Profiting From Digitally Distributed Cultural Products The Case of the Video Games Industry

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The Case of the Video Games Industry

Master thesis (27/02/10) Joost Rietveld (s1387235) University of Groningen

Faculty of Economy and Business

Department of Innovation Management and Strategy Supervisors

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Abstract

The study looks at the strategic implications of digital distribution within creative industries. With the advent of digital distribution channels, actors creating cultural goods now have the ability to independently publish their own products as entry barriers to the stage of publishing have been lowered. The purpose of this study is to develop a theory for profiting from digitally distributed cultural products and illustrating it through practical case study analysis. The study ties together Hirsch’ (1972) strategies for successful commercialization of cultural products with Teece’s (1986) complementary assets. The video games industry is chosen as case study. The results of the study indicate that content producing organizations lack the complementary assets in order to deploy the strategies needed for successful commercialization. Content producers are more likely to successfully commercialize their products by forming strategic alliances with incumbent publishing houses. Publishing houses create value by enhancing the chances for selection by gatekeepers due to their possession of marketing assets, competitive manufacturing assets and relationships with relevant gatekeepers enabling them to deploy strategies for successful commercialization of cultural products. Keywords: Strategy, complementary assets, vertical integration, cultural industries, video games.

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1. Introduction

With the advent of digital distribution channels in cultural industries, pure information goods like books, music, films and video games no longer have to be tied to a physical information carrier to be distributed. The effects of the emergence of digital distribution channels are noticeable throughout the entire value chain as value propositions evolve and power positions change (Bockstedt et al., 2006). The most significant consequence for actors creating the actual cultural goods is the ability to independently publish their own products onto the digital distribution channels. Entry barriers to the stage of publishing in these industries have been lowered as complex and capital intensive logistics of an international distribution network for physical goods are no longer necessary (Kretschmer, et al., 2001). However, for cultural content producers to successfully commercialize their products, strategies need to be deployed for which these actors might lack the necessary complementary assets.

As Teece (1986) pointed out, several factors are relevant in determining who profits from innovations. Sometimes, the owners of complementary assets are the actors within the value system who appropriate the most value from an innovation. Hirsh (1972) was the first to attempt to understand how cultural goods are (pre-)selected for consumption and which strategies need to be deployed to enhance chances for pre-selection. In later work (DiMaggio & Hirsch, 1976; Hirsch, 2000) Hirsch’ findings are revalidated, they still apply in the current state of cultural industries. Mol et al. (2005) look at the role of vertical competition within creative industries and the influences of digital distribution on value distribution among different actors in the value system. Clemons et al. (2003) and Bockstedt et al. (2006) specifically look at how digital distribution will affect musicians and their products.

The purpose of this study is twofold; (1) developing theory for successful commercialization of digitally distributed cultural products; and, (2) illustrating it through practical case study analysis. The study ties together Hirsch’ (1972) strategies for successful commercialization of cultural products with Teece’s (1986) complementary assets necessary for commercializing innovations. The theory is illustrated by conducting a case study analysis of the video games industry. Within this setting, a video game developer active across multiple video game platforms is chosen as a case study organization. Special attention is given to one of its focal products which has been digitally released on two comparable online platforms through different commercialization strategies. Empirical data was collected using sales-tracking databases, interviews with employees and management, field notes, company documentation, and observations. The data is analyzed using an event study methodology.

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products when innovators have the necessary complementary assets in-house or have sufficient cash to buy these assets. Innovators are more likely to successfully commercialize their products by forming strategic alliances with incumbent publishing houses. These publishing houses create added value by enhancing the chances for selection by gatekeepers. They are able to do so due to their possession of complementary assets enabling them to deploy Hirsch’ (1972) strategies for successful commercialization of cultural innovations.

The next chapter provides an overview of the video games industry as a cultural industry and the advent of digital distribution within this industry. The consequences of the advent of digital distribution channels for content producers within the video games industry are discussed in chapter three. Hereafter, a theory for profiting from digitally distributed cultural products is presented. Next, the methodology section explains the research methodology, followed by the results of the study. Based on these results a discussion and conclusion chapter in which suggestions for further research are given concludes the study.

2. Video Games Industry

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Overview

The video games industry’s global revenue over 2009 is estimated at $58 billion, including the PC video games software industry (DFC Intelligence, 2008). In 2008 there were 11 countries with annual video game revenues in excess of $1 billion. In 2009 the industry is projected to directly employ over 250,000 people alone in the U.S. (ESA, 2007). 42% of all U.S. households are in the possession of a video game console, the average player is aged 35 years, 40% of all gamers are women, and 25% of U.S. citizens aged 50 years or older play video games (ESA, 2009).

Despite its economic and cultural relevance, the video games industry has received little attention from scholars. Most noticeable publications in the field of business are: Johns’ (2006) article on video game production networks, value capture power relation and embeddedness and two articles by Aoyama and Izushi (Aoyama & Izushi, 2003; Izushi & Aoyama, 2006) about the foundations of the video games industries in its three most important regional sectors and their evolutions. From an innovations standpoint, Tschang (2005; 2007); Baba and Tschang (2001); Readman and Grantham (2006); and Grantham and Kaplinsky (2005) have contributed to the existing knowledge on the video games industry. There is a lack of studies investigating the strategic side of commercializing innovations within the video games industry, this study contributes by filling this gap. The study

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further elaborates on these authors’ findings and contributes to the existing knowledge on the industry as a cultural industry with economic and scientific relevance.

2.1. The Emergence of Digital Distribution within the Video Games Industry

The current generation of video game consoles launched in December 2005 with Microsoft’s Xbox 360. Sony and Nintendo followed suit in November 2006 with a North American launch of their competing systems PlayStation 3 and Wii. In September 2009, over 267 million units of current generation video game consoles (both home consoles and portable consoles) were sold (VGChartz, 2009). Nintendo is market leader at this point in the systems lifecycle: 50 million Wii’s have been sold, 32 million Xbox 360 consoles, and 24 million PlayStation 3’s (VGChartz, 2009).

All three consoles possess the ability, next to physical distribution through discs, to distribute video games bought at an online web shop directly to the consumer. Nintendo’s Wii Shop Channel, Sony’s PlayStation Store and Microsoft’s Xbox Live Marketplace all offer video games exclusive to the channel on which they are released. The video games offered on these channels are smaller in terms of file size and development costs. Consequently, the games are lower in price compared to their physical counterparts. The larger part of these video games are developed and published by third party developers, outside organizations unaffiliated with the platform owner (Williams, 2002). Once downloaded, the video games are stored on the hard disk of the game console. The digital character of the distribution channels allows for virtually unlimited shelf space as opposed to the physical retail channel.

From 2006 to 2009 digital distribution channels have gained enormous popularity and have grown substantially in terms of number of games available for download and additional services offered. Nintendo’s service for downloading re-released hit video games Virtual Console was launched simultaneously with the Wii console in December 2006 and has since its release generated over 10 million downloads spread over 500 video games (Gamespot, 2008;VGChartz, 2009a). Nintendo’s WiiWare service, offering newly developed video games was launched May 2008 in North America and now offers over 200 video games (VGChartz, 2009a). Estimated sales of the more successful titles range from 50,000 to 350,000 units sold (Careless, 2009). WiiWare titles are sold for $5 – $15 per download depending on the value proposition of the video game.

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emergence of digital distribution (Gamasutra, 2009a). It is clear that within the video games industry, equal to the music and book publishing industries, digital distribution has been established as a legitimate platform for both consumers and industry actors.

3. The Consequences of Digital Distribution on Video Game Developers

3.1. Physical Distribution Value System

The production network of physical video games occurs on a global scale and consists of eight production stages; financing, development, production, publishing, manufacturing, distribution, retailing, and consumption (Johns, 2006; Williams, 2002). These production stages are performed by six industry actors; developers, publishers, platform owners, distributors, retailers, and consumers. The production stages of the video game industry should not be seen as independent production entities as many organizations integrate several stages to obtain economies of scale and scope (Williams, 2002). The physical distribution value system with estimated percentages of value captured by each actor is depicted in Figure 1.

Figure 1. Traditional production value system

3.2. Video Game Developer Business Model

In the traditional physical distribution channel, video game developers are to large degree dependent on publishers as these actors provide financing for video game development projects. Publishers can be seen as the developers’ buyers and act as a gateway to the end-users (Readman and Grantham, 2006). In return for the monetary means, publishers retain the intellectual property rights (IP) to the game, maintain decision-making powers over the game until it reaches the customer, and carry the

Developer (work-for-hire & royalty %) •Development: Designing, programming & debugging Publisher (40% -Developer costs) •Financing •Production: Planning, localization, applying for technical approval •Publishing: IP management, marketing & promotion Platform owner (20%) •Production: Supply development kits & technical approval videogame •Manufacturing: Physical manufacturing videogame (& promotion) Distributor (10%) •Distribution: Storage, delivery & sales effort

Retailer (30%) •Retailing: Shelf space

& product offerings

Consumer •Consumption: Buy

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financial risks involved in the development stage (Johns, 2006). Publishers have control over characters and franchise licenses (IP’s) which are the industry’s key resources (Readman and Grantham, 2006). Due to their dependency on external financing, video game developers are often in a weak negotiation position.

After a video game developer has been given approval for a project, the development stage starts in which the developer has to stick to publisher set milestones. Upon achieving these milestones the developer is granted the agreed upon financial means, also called advances. Publishers have far going termination rights for development projects at almost any point in the development process (Charne, 2006). After the video game has been completed, it is adjusted to the various local markets on which the game is released, a process known as localization. Hereafter the video game is sent to the platform manufacturer for technical approval. Then, the physical product is manufactured. Due to obligatory licensing agreements with platform manufacturers, publishers outsource the video game manufacturing activities to these actors.

Early in the evolution of the video games industry hardware manufacturers realized that software sales would be far more profitable than the sale of hardware (Schilling, 2003; Johns, 2006). Furthermore, by controlling this stage of the production process and by granting video game developers development kits, hardware manufacturers can guarantee a degree of quality control and act as the industry’s gatekeepers. It has been estimated that the manufacturer captures 20% of the total retail value of a video game (Johns, 2006). In return, platform manufacturers use (potential) hit software to promote their systems as these titles contribute to hardware sales (Binken & Stremersch, 2009). Logically these promotional activities are not only beneficial to the platform manufacturer but also to the publisher and sometimes developer (in the form of royalties). On average, the publisher and developer taken together capture in total 40% of the retail value of a video game (Johns, 2006).

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3.3. Digital Distribution Value System

Digitization has several far going consequences for video game developer business models and the industry’s value system. The largest implication for the value system is the fact that physical good distributors and brick-and-mortar retailers are no longer a necessity since there are no physical goods to be distributed or sold at retail outlets. In addition, video game developers now can single handedly publish video games based on their own IP on digital distribution channels. In a situation of pure digital distribution, the video game industry’s value system resembles the image depicted in Figure 2.

Figure 2. Digital distribution value system for publisher turned developers

3.4. Business Model Implications for Video Game Developers

Comparable to the music industry (Bockstedt et al., 2006), video game developers can now enter the stage of publishing as one of three of its most significant entry barriers have eroded: complex and capital intensive logistics in requirement of scale and scope advantages of an international distribution network. Independent video game developers are able to bypass the existing publishing oligopoly and sell directly to the customer (Johns, 2006). Nevertheless, two other entry barriers for the publishing business have remained intact: (1) huge marketing costs involved with bringing a cultural good into the market; and, (2) the need for overproduction in a winner-takes-all market where the reasons for success are unknown beforehand (Kretschmer et al., 2001; Caves, 2000).

The rationale for vertically integrating into the stage of publishing is two-fold. Video game developers receive a larger share of revenue per unit sold, 65-70% (based on case study analysis). A second reason for self publishing video games onto digital distribution channels is IP management. Video game developers retain ownership over their internally developed IPs and have greater freedom and creativity in determining the content of their video games. Publishers want their projects to have a secure revenue stream, not cost too much, and, to be delivered on time (Readman and Grantham, 2006). This has led to a tension between developers and publishers resulting in innovation in video

Developer / publisher (65-70%) •Financing •Development: Design, programming & debugging •Production: Planning, localization, applying for technical approval •Publishing: IP management, marketing & promotion Platform owner / distributor / retailer (30-35%) •Production: Supplying development kits & technical approval videogame

•Distribution: Provide digital storage/virtual shelf space, promotion & sales effort

Consumer

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game development to occur only incrementally the past decade. The latter leading to an abundance of ‘safe’ movie and sports license-based games and sequels to tried and true IPs (Tschang, 2007; Williams, 2002; Gaudiosi, 2007).

A consequence of self-publishing video games on digital distribution channels for video game developers is that these actors have to become more network oriented in order to acquire the skills needed for successful publishing. Traditionally, developers have been relatively isolated in terms of network connectivity compared to platform manufacturers and publishers, occupying a more peripheral position (Johns, 2006). Actively targeting this system of organizations, also known as ‘gatekeepers’ (Caves, 2000), as a means of improving the chances for successful commercialization is a large part of marketing and promotional activities previously performed by publishers. For digitally distributed video games, this system of organizations consists of mass media actors and the platform owner for technical approval and promotional activities.

From a developers perspective, the importance of platform owners as gatekeepers increases in a setting of digital distribution. Research in marketing has argued that in system markets, such as the video games industry, the sale of hardware units is to large degree dependent on the availability of software (Farrell and Saloner, 1986; Gupta, Jain and Sawhney, 1999; Katz and Shapiro, 1986; 1994). Binken and Stremersch (2009) indicated that popular software, so called ‘superstar’ software, in the US video games industry attributed to a 12.4% increase in hardware units sales. Logically, platform owners contribute to the promotion of these superstars to further enhance the effect of these titles on hardware unit sales. The incentive to do so rises with the advent of digital distribution channels as the platform owner also becomes the distributor benefiting even more from every software unit sold.

4. Profiting from Digitally Distributed Cultural Products

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4.1. Value Distribution and Value Chain Envy in Cultural Industries

Value distribution amongst industry actors is a key concept in the literature of strategic management and innovation. Sustainable competitive advantage can be achieved only by having the right balance between value creation, value protection and value capture. The distinction between value capture and value creation is illustrated well by Bowman and Ambrosini (2000). Value creation is defined as the contribution by one of the actors in the value chain to the utility of the final good to end users. Value capture is defined as the difference between the price paid by the end user and the incurred costs. In addition to value creation and value capture, Foss (2003) further distinguishes value protection:

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resources deployed by actors within the value chain to protect themselves against the threat of competitive imitation.

Distribution of value is dependent on the bargaining power an actor has in comparison to other stages directly upstream and downstream within the value chain (Priem, 2001). The amount of profit an actor obtains is determined by the vertical dynamics of the value system and not by its horizontal dynamics. Desirability and feasibility of vertical integration and new entry within a specific stage of the value chain is largely dependent on the degree to which value creation and value capture are in equilibrium in addition to the degree of effective value protection at a particular stage in the value chain. When the amount of captured value disproportionally exceeds the amount of value created at a particular stage of the value chain, new entrants and other actors within the value chain might want to vertically integrate into that specific stage. A phenomenon Mol et al. (2005) call value chain envy.

Over the years, the role of publishers within cultural industries has diminished from a situation of scale advantages in printing, distributing sheet music, and later reproducing and distributing physical information carriers and collecting royalties, to a role where almost anyone can be a publisher (Mol et al., 2005; Caves, 2000). Despite their scaled down role, publishers still capture a large part of the value being created. The term value chain envy is applicable to this particular stage of cultural industries’ value chains (Mol et al., 2005). Mol et al. (2005) found a significant increase between 1992 and 2002 in the number of new actors in the stage of publishing compared to other stages within the music industry in the Netherlands, mainly caused by vertical integration by upper-end actors, i.e. content producers, in the value chain.

Despite entry barriers having been lowered, nearly all new entrants in the stage of publishing were found to have difficulties with capturing value, as they remained small in terms of size and revenues (Mol et al., 2005). In conjunction with literature on this topic (Burnett, 1996; Kretschmer et al., 1999; Peterson and Berger, 1975), Mol et al. (2005) conclude that the competitive advantages incumbent publishing houses have over new entrants can be attributed to their possession of certain complementary assets, namely strong relationships with relevant selectors or gatekeepers.

4.2. The Role of Complementary Assets in Profiting from Innovations

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hinge on a bilateral dependence between the asset and the innovation, these assets are called cospecialized complementary assets (Teece, 1986).

Both innovators and owners of (co)specialized complementary assets can capture disproportionally large shares of value from an innovation. The outcome depends on the market power these actors have. ‘Should the asset turn out to be a bottleneck with respect to commercializing the innovation, the owner of the bottleneck facilities is obviously in a position to extract profits from the innovator’ (Teece, 1986; pp. 296-297). Small firms and new entrants are not usually in the position to vertically integrate for the access to complementary assets when they ideally should. It is, however, unlikely that these actors are already in the possession of the (co)specialized assets needed for successful commercialization of their innovation. These actors either have to incur the expense of building the complementary assets, or need to reach out to holders of the assets and try to contract them for access (Teece, 1986). In either case, the holder of the complementary assets will likely capture a large part of the value being created (Teece, 1986).

Although new entrants are likely to have technological superiority (and less organizational myopia) over incumbents, without access to complementary assets, new entrants might be at a disadvantage in commercializing their innovations (Tripsas, 1997). Managing strategic alliances for contracting access to these assets, then becomes an important success factor for new entrants in profiting from their innovations (Mitchell et al., 2002).

4.3. Cultural Industry Dynamics

Hirsch (1972) states that ‘the production and distribution of both fine arts and popular culture entail relationships among a complex network of organizations which both facilitate and regulate the innovation process. ... Decisions taken in organizations whose actions can block or facilitate communication, therefore may wield great influence over the access of artist and audience to one another.’ (p. 640). Organizations that can both facilitate and regulate innovation have a gatekeeping role as an institutional regulator of innovation and can be defined as ‘gatekeepers’ or ‘selectors’ (Hirsch, 1972; Caves, 2000; Wijnberg, 2004).

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points out that ‘stratification within each industry is based partly on each firm’s ability to control the distribution of marginally differentiated products. Competitive advantage lies within firms best able to link available input to reliable and established distribution channels’ (p. 646).

The distribution sector of cultural industries is more heavily concentrated than the content producing sector. Heavy marketing expenditures for differential promotional and marketing activities are a necessity to pass favourably through this stage of the value system (Hirsch, 1972). It is not so much the favourable or unfavourable interpretation of these marketing activities but rather their presence or absence of coverage that enhance the success of the cultural product within the distribution channel (Hirsch, 1972). The advent of digital technologies has lowered value protection mechanisms and consequently entry barriers to this stage of the value chain (Mol et al., 2005; Bockstedt, et al., 2006; Clemons, et al., 2003; Kretschmer et at., 2001). In a setting of digital distribution, supply of cultural goods will grow even further (and outpace demand for these products).

As opposed to what the long-tail suggests, online distribution channels will not alter the demand curve of all cultural goods in favour of niche products (Anderson, 2006; Elberse, 2008). Anderson (2006) argues that distribution channels enable virtually unlimited shelf space and that consumers value niche products geared towards their particular tastes. This suggests that, the tail of demand will grow longer and fatter in favour of those organizations offering more ‘obscure’ products. Nevertheless, recent research showed that in a setting of digital distribution, the winner-takes-all principle still applies (Elberse, 2008; Caves, 2000). Light consumers still concentrate heavily on hit products, whereas few heavy consumers are more likely to choose a mix of hit products and niche products (Elberse, 2008). Knowledgeable heavy consumers tend to like the hit products better than niche products, leading them to eventually favour the hit products (Elberse, 2008).

More evidence that digital distribution channels might enhance diversity in supply but reduce diversity in sales is given by a study on the impact of recommender systems on sales diversity. Fleder and Hosanagar (2009) conclude their study by stating that recommender systems, an alternative to physical distribution channels’ hit lists, can reduce diversity in sales. ‘Common recommenders ... recommend products based on sales or ratings, they cannot recommend products with limited historical data, even if they would be viewed favorably’, recommender systems will lead to the hits getting bigger and niche products selling less (Fleder and Hosanagar, 2009; p. 698). The increase in supply diversity and decrease in sales diversity even further entrench the role of gatekeepers as institutional regulators of cultural innovations within cultural industries.

4.4. Strategies for Successful Commercialization of Cultural Products

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distribution platform owners (Hirsch, 1972; DiMaggio and Hirsch, 1976). As some gatekeepers are collectively absolute, these actors can impose effective potential constraints on consumer reaching abilities of cultural innovations (DiMaggio and Hirsch, 1976).

Mass media exposure by these actors leading to volume sales of a single product is what drives economic returns. In addition, these ‘hits’ enable publishers to cover losses previously made on less successful products. In order to maximise economic returns and minimize the dependence on elements of their task environments, constraints on output distribution imposed by gatekeepers and contingencies in recruiting input content for organizational sponsorship, publishers have developed three proactive strategies (Hirsch, 1972):

1. The allocation of numerous personnel to boundary spanning roles: A high ratio of marketing and promotions personnel to (surrogate) consumers appears to be a structural feature of any industry system in which goods are marginally differentiated and producers’ access to consumer markets is regulated by independent gatekeepers;

2. Overproduction and differential promotion of new items: ‘Overproduction is a rational organizational response in an environment of low capital investments and demand uncertainty. The production of a surplus is facilitated further by contracts negotiated with artists on a royalty basis and other cost-minimizing features of the craft administration of production’ (p. 652); 3. Cooptation of mass media gatekeepers: ‘Mass-media gatekeepers report a wide variety of

mechanisms developed by cultural organizations to influence and manipulate their coverage decisions. … Promotional campaigns aimed at co-opting institutional gatekeepers are most likely to require proportionately large budgets and illegitimate tactics when consumer’s awareness of the products hinges almost exclusively on coverage by these personnel’ (pp. 654-655).

A revisit to the abovementioned strategies leads the author to conclude that the framework is still applicable today (Hirsch, 2000). Other sources (Burt, 1992; Noria and Eccles, 1992, Granovetter, 1982) agree with Hirsch that ‘for a cultural product to succeed, networks of relationships must be mobilized, coordinated and managed to get the job done’ (Hirsch, 2000; p. 358).

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4.5. Hypotheses

Linkages between strategy formulation and a firm’s appropriablity regime and its complementary assets position can be seen as a logical step as strategy is contingent on these concepts (Pisano, 2006). Christmann (2000) states that complementary assets are required to capture the benefits associated with strategies. This study argues that access to critical specialized complementary assets determines into what degree publishing actors are able to effectively deploy Hirsch’ (1972) strategies for successful commercialization of cultural products. In cultural industries, publishing activities include; IP management, marketing and promotion. When translated into more generally accepted and broadly applicable complementary assets, publishing organizations should own or have access to the following complementary assets:

 Marketing assets: Marketing is essential for successful commercialization of cultural products. Marketing assets are needed to fulfil the differential promotion and the allocation of numerous boundary spanning contact men strategies for successful commercialization of cultural products;  Competitive manufacturing assets: In cultural industries, competitive manufacturing is an

integral part of IP management. In order to adequately fulfil the overproduction strategy for successful commercialization of cultural innovations, one must be capable of rapidly producing a surplus of marginally differentiated products;

 Access to relevant gatekeepers: Relationships with relevant selectors and gatekeepers are needed for effective marketing and promotional activities. When linked to the strategies for successful commercialization of cultural products, these relationships are critical in deploying the cooptation of gatekeepers strategy.

Content producers willingly to vertically integrate into the stage of publishing are not likely to either possess these complementary assets nor have sufficient financial means to buy them. These actors would be best positioned by forming strategic alliances with incumbent publishers who do have access to these assets (Mitchell et al., 2002; Teece, 1986; Teece, 2006). Content producers having had hit products in the past are more likely to have access to these assets. When these actors’ cash position is sufficient to buy the critical complementary assets, they are best positioned by buying them and integrating into the stage of publishing (Teece, 1986; Teece, 2006).

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larger value capturing for content producers compared to vertically integrating into this stage without having access to critical complementary assets.

Hypothesis 1. Despite entry barriers having been lowered, incumbent publishers will retain an

important role in commercializing digitally distributed cultural products due to their access to critical specialized complementary assets enabling them to deploy Hirsch’ (1972) strategies for successful commercialization of cultural products.

Hypothesis 2. Cultural content producers integrating vertically into the stage of publishing

without access to complementary assets enabling them to deploy Hirsch’ (1972) strategies for successful commercialization of cultural products will be less successful in commercializing their products compared to content producers forming strategic alliances with incumbent publishers to access complementary assets.

5. Methodology

A case study analysis with multiple aggregation levels was executed. The video games industry is chosen as the industry of interest. Within this setting, a video game developer active across multiple video game platforms on a global scale is chosen as case study organization. Special attention is given to one of its focal products which has been released on two comparable digital distribution platforms. The deployment of commercialization strategies and the organization’s access to complementary assets differ per distribution channel. The conditions for data collection and the match with the study’s objects and theoretical perspective make the case a critical one to study.

In the first setting, the content producer attempted to market its product independently without forming strategic alliances with external parties for accessing complementary assets. The actor integrated vertically into the stage of publishing. In the second setting the actor formed a strategic alliance with an incumbent publisher specialized in the platform onto which the product was released. The publisher possessed specialized complementary assets, marketing, competitive manufacturing and access to relevant gatekeepers in order to deploy Hirsh’ (1972) strategies for successful commercialization of cultural products whereas the content producer did not.

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channels. The study tries to determine both the relative success within the channels onto which the products have been released and the products’ financial performance.

Table 1. Channel comparisons

Distribution channel data Channel: Independent Chicken’s Tale Channel: Strategic Chicken’s Tale Success indicators3 Low-end 6,000-25,000 60% of all products 100-1,500 85% of all products (estimations / units sold) Mid-end 25,000-50,000 30% of all products 1,500-5,000 10% of all products High-end 50,000-350,000 10% of all products 5,000-1,500,000 5% of all products

Installed base 42,500,0004 37,000,0005

Average selling price € 9.546 € 1.327

The embedded design of the case study, e.g. analysis on industry level and firm level in combination with multiple data collection methods add to the validity of the results (Eisenhardt, 1989). Eisenhardt (1989) states that such an approach ideally suits theory building research. During the study, the data collection methods have evolved, meaning that collection methods have been altered and data has been added at some stage in the research process. This can not been seen as a bad thing as the researcher attempted to understand the case as an individual one and into as much depth as possible. As value distribution and strategic-decision-making within a setting of digital distribution are in its primary stages of research, building theory from case study research is the most appropriate way of conducting study (Eisenhardt, 1989).

Within the case study design, an event study methodology is deployed. Event studies can be seen as a powerful tool to judge the effects of endogenous events (McWilliams and Siegel, 1997). The method is frequently used to assess the impact of managerial decision making on financial performance of a firm (McWilliams and Siegel, 1997). Event studies are suitable for settings that comply to the following assumptions: (1) markets are efficient, (2) the event was unanticipated, and (3) there were no confounding effects during the event window (McWilliams and Siegel, 1997). Whereas the third assumption is difficult to control for, the first two assumptions are present in the current study. ‘The event period usually includes the day before the event date through one to three days following the event date’ (Wells, 2004; p. 64).

5.1. Critical Case: Dutch Video Game Developer

The case study organization is a video game developer based in the Netherlands, from here on called Dutch Video Game Developer (DVGD). DVGD has been operative for over a decade and has

3_{Careless, 2009} 4

85% of global market. BBC News, 2009

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Apple Insider, 2009

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DVGD internal research

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traditionally focused on the physical work-for-hire business model. Due to the company’s small size and limited financial resources, DVGD has mainly been doing smaller publisher granted development projects. With the advent of digital distribution channels, DVGD saw opportunities for operating autonomously and producing its internally developed IP. The company is platform agnostic meaning it is licensed to develop video games for multiple video game platforms.

The company’s first internally developed IP, labelled Chicken’s Tale (fictional), has been released onto two comparable digital distribution channels. The first time Chicken’s Tale was released in May 2008, no efforts where undertaken in order to enhance the chances for selection. In May 2009, DVGD released Chicken’s Tale onto a comparable digital distribution channel, however, now a publisher was contracted to have access to complementary assets. The first time Chicken’s Tale was released will be labelled Independent Chicken’s Tale, whereas the game’s second release will be labelled Strategic Chicken’s Tale. Both products received generally favourable reviews during their release and are considered to be among the better titles available for the platforms onto which they were released.

5.2. DVGD’s Complementary Assets Position

DVGD lacks specialized complementary assets needed for the deployment of strategies for successful commercialization of cultural products (Hirsch, 1972). The organization develops on average two video games a year, and has been told by publishers that the development costs of its products are above industry standards. Secondly, during the time of investigation, the company had no personnel employed responsible for marketing purposes. Neither did the company’s founders have much expertise in marketing or promotional activities. Lastly, although DVGD had relationships with several publishing organizations, it did not hold strong relationships with either platform owners or mass media actors.

During Independent Chicken’s Tale release, DVGD reached out to both mass media actors and the platform owner onto which the product was to be released. Media coverage, however, was scarce and the product was not actively promoted by the platform owner. As these complementary assets are not in-house it is suggested that the company should look at its cash position to decide whether to vertically integrate or form strategic alliances. As DVGD has limited financial resources, to access the complementary assets, the company should, according to the PFI framework, form strategic alliances with incumbent publishers (Teece, 1986; Teece, 2006).

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marketing, overproduction and differential promotion of products could be deployed as strategies for successful commercialization.

6. Results

6.1. Independent Chicken’s Tale Commercialization Analysis

Sales analysis. The product’s sales curve is a typical downward linear curve, representative of cultural products. Sales follow demand without specifically influencing it. Independent Chicken’s Tale sold for €9.00 throughout its entire release. Apart from not performing any marketing activities with regard to price, the distribution channel also did not allow for price fluctuations. The product’s revenue curve follows the product’s sales curve. The product’s selling price was just below the channel’s average selling price of €9.54. In the last 25 days of the sales tracking period, Independent Chicken’s Tale sold on average 46 units each day.

Figure 3. Sales per day Independent Chicken’s Tale

Events. No specific actions have been taken place during the time Independent Chicken’s Tale sales were tracked. Management of DVGD lacked specialized complementary assets to act in an eventful manner. However, there are spikes noticeable in the product’s sales curve. The most apparent surge in sales occurred at day 14, or June 2nd, when sales jumped from 296 to 1,265 units per day. This spike can be attributed to the North-American launch of the product, which up till then was only available in the Atlantic and Europe. A late North-American launch was anticipated as it had been announced earlier. The discrepancy in release dates between the different continents is attributed to localization issues.

There are also a number of smaller sales spikes noticeable in the product’s sales curve. At day 5 or May 24, sales jumped from 331 units per day to 409 units per day. Precisely one week later sales

0 200 400 600 800 1000 1200 1400 1 5 9 ₁₃ ₁₇ ₂₁ ₂₅ ₂₉ ₃₃ ₃₇ ₄₁ ₄₅ ₄₉ ₅₃ ₅₇ ₆₁ ₆₅ ₆₉ ₇₃ ₇₇ ₈₁ ₈₅ ₈₉ ₉₃ ₉₇ 101 105 109 113 117 121 125 Sal e s

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surged again and after the North-American launch the pattern repeated itself even more significantly. These sales spikes represent increased weekend traffic on the online shop channel as it turns out that dates on which sales peaked are Saturdays and Sundays. Users of the online distribution channel generate more shopping activity during weekends compared to working day shopping activity. These repeated increases in financial performance can thus be attributed to exogenous influences.

Financial results and market performance. In total, the Independent Chicken’s Tale sold 20,845 units during the 125 days sales tracking period. According to Careless (2009) who provides an analysis of relative success in terms of units sold per digital distribution platform, the product is not successful as it resides in the 60% lower-end of the titles released onto the channel in terms of cumulative sales (6,000 – 25,000 units sold). Market performance of Independent Chicken’s Tale can be considered unsuccessful.

Financial performance for the product follows its market performance. After deduction of currency conversions, platform owner value added taxes, and a fixed percentage for every unit sold transferred to the platform owner, Independent Chicken’s Tale generated €97,690 revenue. Development costs for Independent Chicken’s Tale were €147,878. The product’s earnings before interest, taxes, depreciation and amortization (EBITDA) are - €50,180. Independent Chicken’s Tale is financially unsuccessful, it generated a loss for DVGD.

6.2. Strategic Chicken’s Tale Commercialization Analysis

Events. Strategic Chicken’s Tale shows a much more volatile sales curve with greater shocks in demand. Pre-release marketing activities included: distributing press releases; securing product reviews by relevant media; and organizing a promotional contest to win channel store credit. Relationships with relevant gatekeepers enabled the publisher to effectively perform these promotional activities. Without these relationships, the promotional activities would have lacked a platform for exposure and ultimately missed their purpose. Apart from an overall higher number of units sold, some of the marketing agency’s specific activities have had significant effect on sales and revenue.

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hovered around 1,000 during the period the game was featured by the platform owner after which it dropped to approximately 400 units sold per day.

Figure 4. Sales per day Strategic Chicken’s Tale

Plotting out and realizing the product’s price policy was another part of the publisher’s marketing expertise. The first 41 days from release the product was sold for €3.99. Hereafter, from day 42 until day 55, the product went on sale selling for €0.79. As of the market’s efficiency, results of such an unanticipated event were noticeable immediately (McWilliams and Siegel, 1997). The effect of the lowered price on sales was further boosted by the product’s listing in several nations’ in shop Top 100 lists. Sales jumped from an average of 400 units per day to 6,400 units sold per day on average during the time the product was on sale. The sale period was followed by a transition price of €1.59 for the 20 days hereafter. Average units sold per day dropped to 1,700. Finally, in the remainder of the sales tracking period, the product was sold for its original price of €3.99.

Despite the overall impact on sales of publisher activities, one promotional activity did not have any noticeable effect on sales. The release of a free demo version of the game on day 20, or June 9th, has not significantly boosted sales. Interviews with DVGD management and publisher documentation further support the sales data with regard to this issue. Besides not attributing to the product’s financial success, the abovementioned marketing activity has attributed to DVGD’s development costs as this activity required time investments from a large share of the company’s workforce.

The spike in the sales curve on day 2, May 22nd, can be attributed to a administrative error on the side of the platform holder. The first day Strategic Chicken’s Tale was for sale, the product was not yet visible to consumers upon entering the store.

0 1000 2000 3000 4000 5000 6000 7000 8000 1 6 11 16 21 26 31 36 41 46 51 56 61 66 71 76 81 86 91 96 101106111116121 Sal e s

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Figure 5. Revenue per day Strategic Chicken’s Tale

Financial results and market performance. Strategic Chicken’s Tale sold 135,288 units during the 125 days sales tracking period with an average price of €1.45. According to Careless (2009) the number of units sold can be considered successful for the platform as it resides in the 5% high-end range (5,000 – 1,500,000 units sold) of games available for the platform. In addition, the average selling price of €1.45 is above the average selling price for the Top 10 bestselling video games on the platform (Pocket Gamer, 2009). In the last 25 days of the sales tracking period, Strategic Chicken’s Tale sold on average 45 units per day. The product’s market performance can be considered successful.

After deduction of currency conversions, platform owner value added taxes, publisher fees, and a fixed percentage for every unit sold transferred to the platform owner, Strategic Chicken’s Tale generated €104,441 revenue. The publisher was paid a 10% fee per unit sold in the first month from release and a 15% fee thereafter. In total, publisher fees were €16,000. The development costs for Strategic Chicken’s Tale were €73,354. The products financial performance can be considered successful, Strategic Chicken’s Tale earned DVGD €31,087 before interest, taxes, depreciation and amortization (EBITDA). € 0,00 € 500,00 € 1.000,00 € 1.500,00 € 2.000,00 € 2.500,00 € 3.000,00 1 6 ₁₁ ₁₆ ₂₁ ₂₆ ₃₁ ₃₆ ₄₁ ₄₆ ₅₁ ₅₆ ₆₁ ₆₆ ₇₁ ₇₆ ₈₁ ₈₆ ₉₁ ₉₆ 101 106 111 116 121 Sal e s (in € )

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7. Discussions and conclusions

7.1. Conclusion

This study illustrates the role complementary assets have in implementing relevant strategies for successful commercialization of digitally distributed cultural products. Strategies for successful commercialization of cultural products are: (1) The allocation of numerous personnel to boundary spanning roles; (2) overproduction and differential promotion of new items; and, (3) cooptation of mass media gatekeepers (Hirsch, 1972). Critical specialized complementary assets for effective deployment of these strategies are: marketing, competitive manufacturing and relationships with relevant gatekeepers (Teece 1986; Mol et al., 2005).

In a setting where innovators can now vertically integrate into the stage of publishing due to the advent of digital distribution channels, incumbent publishers remain value adding due to their complementary asset positions. These actors retain an important role in digitally distributing cultural products by effectively deploying Hirsch’s strategies for successful commercialization of cultural products, whereas their access to critical specialized complementary assets serves as facilitator and value protection mechanism (Hypothesis 1). Cultural content producers that do not own these assets should form strategic alliances with incumbent publishers to commercialize their products. Those content producers forming strategic alliances with incumbent publishers will be more successful in commercializing their products and capture a larger share of value compared to those producers integrating vertically into the stage of publishing (Hypothesis 2). Incumbent publishers have added value and play an important role in achieving success even in an era of digital distribution of cultural products.

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7.2. Implications

The study contributes to the literature by tying together Teece’s (1986) profiting from innovations (PFI) theory and strategy formulation for successful commercialization of cultural products (Hirsch, 1972). This study further illustrates the theoretical relevance and practical applicability of both theories. In addition, this study contributes by updating Hirsch’ strategies to apply in a setting of digital distribution of cultural goods. The advent of digital distribution channels makes Hirsch’ (1972) strategies for commercializing cultural products more relevant than before.

Whereas previous studies, taking the perspective of resource-based retention and newly vulnerable markets, questioned the power and relevance of publishing actors in the music industry in a setting of digital distribution (Clemons, et al., 2003; Bockstedt et al., 2006), this study illustrates that incumbent publishers will remain powerful actors in cultural industries. Value protection mechanisms in the form of specialized complementary assets critical for the success of cultural products make it difficult for content producers to break away from incumbent publishers. Therefore, although the digitization makes the publisher stage easier to enter, and it already was attractive to attack because of value chain envy (Mol et al., 2005), incumbent publishers can still defend their positions from new entrants as opposed to what Bockstedt et al. (2006) state.

The results of the study indicate that with the advent of digital distribution channels, incumbent publishing houses will remain a ‘necessary evil’ for the successful commercialization of cultural innovations, a topic of debate within the video games industry (Gamasutra, 2009b). The advent of digital distribution channels will lead to enhanced creative freedom for content producers. This freedom has added value as artists often produce ‘art-for-art’s-sake’ (Caves, 2000). Digital distribution channels will expectedly alter the balance between creativity and rationalization in favour of creativity (Tschang, 2007). The number of new IP’s in video game development is will increase as will competition among video game developers (Industry Gamers, 2010). Another topic of debate in the video games industry is the effectiveness of demo’s as a marketing tool (Gamasutra, 2009c). This study found that free demo versions of a video game do not attribute to the successful commercialization of the product.

7.3. Limitations and Further Research

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Despite the case being illustrative for most content producers, it is interesting to see whether producers of ‘hit’ products are able to independently publish their succeeding products successfully onto digital distribution channels. Another limitation is that the effect of price fluctuations on consumer behaviour cannot be determined from one study, additional research needs to address this issue into greater detail. Future research should deploy a more long term perspective on the effects of different commercialization strategies on financial success and IP management, i.e. market performance of sequels.

From the data, two other suggestions for further research arise. The effect of marketing on sales after the introduction phase is over seems to be zero. Despite the publisher’s involvement, both products sold an equal amount of units in the latter part of the sales tracking period. From a long tail perspective of overproducing publishers, further validating such an effect has added theoretical and practical value. Furthermore, the inclusion in Top 100 lists seems to have boosted the effect of marketing activities. Further research should elaborate on the implications of these lists and their practical implications on value distribution.

Acknowledgements

I greatly thank dr. Thijs Broekhuizen for his continuous stream of comments and patience. Prof. dr. Wilfred Dolfsma for supporting me. I further acknowledge the management at Dutch Video Game Developer for their openness and time. And lastly, Wieger van der Meulen for inspiration and numerous discussions. All errors are mine.

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