a new business model. Most evidently, is the effort producers placed to acquire public funding to be able to control the distribution channels. Whilst this is not a direct evidence for a technological innovation, it does represent how the business model which was reliant on the big studios to provide the distribution means, are now being undermined by innovative ways of existing technological platforms. More importantly these cases illustrate the importance of how the value creation of business models can a substantial influence on the overall performance of a film. The following are considered for proposal:
Proposition 4a: As discussed in theory, for business model innovation to be effective, the vision and role of the manager is an intractable role in sustaining the process of innovation.
Proposition 4b: The Internet according to many articles has proven to have largest effect as a disruptive technology in the film industry, especially peer-to-peer sharing.
