Dwi14202a Cs94 Videogame

Foreword
The switch to digital is often presented as the cause of upheavals in sectors

that are directly affected, condemned or transformed by its irresistible expansion.
Video games are a special case to some degree, as they emerged as a new
industry at the time the transistor radio was born. And it has been a growing
business ever since. But this growth has always been intertwined with the
different components that have made up the successive waves of innovation
over the years: TV, personal computers, game consoles, the internet,
smartphones, social networks, tablets, etc. To such an extent that this industry
whose combined talents make it both unique and complex, has evolved in
different cycles, under different models and in very different markets.
This then was the matrix we entered into for this issue, guided by the expert
hand of our Editors whom I salute most sincerely for having succeeded in their
quest.
Yves GASSOT
Executive Director of Publication - CEO, IDATE-Digiworld Institute
No. 94, 2nd quarter 2014
Dossier
Video game business models and monetization
Edited by
Philippe CHANTEPIE, Laurent MICHAUD,
Laurent SIMON & Peter ZACKARIASSON
Introduction - The Rebound of Videogame Industry

by the Editors ................................................................................................ 9
Papers
Innovations in the Video Game Industry: Changing Global Markets
Giuditta DE PRATO, Claudio FEIJO, Jean-Paul SIMON ......................... 17
Game Console Manufacturers:
the End of Sustainable Competitive Advantage?
Marie CARPENTER, Nabyla DAIDJ & Christina MORENO ....................... 39
'Few to Many': Change of Business Model Paradigm
in the Video Game Industry
Thierry RAYNA & Ludmila STRIUKOVA ..................................................... 61
Paid and Free Digital Business Models Innovations
Myriam DAVIDOVICI-NORA ....................................................................... 83
Exploring Mobile Gaming Revenues: the Price Tag of Impatience,
Stress and Release
Denis LESCOP & Elena LESCOP ............................................................ 103
Interviews
Yves GUILLEMOT, Ubisoft
Conducted by Philippe CHANTEPIE ........................................................ 123
Daniel KAPLAN, Mojang
Conducted by Peter ZACKARIASSON ..................................................... 127
Alain LE DIBERDER, ARTE
Conducted by Laurent MICHAUD ............................................................. 129
Features
Nomad Gaming - A New Era for Video Games? .................................. 135
Social Gaming - Markets and Trends, 2012-2016 ................................ 139
General Overview of Home Console Market ........................................ 141
By Laurent MICHAUD
Book Review
Godefroy DANG NGUYEN & Sylvain DEJEAN
Le numrique conomie du partage et des transactions
By Yves GASSOT ..................................................................................... 149
Author biographies ..................................................................... 151
Service Section
NEMOG project (New Economic Models and Opportunities for digital
Games) ..................................................................................................... 159
st
1 Africa Regional ITS Conference
Accra, Ghana, May 26-28, 2015, Call for papers ..................................... 161
DigiWorld Summit 2014 - Mobility Reloaded
Montpellier, France, November, 18-20 2014 ............................................ 163
DigiWorld Yearbook 2014 ....................................................................... 167
C&S Dossiers .......................................................................................... 169
Extra papers / Guide for authors ........................................................... 171
Dossier:
Video game business models and monetization
Introduction
The Rebound of Videogame Industry
Papers
Innovations in the Video Game Industry:
Changing Global Markets
'Few to Many': Change of Business Model Paradigm
Paid and Free Digital Business Models Innovations
Exploring Mobile Gaming Revenues:
the Price Tag of Impatience, Stress and Release
Interviews
Yves GUILLEMOT,
Ubisoft
Daniel KAPLAN,
Mojang
Alain LE DIBERDER,
ARTE
Introduction
The rebound of videogame industry
Philippe CHANTEPIE
French Ministry of Culture and Communication;
Associate researcher, Innovation & Regulation Chair, Paris
Laurent MICHAUD
IDATE, Montpellier
Laurent SIMON
Mosaic - HEC Montreal
Peter ZACKARIASSON
University of Gothenburg, School of Business, Economics and Law
O
ver the last few years the videogame industry experienced a
deep transformation Formerly based on a traditional vertical
production model with developers, studios, publishers, hardware-
console manufacturers, the industry was mostly dominated by
retailers and hardware makers, in control of the value chain. Over the past
decades, the competition between the two (Nintendo, Sony) then three
(Microsoft) console manufacturers did not modify this industrial organization
as a digital model of domination by downstream. However, a few publishers
gained key strategic influence in this ecosystem, such as Electronic Arts,
Activision, Ubisoft, etc.
Today, this model and its ecosystem are experiencing profound changes
affecting the business models, distribution, supply chain, value chain,
financing and the ecosystem as a whole. It may be argued that,
paradoxically, the digital native videogame industry, the youngest and the
more dynamic sector of entertainment's industries, is just entering the digital
revolution. The videogame industry is entering a mutation phase, a rebound,
or a rebirth, that may appear as the first step into a complex maturity.
This issue of Communications & Strategies explores this hypothesis

through several articles dedicated to the analysis of changes in the video
game industry. Specifically, this issue examines the changes in business
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Digiworld Economic Journal, no. 94, 2 Q. 2014, p. 9. www.comstrat.org
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10 No. 94, 2 Q. 2014
models, in business revenue and prices, changes in markets and in

industrial structures. Hence, this issue is focused on the current dynamics
that alter the strategic ecosystem of the videogame industry, and it also
discuss some of the conditions necessary for its possible future
developments in these times of turmoil.
The death of an old model?
The mutation of the video game industry is not entirely new. It results
from some breakdowns of access modes and from the evolution of modes of
uses of video games. It started with the deployment of mobile games and
online games, increasing casual gaming and impacting business and
revenue models. It accelerated with games played on smartphones and
tablets. The paper of de PRATO, FEIJO & SIMON presents the main
movements in the video game industry, in particular the changes at work in
the Asian markets.
Strengths and weaknesses of the model
The traditional model formed on production, editing, and retail of AAA

games 1 has the following characteristics: rapid growth of production
budgets, a large selection of projects, market share concentrated on a very
small number of titles almost a "winner takes all model", margins relatively
small for most of the production. This economy of "hits" - where there would
be only one slot for one blockbuster in each game category every two years
or so persisted in particular with the installed console parks of the two last
generations.
This model results from a quasi-cartel situation involving a small group of

major publishers and console manufacturers. The dynamics of industrial
organization are powerful enough for the strength of this model to persist.
This economic model remains dominant: Some competitive differentiation
comes from the new proposal of access modes (mobiles, tablets, web), but
the general competitive structure remains mainly unchanged, and
characterized by the domination by the downstream stakeholders: consoles,
1 AAA is a classification term used for games with the highest development budgets and levels
of promotion, the equivalent of "blockbusters" in the movie industry.
Introduction 11
mobile platforms systems, access platforms in a two sided-market logic for

developers.
It must be acknowledged that this model still has major advantages:

installed base of consoles have become significant and the move from one
generation of consoles to another has slowed down. Its main weakness is
that the hardware technological innovations have become less obvious,
challenging firms to actually demonstrate their capacity to offer new gaming
experiences. The growth of the Asian market and the opening of the
Chinese market mostly console based ended up consolidating this
industrial organization. The article by CARPENTER, DAIDJ & MORENO
focuses on the new situation of the standard model from console
manufacturers.
Emerging markets and new business models
The dematerialisation and democratisation of the video games

distribution produces the same effects as in any other cultural industry
sectors: a profound modification of the value chain, where the market
leaders of this industrial lose grip on value proposal, innovation, and market
leadership. In addition, these traditional actors are getting challenged by
very dynamic newcomers in the sector of mobile telephone, tablets and
social networks.
First, the entry of Apple and Android in the mobile sector has shorten the
value chain. This led to a remodeling of the barriers of entry for application
developer, both in terms of cost and market knowledge. It allowed a pool of
developers to swarm with hundreds of thousands of amateur developers
who wanted to try their luck this open market where they could compete on
equal foot with a limited number of professional developers.
Second, with the emergence of online games, especially massively

multiplayer games (MMPOGs), mobile phone games, social games, casual
games, the major industry model was open to very profound changes in the
last ten years. The success of World of Warcraft on one side or of Angry
Birds on the other shows that emerging markets have become very dynamic
and would generate rapid and massive profits, besides the more traditional
model.
In this new industrial ecosystem, the structure appears to be very

different. The "triple monopoly" of console manufacturers and a small
number of publishers dominated most of the market, is now replaced by a
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12 No. 94, 2 Q. 2014
much more open economy. This "economy of the multitude" has a larger
number of independent studios, individual developers, and new modes of
distribution. As the triple monopoly still acts as a gate-keeper for the well-
established platforms, the economy of multitude is quickly becoming a force
to be reckoned with in the future in terms of creativity, market adaption,
and revenue generation. This is especially the thesis of the article "Few to
Many" by RAYNA & STRIUKOVA.
The age of uncertainty: creativity and diversity
The video game sector has shifted into an age of uncertainty and may
have reached a tipping point Formerly based on concentrated markets, it is
now shifting to open markets, supported by a strong demand. One might
claim that the traditional product based production of video game is
challenged by market production strategies.
The opening of markets and industrial change
Markets opening, parallel to their internationalization promoted a deep

reorganization of industrial structures. The changes we have witnessed in
business models have enabled a much richer ecology of video games. This
richness can prove to be a well needed innovative force for the game
industry. Compared to other cultural industries, such as the film industry, its
history has been strongly influenced by a culture on technical perfection
aiming at emulating the real and masculine culture. At this point, this richer
ecology of models of games, allowed by the evolution of the technological
platforms, opens new possibilities not only to develop a richer array of video
games experiences, but it also challenges what games are and what it
means to play video games.
The evolution of technology helps in supporting more immersive content.

In Heavy Rain, for instance, the screen interface almost disappears to
smoothen the experience of the immersion in a "film noir" narrative. In Watch
Dogs, the player could interact with in-game characters without knowing if
they would be computer-generated artificial intelligence, part of the scripted
scenario, or distant real-life players. On the other side of the continuum,
some games on smartphone and tablets are closer to the definition of toys
than games, with simple, repetitive mechanics, yet engaging and enjoyable,
like Angry Birds.
Introduction 13
Funding and revenue models
In terms of funding, the former model put publishers in a key position.

This position is being changed by the diversification of funding It is mostly
the same for AAA games, but new markets and new products, financing
leverages are diversified (crowdfunding, sponsorship, incubators, etc.) and
allow for the exploitation of new revenue models (such as advertising
games, cross promotions, microtransactions and downloadable content).
This not only means better possibility for smaller studio's to fund games, but
it has effectively revitalized the industry that previously were dominated by
the all too risk averse major publishers.
Production delays are becoming increasingly shorter, pushing developers

to choose between smaller, more precise game-play proposals, or larger
production teams, affecting the cost structure. As for the price model, the
selling periods are very short, and sometimes the commercial success or
failure of a game depends on the two or three days after launch. Where
console games are concerned, marketing would play an increasing role on
pre-orders and launching days, and then would be relayed by the long tail of
the second hand market.
The keys: the ecosystems' changes
Over a decade, the landscape of this sector went through upstream and
downstream changes. Along with consoles, Apple, Android, Facebook,
Tencent, etc, have emerged. Alongside 10+ major editors linked to this
ecosystem, a multitude of smaller studios have also appeared. From an
ecosystem, moving bottom to top, we have shifted to world markets with an
all-inclusive ecosystem: more access modes, more studios and more
developer. Such shifts have also modified the key success factors .
The key drivers of change:

creativity, innovation, modularity, diversification, agility
These smaller studios are largely independent, operating without the

control of the publisher and with adaptive processes and more agile
development.
The dangers of vertical integration publisher focused on creativity to

ensure long-term innovation and ultimately productivity. Methods, practices
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14 No. 94, 2 Q. 2014
and organization of the game design have evolved rapidly over the past
decade, but the industry is largely configured to take advantage of only a
small proportion of the innovation occurring at interactive technologies, new
creative content and experience more social and cultural relevance (beyond
the relatively narrow market segments), and education and training.
A richer, more competitive environment
The keys for success are less in the hands of the players already in place
who need to diversify their R&D strategy, with innovation, experiential and
hybrid models. The newcomers are much more agile and integrate such
strategies, which are more fragile and volatile, dependant on the success of
young companies. They are confronted with a high level of competition:
because of the costs at a global level but also by the creativity and the
speed of production allowed by the industrial organisation, talents
attractiveness, financing terms, legal environment, especially from a tax
perspective.
In this period of shifting models and diversification, competition is also

amongst ecosystems and institutional structures, which are supporting the
new industrial pattern. The reduction of entry costs in this new landscape for
creating games are eased by competitive institution and public policies. The
structures and tools of public support are often very similar: access to
financing for R&D, talents, and marketing, tax credits networks, supports,
etc. In this cluster competition, the weight of the most competitive measure
and the speed of their implementation are crucial. In this transition towards a
new competitive structure, the threshold effect produce ratchet effects.
The last two articles that discuss revenue models (DAVIDOVICI-NORA)

and business models in the segment of mobile games (LESCOP &
LESCOP), highlight the profound changes in the sector.
In vivo. This issue of Communications & Strategies decrypts the mutation

changing the gaming economy and its ecosystem landscape. It seeks to
capture movement through a photograph of this mutation. But he knows he
is a film that, at this point in the film, the young history of the video game
industry is not only experiencing episode, but the crux of the plot of a movie
that nobody knows the end. At this time, the locks are released. Economic
stakeholders have the keys. Players and their uses as well. And perhaps
much, public policies that will stimulate, foster, maintain, transfer of the
ecosystem, or just accompany or observe... or not!
Introduction 15
***
For this issue of Communications & strategies, the editors are happy to
complete the scientific papers by three interviews of actors or observer of
the video game industry. They're thankful for.
Yves GUILLEMOT, CEO of Ubisoft, one of the largest video game

publishers in the world with major licenses (like Assasin's Creed, Just
Dance, etc.), explains one hand the importance of the classic economy of
video game industry, and secondly, many factors of the transformation of
this industry, and therefore the elements combining and changing business
models.
Included in this special issue is also an interview with Mr. KAPLAN,

business developer at Mojang. This Swedish game developer has had huge
success with the game Minecraft, a multi-platform game that has sold
millions and expanded into branded merchandise. Mr. KAPLAN provides a
brief explanation on the role of business models and future possibilities for
Mojang.
In conclusion, we include an interview with Alain LE DIBERDER, Director

of ARTE programs, an essential representative of video games industry in
France. He took part to the first real-time 3D modeling online experiments in
France, thanks to the project "Second World". Author of several books on
the industry, he provide us with a relevant and original point of view on what
happens in the game industry. This interview confirms how is important to
step back facing disruptive innovation.
Innovations in the Video Game Industry:
Changing Global Markets (*)
Giuditta DE PRATO
Institute for Prospective Technologies, European Commission, Seville
Claudio FEIJO
Technical University of Madrid; Research Centre for Applied ICTs (CeDInt)
Jean-Paul SIMON
JPS Public Policy Consulting, Seville
Abstract: The paper examines the video game industry in the perspective of being the
paradigm of innovation in digital media and content. In particular, it analyses the response
to two main factors that have impacted this industry over the last decade. First, it tracks
the evolution of its global market and its emerging geography with the rise of Asia.
Second, within this global landscape the paper explores how the changes derived from
mobile and on-line gaming enabled major transformations of this industry. From here,
some conclusions on the lessons from the evolution of this sector for the whole media and
content industries are presented.
Key words: games, game industry, video games, mobile games, apps, Asia, China,
freemium, free-to-play, mobile, multiscreen, cross-media, smartphones, tablets, virtual
goods.
O
ver the last forty years, the video games industry grew steadily,
increasing its audiences worldwide, widening its demographics
and adding access platforms along the way (video consoles,
personal computers, portable consoles, portals, mobile handsets,
tablets, etc.). Indeed, supply and demand have changed under pressure
from a variety of factors such as technological developments in interfaces,
devices, and networks, the emergence of social computing and communities
(*) The views expressed are purely those of the authors and may not in any circumstances be
regarded as stating an official position of their institutions.
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18 No. 94, 2 Q. 2014
and the production of simple and short games ("casual games" 1), capturing
an, until now, unsatisfied demand across age categories, socio-economic
classes, or gender (JUUL, 2012, KERR, 2006). In fact, there are 1.2 billion
st
active gamers worldwide as of 2013 2 (1 semester: WARMAN, 2013a),
from 880 active gamers in 2012 (WARMAN, 2012), and predicted revenues
of US $86.1 billion by 2016 and a compound annual growth rate of 6.7%. In
other words, this industry is going more and more mainstream 3 and
becoming/has become an established form of entertainment. Besides, the
industry is still expanding with new segments such as serious games
(STEWART & MISURACA, 2013) and electronic sport (TAYLOR, 2012).
From authors' perspective the key element that accounts for the growth
of this industry has been the ability of this digital native to deal with
technological changes, in particular to rapidly innovate in synergy not only
on the technological side but on the creative side, ushering in pioneering
business models 4 and attracting new geographies and users. To argue for
this view, the first section of the paper sums up the main trends identified in
a global landscape, namely the role of mobile communications (devices,
networks) combined with the rise of the "app economy", and the move
toward a multiscreen / cross-media paradigm. Section two analyses the
changing geography of the global video markets stressing the rise of the
Asia-Pacific region and the new role of China. Section three explores
changes in the legacy value chain through the processes of
disintermediation and re-intermediation. Some conclusions on the lessons
from the evolution of this sector for the whole media and content industries
close the paper.
1 Casual game: ease of use games (to learn, to access and to play) spanning all genres.
Classification of videogames is discussed in DE PRATO et al. (2010), see chapter 2 and 6.2.
2 Consultancy Newzoo reported.
3 The Economist (2011) traced back the move from niche to mainstream, to the launch of Sony
Play Station console in December 3rd 1994.
4 The analysis of business models is left to other papers in this special issue.
Giuditta DE PRATO, Claudio FEIJO & Jean Paul SIMON 19
A new global landscape for supply and demand
Going mobile
According to the sources (ITU, 2013: 1), there were, in 2013, almost as
many mobile-cellular subscriptions as people in the world, with more than
half in the Asia-Pacific region (3.5 billion users out of 6.8 billion total
subscriptions). Wireless Intelligence (2012) estimated the total number of
unique (eliminating subscribers with multiple SIM cards) mobile subscribers
worldwide at 3.2 billion in 2012. Wireless Intelligence (2013) forecasts 8.5
billion connections by 2017 with 50% operating under the new generation of
mobile networks (3G 5: 40%, 4G 6: 10%). According to the Cisco Visual
Networking Index (2013:25): "Mobile data is well on its way to become a
necessity for most network users". Indeed, the shift to digital information is
scaling up by several orders of magnitude in data volume every couple of
years.
China and India are the fastest growing mobile (data) markets in the
world. China as a whole surpassed the 1 billion milestone earlier in 2012,
with three companies in the top ten mobile operators and China Mobile
ranking one (ABBOTT, 2012). In the case of India, 69% of Internet users
access via their mobile (McCLELLAND, 2012). India's Bharti Airtel was
ranking four in the top ten mobile operators. In 2012, mobile operators
revenues in BRIC 7 countries (over US $250 billion out of US $1.16 trillion in
2012, Wireless Intelligence, 2013a) represented almost 22% of total global
mobile revenue (up from 16% four years ago) having already surpassed
North America in terms of sales during 2011 (Wireless Intelligence, 2013b).
These growth markets have already turned into primary markets.
This impressive growth results from the increasing availability (and

affordability) of mobile broadband, the increasing availability (and
affordability) of smartphones, and the changing role of customers as avid
demanders or even co-creators of mobile content and applications
(FEIJO, MAGHIROS et al., 2009). The result is a new circle between
5 3G: HSPA, EV-DO.

6 4G: LTE, TD-LTE and WiMAX. Samsung's flagship Galaxy S3 and Apple's new iPhone 5 are
LTE-enabled devices.
7 Brazil, Russia, India, China.
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20 No. 94, 2 Q. 2014
supply (network, devices) and demand led by the latter the "app" economy
within which games play a major role as explained below.
Within this framework, the growth of traffic is now mainly driven by

consumers (as opposed to business previously) also active as "prosumers".
The growth is mainly media-led, with video being the driver (over 50% of the
traffic) (Cisco, 2013) 8. In addition, cloud applications allow mobile users to
overcome the memory capacity and processing power limitations of mobile
devices; reliance on cloud computing increases demand for the quantity of
bandwidth as well (FEIJO, 2014). Games contribute decisively to this
growth as they are increasingly played both from mobile devices and from
the cloud online gaming. They will also use increasingly more advanced
graphics and controls, going from normal definition to high definition and
ultimately 3D graphics, and including augmented reality elements (FEIJO,
GMEZ-BARROSO, AGUADO & RAMOS, 2012). In fact, a survey from
Information Solutions (2011), with both UK and US online panellists, showed
that when asked to identify which gaming-enabled device they played games
on most often, 44% cited their phones, ahead of videogame consoles (21%)
and computers (30%).
Smartphones and tablets, the new hardware and software platforms
The number of smartphones in use worldwide reached 1.4 billion at the

end of 2013. As of 2020, 81% of phones sold globally will be smartphones
(2.5 billion) from 26% in 2011 (400 million). Tablets are expected to reach
700 million in 2020, from 70 million in 2011, and 450 million in 2013. Tablets
are considered as the "fastest ramping mobile device in history" (Morgan
Stanley, 2012).
The release of the Apple iPhone in late 2007 played a major role to
trigger such a migration while mitigating the expected negative impact of the
financial crisis in mobile telecoms, as data growth in mature markets
accelerated (WEST & MACE, 2009) It was also the appearance of the
iPhone that dramatically changed the circumstances of mobile gaming from
the previous modest version of gaming in feature phones (FEIJO et al.,
2012). Tablets and smartphones are now being adopted as gaming devices
8 "Global mobile data traffic will increase 26-fold between 2010 and 2015. Mobile data traffic will
grow at a compound annual growth rate (CAGR) of 92 percent from 2010 to 2015, reaching 6.3
exabytes per month by 2015". Cisco Visual Networking Index (2012).
for casual game players, driving the demand for wireless games; and
becoming in turn one of the most dynamic segments. The survey from
Information Solutions (2011) mentioned above showed that smartphone
owners were by far the most avid mobile gamers: 93% of smartphone
owners said that they played at least once each week, and 45% played
daily. Jupiter Research predicts games sales for tablets up to US $ 3.1
billion in 2014 (SNJV, 2012). Gaming is currently the dominant use for
tablets accounting for 67% of the time spent on that terminal (MICHAUD,
2013).
As a summary, the smartphones and tablets phenomenon allowed novel

ways for users to interact with devices and screens, shifting the patterns of
use toward a mobile Internet and all types of mobile media. It paved the way
for the creation of new content and an array of new applications whose
number has skyrocketed as discussed below.
The rise of the app economy in a platform ecosystem
A simple figure displays the absolute success of the mobile applications:

within five years (July 2008-October 2013) the number of apps available for
download in the Apple platform has grown from 500 to more than 1,000,000
with 60 billion downloads in total. App stores have changed or rather
disrupted the value chain of software (distribution and pricing), and also
the industries of music, books, and games in particular. The mobile app
market is expected to be worth $27 billion in 2013 from revenue generated
directly from apps according to Appnation (Appnation, 2013).
Along these lines, the first 'State of the App Economy Report' (Appnation,
2013) predicts that the largest contributor to this growth will be the app-
enabled commerce, with revenue from downloads, in-app advertising and
virtual goods complementing this. The total size of the 'app economy' is
expected to hit US $151 billion by 2017, more than double the US $72 billion
forecast for 2013. Revenues from games increased at a 66% CAGR over
2013 (FERGUSON, 2014).
Asia is "the most lucrative app market in the world" (Distimo quoted by
COSTELLO, 2014), with 41% of total revenue generated globally in
December 2013 coming from this region. In comparison, North America
generated 31% of the total, while Europe accounted for 23%.
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22 No. 94, 2 Q. 2014
The top grossing iOS and Android apps generally came from games. In
September 2012, games accounted for 64% of the combined total, a year
later; this had increased to 77%. The iOS market (iPad, iPhone and iPod
Touch) generates 89% of its revenues from mobile gaming 9 (Newzoo, 2012
quoted by SNJV, 2012). Also games were the most downloaded apps
across the iPhone (33%), iPad (48%), from Google Play (37%) and the
Amazon Appstore (a remarkable 63%) in 2013, according to a study from
Distimo. App Store dominates in mobile game sales, but Google Play is
catching up fast. The top three Apple store titles in 2013 were Clash of the
Clans (Supercell), Candy Crush Saga (King) and Hay Day (Supercell). For
Google Play, the top three grossing apps were Candy Crush Saga, Puzzle &
Dragons (GungHo) and messaging title LINE.
Besides, a host of Android-based tablet rivals have also expanded the

market considerably, including Amazon's Kindle Fire and its successors,
Google's Nexus line and Samsung Galaxy devices; many of them more
affordable than Apple products. Thus, the installed base of mobile and
portable devices used for gaming will grow from nearly 800 million in 2012 to
more than 1.2 billion by 2014, with Android-powered devices seeing the
strongest growth in market share at the expense of gaming-optimised
handhelds such as the Nintendo DS and Sony PlayStation Vita. According to
IDC and App Annie (FERGUSON, 2013), revenue in 2013 is on track to top
US $12 billion, with in-app purchases generating the lion's share (51%),
followed by paid app sales (44%) and advertising (5%). Each of these
platforms uses a particular strategy for the combination of the device and the
software to operate it. From relatively close strategies a-la-Apple to open-
but-not open strategies a-la-Android (FEIJO, 2012).
Moving to a multiscreen / multichannel world:

A new allocation of screens
In the US, as of December 2012, more than three-quarters of adults

owned a laptop or desktop computers and about 45% of adults owned a
smartphone (PEW, 2013); and the number of adult tablet owners grew by
about 50% since the summer of 2011, up to 31% (PEW, 2013). 62% of
smartphone owners said they consume news on their device weekly, and
64% of tablet owners, (PEW, 2013). In this increasingly multichannel
9 Based on the revenues from the 200 most popular games in the iPad, iPhone/iPod App Store
and Google PlayStore.
scenario, 25% of US consumers play digital games every day, which makes
it one of the most common daily activities -29 % read a newspaper and 14 %
read a magazine every day (Ericsson, 2013).
Media and content activities are moving toward a five screen world
(SIMON, 2012, 2014a): TV, PC, game consoles, connected TVs and mobile
devices (smartphones or tablets). The screens are used prevalently
sequentially but more and more often simultaneously (multitasking,
complementary activities) and the industry starts to approach this scenario
with a cross-media approach. In fact, 25% of all US gamers play on all
screens (WARMAN, 2013a) and based on a US survey, a Google study
claims that, in 2012, 90% of media interactions were screen-based, 4.4
hours per day (38% of media interactions were on smartphones, 9% on
tablets, Google, 2012: 8), leaving a mere 10% for non-screen-based (radio,
newspapers, and magazines).
As a summary, gamers a few years ago were mostly using

console/TV/PC, but now they can allocate their gaming time across two
additional screens in combination with the previously existing ones. This
proliferation of screens at the same time enables ubiquitous or cross-media
gaming (MICHAUD, 2013) across platforms. Therefore, to better track the
changes in the games market, the consultancy Newzoo proposed a new
screen segmentation: entertainment screen, computer screen, floating
screen 10 , and personal screen. As of the first semester of 2013, the
distribution of revenues was the following: computer screen 39%,
entertainment screen 36%, floating screen 13%, and personal screen 12%
(WARMAN, 2013b).
Changes in the global video game market
Regional markets for video games: Asia rising
Developed regions such as Europe, the US and Japan, have been the
main markets for video games until 2009: these regions accounted for over
one half, or 26 billion, of the video games market (IDATE, 2011). The
10 This category appears to be less obvious to grasp, but it basically includes handheld
devices.
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24 No. 94, 2 Q. 2014
EMEA 11, once the biggest market for video games among the four major
world regions, was overtaken by Asia-Pacific in 2010. The main engine of
this shift is the on-line and mobile segment. If the US is still the leading
market, the next three are located in this region, respectively: Japan, China
and South Korea. In 2012, Asia-Pacific (APAC) accounted already for 33%
of the global market (US $ 22.2 billion of revenues, 298 million gamers)
growing at a 13% rate, followed by North America with 32% (21.8 billion, 169
million gamers) growing at a mere 1%, then Europe with 28% (18.8 billion,
274 million gamers) growing at 3% (WARMAN, 2013a). The same
consultancy, Newzoo, predicts that 38% of games revenues will be
generated by APAC by 2016 (WARMAN, 2013a). In addition, games is the
fastest growing Internet category in India (McCLELLAND, 2012).
Online gaming in the People's Republic of China represented one of the

largest and fastest growing Internet business sectors in the world (Radoff,
2009). The Chinese games industry reached, as of 2012, estimated
revenues of US $9.7 billion (2012 China Games Industry Report, quoted by
HANDRAHAN, 2013), online gaming accounted for 90% of this total.
Moreover, mobile is expected to grow by 50% year on year until 2015
reaching US $3.5 of revenues and 455 million gamers (ZhenFund, 2013).
Figure 1 - The growth of online gaming in China
Source: Morgan Stanley (2012), China (*) Gaming Industry Report. Quoted by The Economist
(April 2013), Special report: China and the Internet
(*)
1 Yuan: 0,12 Euro as of April 2014
The Chinese online gaming industry illustrates two striking facts. The first
is that the number of consumers and their spending have grown
extraordinarily fast: in absolute terms far more people are online to shop,
11 Europe-Middle East-Africa.
play games, search, watch videos and use social media in China than in any
other country. The second is that consumers are spending almost all of that
time and money on Chinese Internet platforms.
Table 2 - Top 20 companies by game revenues (*) (2012)
Company Country Revenues US$ million Growth rate

Activision Blizzard US 4.856 2%
Sony US 4.589 -20%
Microsoft US 4.557 -1%
Electronic Arts (EA) US 3.956 2%
Tencent China 3.627 40%
Nintendo Japan 2.775 -27%
DeNa Japan 1.841 7%
GREE Japan 1.735 36%
Ubisoft France 1.639 18%
Konami Japan 1.404 -20%
Zynga US 1.281 12%
Apple US 1.262 65%
Nexon South Korea 1.254 10%
NetEase China 1.248 22%
Take Two Interactive US 1.063 24%
Namco Bandai Japan 1.021 -5%
Square Enix Japan 878 0%
Disney US 857 -6%
Facebook US 810 45%
Capcom Japan 780 12%
(*)
The consultancy lists revenues from games not only from pure players but also from other
companies such as Apple or Facebook that derives some of their revenues from games in a
significant fashion.
Source: Newzoo (2014).
The data is based on analysis of annual and quarterly financial reports of the universe of
relevant publicly listed companies. Revenues exclude hardware sales and other non-game
sales where possible. Authors' emphasis. See http://www.newzoo.com/free/rankings/top-25-
companies-by-game-revenues/#bubkvLzRXq5XPlSD.99
As a consequence, China is witnessing considerable changes in its

games market. For instance, new alliances are being inked, as illustrated by
the July 2012 strategic relationship between Activision Blizzard and Tencent
Holdings Limited to bring Call of Duty Online to Chinese game players 12.
12 Source: http://www.tencent.com/en-us/content/at/2012/attachments/20120703.pdf
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26 No. 94, 2 Q. 2014
Also some international titles are already popular like Temple Run 2, Angry
Birds and Fruit Ninja. Rovio opened its Chinese office at the beginning of
2012, and its first Angry Birds activity park in Shanghai at the end of that
same year.
US and Japanese companies continue to dominate the market (Table 2)

with nine out of 20 among the top companies (by game revenues) for the US
and seven for Japan. However, new companies are climbing up reflecting
changes in the global market. The entry of two Chinese companies
(Tencent, NetEase) with very high growth rates of revenues (40% and 22%:
2011-2012) is to be noted. The two companies were not even included in the
st
top 20 in 2009 (DE PRATO et al., 2010: 41). During the 1 semester of
2013, Tencent became n1 (Newzoo, 2014). By the same token, the entry of
Apple is noticeable with a comparable growth rate indicating the strength of
its ecosystem. Zynga's position reveals as well the strength of mobile and
social networks, main distributors of "Free-to-Play" games like Zynga, hence
the position of Facebook in the table, illustrating an extreme case of
interdependence between players. Google entered the ranking 13 in 2013,
with an even higher rate of growth: 250%. These fast changes illustrate the
dynamism of this industry but its versatility as well.
Declining segments: consoles and PC-based games
There are some significant differences in the dynamics of individual

segments in terms of platforms (PC video games, home consoles and
handheld console games vs. online games and mobile games). Some
segments are declining (consoles and PCs), while other are growing fast
(on-line and mobile games). Regions display specificities with the respective
share of each platform.
Games sold for home consoles and handheld devices have still the
highest share in the total sales of video games: 49% in 2011 (IDATE, 2012:
36% for home consoles and 13% for handheld devices) but down from 70%
in 2004 (PWC, 2009). North America remains the main market for this
segment: in 2011 49% of the US households owned a dedicated game
console (ESA, 2012), up to 56% in 2012 (Nielsen, 2012). The EMEA and
Asia-Pacific regions followed respectively. Although declining in relative
share, the new consoles are likely to reignite the segment for some time; in
13 Of the top 25.

fact IDATE forecasts some growth until 2016, to be followed by a decline

(MICHAUD, 2013). The market share of PC-based games was steadily
growing up to 2000, but has been declining since. PC-based gaming is very
significant in the EMEA area in comparison with the other regions. The
decline of the PC video games market is not yet as marked as it is in North
America, although with national differences. Nevertheless, accessing to
highly-diffused genres of games, such as Massively Multiplayer Online
Games (MMOGs), still required a PC, and this will bring an element of
stability to the market for some time. The PC business context reflects low
entry barriers, which are free from proprietary restriction and manufacturers'
licensing fees, and benefit from lower development costs compared to
consoles (no need for specific and highly expensive software
development kits, with very low costs of duplication and deployment).
On-line and mobile games as engines of growth
Second to consoles, on-line and wireless video games 14 are the next
largest product segments, reaching a 44% share (on-line games: 32%,
mobile games: 12%) (IDATE, 2012). The basic distinction for online games
is drawn between single user games and multiplayer games. The former are
generally available as "browser games", which are played by means of a
web browser and typically do not require additional software, specific to the
game, to be installed. Multiplayer games, however, are instead usually (still)
played in the form of "client-based games", where the activity required of the
client machine is still relevant, its performance and elaborating power still
matter.
On-line and mobile games are characterized by two major business

models: pay (subscription usually the case for MMOGs) and freemium (with
free basic features: free trial period, full version for a fee) which is
alternatively called also free-to-play (F2P: the content is made available for
free on line) 15. The free-to-play business model is now dominating in the
world-wide market for mobile games (Mobile Game Arch Roadmap, 2013).
The transition is even speeding up with an unprecedented wave of MMO
14 These kinds of games do not have the same technological features and are not in the same
segment, however it is easier to present together as they differ from all former platforms.
15 Freemium is often included within the F2P category, the distinction is not stabilised and
keeps on moving. There is some "hybridization" between pay and free models: see
DAVIDOVICI-NORA (2014: 14) in this issue.
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28 No. 94, 2 Q. 2014
games going from a paid subscription model to the F2P model) (MICHAUD,
2013). According to research by NPD Group's Insights into the Freemium
Games Market report (2012, quoted by Mobile Business Briefing):
"Freemium games appear to have a high retention rate, with 84 percent of
users continuing to play after their initial interactions".
Since 2004, the online and wireless market has grown with remarkable
rapidity, driven by the increase in the number of broadband subscribers, the
innovation in available games, the transition to handheld devices, and the
newest generation consoles: e.g. Nintendo DS Wifi Connection was
launched in November 2005, and both Microsoft and Sony launched their
online services for gaming consoles between late 2003 and early 2004. 16
Now as smartphones provide the engine for growth the mobile segment is
likely to become the fastest-growing video games sector over the next five
years according to PriceWaterhouseCoopers (PWC, 2013) with revenues
increasing from US $8.8 billion in 2012 to US $14.4 billion in 2017 with a
CAGR of 10%.
Asia-Pacific is leading for on line and mobile games and has been a
pioneer in the field. Freemium is also the leading business model in Asia
according to Distimo (COSTELLO, 2014). With sales of US $9 billion (PWC,
2010), the Asia-Pacific region was already the biggest market of online and
wireless video games in 2009. Mobile Multiplayer Games (MMG) will be the
largest share by 34% of the total mobile games by 2017 in Asia 17, and
spending on virtual economy / in-game transaction will increase from current
20 to 52% over the same period. It is expected that the Asia mobile gaming
market will reach 50% of total global value (AHMAD, 2013). The emerging
revenue stream from selling virtual goods on line, an innovation born in Asia
with leading companies like Tencent for social networking and online gaming
(SNOW: Wi, 2009, In-Stat, 2010 a,b), is gaining momentum. Tencent has
converted most of its hundreds of millions of social-media users into paying
customers, mainly for virtual items in games.
16 It must be taken into account that figures on online games only refer to subscription fees,
while retail purchases of games are accounted for in the relevant categories: PC, console or
handheld.
17 The consultancy includes the following sub-regions: Asia-Pacific, Southeast Asia, Central
Asia, South Asia, and the Middle East.
Box 1 - Tencent. King of SNOW
Founded in November 1998, Tencent has grown into one of China's

largest and most used Internet service portals. On June 16, 2004,
Tencent Holdings Limited (SEHK 700) went public on the main board
of the Hong Kong Stock Exchange. In 2012, total revenues were US
$6,983.3 million, an increase of 54 % over the year ended December
31, 2011.
As one of the four online platforms of Tencent, Tencent Games (QQ

Game Platform for online games) is an online game developer and
operator, and is recognized as the largest online game community in
China. Other services include QQ, Weixin and WeChat (400 million
users) for communications; Qzone for social networking; QQ.com for
information; as well as an eCommerce open platform. Tenpay has a
21% share of the online payment market.
Games revenues are included in the revenues from Internet value-

added services (IVAS) US $5,090.3 million, and in mobile &
telecommunications value-added services: US $592.3 million). The
company stresses that for IVAS, item-based sales enjoyed a strong
year-on-year revenue growth; and that for MVAS, mobile games and
mobile books continued to grow significantly.
More than 50% of Tencent employees are R&D staff. Tencent has
obtained patents relating to the technologies in various areas: instant
messaging, e-commerce, online payment services, search engine,
information security, gaming, and many more. In 2007, Tencent
invested more than RMB 100 million in setting up the Tencent
Research Institute, China's first Internet research institute, with
campuses in Beijing, Shanghai, and Shenzhen. The institute focuses
on the self-development of core Internet technologies, in pursuing its
development and innovation for the industry.
Sources: http://www.tencent.com/en-us/at/abouttencent.shtml, http://www.tencent.com/en-
us/content/ir/news/2013/attachments/20130320.pdf
Social networks like Facebook contributed to popularize the games on

these platforms (Zynga's Farmville being a main example) offering simple
games, however based on servers allowing the kind of interaction offered by
MMOGs, and fuelling audience and revenue growth in the online games
segment. The Chinese game Happy Farm (2008) was included in Wired's list
of "The 15 Most Influential Games of the Decade" (at 14), for its major
influence on social network games, inspiring dozens of Facebook clones like
FarmVille (RADOFF, 2009). Social networks are now a fully-fledged platform
on their own (MICHAUD, 2013), experiencing exponential growth since
2010, reaching 186.7 million gamers in 2013. In fact, 45.7% of gamers play
online games on social networks according to IDATE (MICHAUD, 2013).
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30 No. 94, 2 Q. 2014
The social gaming market amounted to 55.3% of the total online gaming
market (MICHAUD, 2013).
From disintermediation to re-intermediation
The previous section reviewed the role of online and mobile games as an
engine of change with regard to previous dominant platforms. In this section
we will quickly 18 shed some light on the potential transformations that this
value chain might incur as a consequence of the disruptive trends brought
by these two new platforms: online and mobile.
Indeed, online digital distribution has affected the value chain structure,
resulting in a convergence of the roles of the distributor and of the retailer
under the range of activities of the publisher. Online gaming introduced new
distribution methods and started to rearrange the relative roles and
interaction dynamics among the actors at the different levels in the supply
chain. A whole part of the core business involving publishers, distributors
and retailers has basically disappeared as there is no longer any need to
duplicate physical products because these can be distributed over the
network. The publisher, in many cases, directly distributes games, without
the need for a distributor to act as intermediary between the publisher and
the retailer: i.e. "disintermediation" is taking place, cutting out the role of the
distributor. By the same token, it creates opportunities for developers to
circumvent existing intermediaries and to sell directly to the end customers
as illustrated by Figure 2.
These changes to the value chain of online video games, as compared

with that of "traditional" video games, affect not only the interactions
between the actors in the value creation process, but also the type and
number of actors involved. Different types of games are affected to different
extents. Though the characteristics of browser-based games have heavily
reduced the need for distributors and retailers for logistic support, portals
and dedicated sites with adequate visibility are required. With direct sales a
developer selling will receive the sole 5 Euros paid by the consumer, instead
of the 4 he was getting through the traditional value chain (out of 50 typically
paid by the consumer).
18 For a broader presentation see DE PRATO et al. (2010), DE PRATO (2012), DE PRATO et
al. (2014), FEIJOO et al. (2012), FEIJOO et al. (2013).
Figure 2 - Disintermediation in progress: the value chain and sharing of revenues
Source: EGDF (2011)
This is not necessarily true for client-based online games, particularly the
complex and expensive games, which in many cases still rely on the more
traditional chain to reach consumers. As noted by M. DAVIDOVICI-NORA
(2013), about "freemium": acquisition is not obvious, retention is volatile and
monetization complex. The low barriers to entry are not equivalent to a new
form of pervasive online publishing; the expertise of an intermediary, such as
the publisher may be required (not to mention the marketing/ promotion of
the product). Hence the emergence of new forms of "re-intermediation"
brought by Internet Service Providers (ISPs), online shops such as App
Store, PSN, and XBLA, and social networks like Facebook. These new
platforms act as content aggregators and provide portals for game
distribution which allows easier promotion and localization of new games by
users; at the same time they attract advertising which brings an added
source to the mixed revenue models. These new intermediaries are taking
on the role previously played by distributors. Their growing role being partly
based on the monetization of players' personal data raises new issues and
triggered reactions from citizen and policy makers (TUBARO et al., 2014).
Besides, policy makers have concerns about the FtoP model, about games
advertised as "free" that may mislead consumers about the true costs
involved 19.
19 After the UK's Office of Fair Trading (March 2014) investigated in-app purchases and free-to-
play games, the European Commission got involved.
See: http://www.jeuxvideo.com/news/2014/00070763-la-commission-europeenne-se-penche-
sur-les-free-to-play.htm
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32 No. 94, 2 Q. 2014
Conclusion
Despite some turbulences in the recent years due to changes in the

business models (LE DIBERDER, 2012), the need for established players to
adapt to the changes (MICHAUD, 2013), and some declining segments
(consoles and PCs), the games market is in a healthy state with exceptional
growth dynamics forecasted.
Sources of revenues and business models are bound to change, and to

keep evolving at the same pace as the underlying products, or services. The
F2P model is introducing games as a service with monetization taking place
during the game which in turn drives the developer and publisher to keep the
gamer on line as long as possible. Publishers are motivated adopting the
virtual items model by the huge difference in sales life span between virtual
items and the games themselves. A single virtual item product could be sold
online for years, while the "productive" life of a standard game is of some
(or, more often, only a few) months. Among the changes in business
models, new funding opportunities are opening up with, for instance crowd-
funding (RAMOS, 2014; SIMON, 2014b), paving the way for community
management and echoing the new consumer behaviour.
Consumer behaviour has evolved over the past few years and has
allowed the viral diffusion of online gaming to take place at an unexpected
pace. Both user engagement and the increasingly active role of users have
been sustained by the interactive and social nature of the online gaming
experience. This is seen as a first step for users towards interaction with the
game itself, to the creation of content paving the way for community
management. Nevertheless, this trend could take time to establish itself and
one should be cautious about predicting the different paths it could follow
and also about its potential impact on industry, as for instance new
competencies like community management become critical.
The proliferation of devices leads to an era of "ubiquitous games" and

cross-media experiences. The demand from users for a coherent gaming
experience will increase the need for developers and publishers for a
multiplatform strategy, it will create further tensions with the exclusivity
strategy of console manufacturers. Evolving from mere entertainment into
virtual worlds, the online game segment is providing a marketplace for online
economic activities (WI, 2009).
Asia is paving the way. The global market and its geography are
changing and old and new companies are aiming for the Asian market as
illustrated throughout the paper as a way of counterbalancing more mature

markets.
Therefore, as a final conclusion, it can be said that these innovations

introduced in the games industry have allowed it to successfully overcome
first the transition to digitization and then the advent of new platforms, wider
demographics and saturation of geographically mature markets. This is not
to say that the game industry is immune to crisis and/or difficulties, such as
satisfying gamers' expectations while increasing their figures, but arguably
has put this industry at the forefront of media and content industries in terms
of digital development.
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23150783
Marie CARPENTER, Nabyla DAIDJ

Tlcom Ecole de Management, Paris
Christina MORENO
Tlcom SudParis, Institut MinesTlcom
Abstract: The video games industry has been subject to a number of significant
transitions in its short history. The current transition, however, has the potention to
restructure more fundamentally the technological, competitive and market dynamics with a
growing share of revenues attributed to non-console linked video games. Existing players
from the "traditional" video games market are not standing idly by as the market evolves.
What is unclear, however, is whether the competitive advantages they have built up over
previous generations of video games will be sustainable in the new landscape. Ironically, it
may be argued that existing competitive advantages could restrict their ability to adapt to
the new dynamics. By proposing two alternative scenarios for future development, we
examine the implications of either maintaining competitive advantage or developing
temporary advantages. The video games industry is judged to be an ideal laboratory in
which to investigate the consequences of hypercompetition and for developing strategic
management insight into sustainable competitive advantage in such a context.
Key words: sustainable competitive advantage, temporary competitive advantage,
business model, video games.
The transformation of the video game sector
Since its emergence in the 1980s, the video games industry has grown to
become one of the most stable and profitable sectors in the entertainment
market. Video games were historically played within a specific technological
set-up initially involving an arcade machine and subsequently a PC or a
video-game console. Nowadays, videogames can be displayed in a large
number of devices including handheld devices such as mobile phones, MP3
players and tablets. All these hardware platforms can be used to play
videogames and the distinction between dedicated and non-dedicated
platforms is becoming less clearcut.
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Market trends
In 2008, IDATE estimated that the video games market in 2012 would be
valued at almost 30 billion and that 11 billion, or 37%, would be accounted
for by games delivered on PCs or via mobiles (IDATE, 2008). In fact, in
2013, IDATE data on the video games market show the combination of five
software markets (home console, handheld console, offline computer, on-
line computer and mobile) as generating over 41 billion in revenues, with
over 61% coming from the three non-console based categories (IDATE,
2013).
Traditionally, the market has been dominated by console manufacturers.

Through regular upgrading of their technological prowess and the content
available on different generations of consoles, these global firms had
created strong barriers to entry and dominated their value chains. Yet a
growing number of commentators are questioning the future relevance of the
traditional console. In France, Henri Crohas, CEO and founder of Archos, a
French consumer electronics company, has claimed that consoles for
classical video games will disappear (LAUGIER, 2012). Kevin Chou, co-
founder and CEO of Kabam, an on-line free-to-play provider, admits that
"consoles aren't going to disappear overnight" but goes on to state that the
current generation of consoles "will be the first generation of consoles that
won't outsell their predecessors" (CHOU, 2013).
Facing an inevitable transition due to the digitalization of the value chain,

console manufacturers and their partners are reconsidering their strategies
and their business models. At the same time, entrepreneurs and new
entrants are seeking to position themselves to benefit from the new
opportunities on offer. It appears that consumers will continue to spend more
than before on entertainment products in the video game sector. What is not
clear is how the existing industry structure will transition to a new structure
and how different players will be impacted by the changes. Before
presenting the relevant literature and its applicaton to the video games
industry, we will present the major transformations already undergone in this
sector.
The console game sector
The video game industry includes all the production activities from the
development to the distribution of gaming software and hardware and
accessories. Home console manufacturers remain key industry actors as
Marie CARPENTER, Nabyla DAIDJ & Christina MORENO 41
they generate a large share of the industry's revenue. The oligopoly

maintained by the three console manufacturers is governed by the strategies
they have adopted over time (Figure 1). The console life cycle is typically
between 5 and 6 years. Each cycle is represented by a technological
innovation that determines the success of the product.
In this industry, innovation is considered to be the key success factor and

technological prowess has grown with each new generation of console
launched. Microsoft and Sony compete head on in this regard, while
Nintendo has a different positioning based on gameplay (DAIDJ & ISCKIA,
2009). The video games industry has a certain number of characteristics that
have influenced the strategies of its major players. It is a two-sided platform
industry with proprietary standards and high direct and indirect network
externalities (DAIDJ & ISCKIA, 2009). The subsidized pricing of the console,
for example, serves to develop the user base and draw in developers. The
sector is also characterised by path dependency whereby choices made by
console manufacturers in relation to next generation consoles are
determined, in part, by prior decisions and investments (VENKATRAMAN &
LEE, 2004).
Figure 1 Evolution of the console leading manufacturers
Adapted from DAIDJ, 2013

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Rapidly emerging non-console based video games
It has been possible to play games on mobile phones since 1997 when
the game Snake was installed on Nokia phones. Mobile video game
revenues have grown significantly since the launch of the iPhone in 2007.
There are two main revenue models in mobile gaming: the paid content
model, considered to be the "traditional model", and the Free-to-Play, ad-
funded and micro-transactions model. The first form of mobile gaming is
focused on enlarging the gaming population; the second is interested in
increasing the revenue per user. The flourishing mobile market corresponds
mainly to the second form of gaming.
The success of engaging on-line games such as Clash of Clans and

Minecraft has been magnified by the emergence of tablets and higher quality
mobile phones. Both the mobile and tablet phenomena are further
accelerated by the growth of such terminals in emerging markets, where
penetration of both consoles and fast Internet connections has not yet
reached anything close to that of developed markets. Chinese consumers'
online and mobile use of video games, for example, depends largely on local
suppliers such as Tencent.
Online gaming initially emerged in 1996 with the launch of Nexus: The
Kingdom of the Winds in Korea. There are two categories of online games:
browser-based games and client-based games. The first category
corresponds to games that can be accessed on a browser or portal, such as
"Yahoo! Games", and where there is no need to install any software. Client-
based games, on the other hand, require users to download software.
Initiatives have been undertaken to structure the online gaming ecosystem.
These include, for example, the development of the Steam platform by the
on-line game developer, Valve. Launched initially in the Windows
environment in 2003, Steam continues to evolve and adapt to the market by
adding new environments to its platform: iOS in 2010, Android in 2012 and,
more recently, Linux. By providing a pipeline directly to gamers, such
platforms allow developers to build communities more easily and increase
potential to monetize their online games.
Offline players have also progressively shifted online with the arrival of
social games. Broadband access enables the diffusion to a wider market via
social networks in which a whole new category of games such as Farmville
has appeared. These games are simple, casual and have a viral distribution
as users share them, challenge each other and post their performance to
compete with each other.
Traditional video gaming has also shifted to online distribution and the
main console manufacturers offer online services such as Sony's Playstation
Network, Nintendo's WiiWare and Microsoft's Xbox Live. By allowing games
to be downloaded to the console's hard drive, manufacturers can generate
greater revenues and also offer content other than games, such as music
and films. This form of access also facilitates occasional gaming and
enhances collective gaming experiences.
Game on Demand (GoD) or Cloud Gaming is another promising area of

development as data compression allows the user to access high-definition
games without storing any files, as the games are stored in the cloud. Users
can thus access AAA games no matter where they are and which device
they are using. The first live cloud gaming on demand service was launched
in Cyprus in 2005 by G-cluster and other significant cloud gaming
companies such as Onlive and Gakai have emerged since 2010. While
significant economic and technological difficulties remain to be overcome,
cloud gaming has the potential to restructure the industry as it removes the
constraints of localization and the limitations linked to the gaming device
(MORENO et al., 2012).
Finally, further disruption may emerge in the video game sector from
"Smart" TV initiatives from potential new entrants such as Samsung and
alternative players such as the low cost Gamestick, which potentially turns
every TV into a video console. The potential for mobile phones to be
converted to controllers for both hand-held and TV-based video games is
also likely to be exploited more fully in the future.
From value chain to video game ecosystem
Traditionally, the videogame sector used the same value chain as that of
multimedia-based technology (Figure 2) with the console constructor
dominating and clearly influencing the other actors (DAIDJ, 2007).
With the multiplication of devices and the development of the Internet, the
value chain has evolved and the videogame industry involves a large
number of actors conducting inter-related activities. In the traditional value
chain, for example, the consumer has no interaction with either the content
owner or the developer. Today, however, such actors are increasingly in
direct contact with users.
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Figure 2 Video game value chain
Adapted from DAIDJ, 2007
Figure 3 - Video game ecosystem
Adapted from DE PRATO, 2010
As a result, viewing the video game sector from the perspective of a

value chain is less relevant than before and it is more useful to consider it as
an ecosystem, composed of development, distribution and consumption. As
more actors appear within the ecosystem, value is no longer created only by
the main actors of the original value chain but also by other participants such
as the operator providing internet access or advertisers funding game

development (Figure 3).
It is not possible today to predict either the future ecosystem or the

proportion of spending that will go to mobile and online gaming compared to
traditional console-based gaming. The level of uncertainty that this creates
generates specific challenges for mainstream strategic management. Long-
term and medium-term planning becomes more difficult and the relevance of
long-standing competitive advantages becomes less clear. We will now
consider the different approaches to the concept of strategic management
before applying the different schools of thought to the transformation of the
video games industry.
Revisiting the concept of competitive advantage

in strategic management literature
Sustainable competitive advantage has traditionally been the key concept
used by strategic management to explain a firm's success. A recent best-
selling book (2013) published by Rita GUNTHER McGRATH entitled The
end of competitive advantage has called into question its relevance in
today's fast moving and hypercompetitive marketplaces. Before looking at
the video game industry from this perspective, we will begin by examining
the concept of competitive advantage and the related concept of business
models.
Sustainable competitive advantage

versus transient competitive advantage?
The concept of sustainable competitive advantage has remained a

cornerstone of management thinking and behavior. The idea emerged in
1984, when DAY explained that there are two types of strategies that may
help to "sustain the competitive advantage" (p. 32). Other authors (HALL,
1980) insisted on the need for firms to possess unique advantages in
relation to competitors in order to survive. A debate on what actually
constitutes competitive advantage ensued in both strategic management
and economics (RUMELT et al., 1991).
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Michael PORTER (1985) is generally considered to be the founder of the

school of sustainable competitive analysis. He developed several tools with
a view to analyzing the environment in which businesses operate. Up to and
including Porter, firms were judged on how they interpreted the
environmental constraints be they competitive, regulatory or of other
forms. The 'external' emphasis of this approach, however, was judged to be
limiting and, over time, more attention was paid to the internal dimension of
a firm's competitive strategy. Alternative approaches thus emerged to enrich
strategic thinking, notably the theory of resources and competences. The
resource-based view (RBV) and the associated analysis of competences
and capabilities (HAMEL & PRAHALAD, 1994; WERNERFELT, 1989) have
grown to represent a significant analytical framework of company strategies
and have generated new perspectives on how firms actually construct
sustainable competitive advantages based on distinctive resources, core
competences and capabilities thus having a long-term influence on the
context in which they do business.
BARNEY (1991) contributed to the discussion by exploring the

relationships between a firm's resources and sustainable competitive
advantage. He considered that for firms to achieve sustainable competitive
advantage through resources, these resources must possess four attributes:
rareness, value, inability to be imitated, and inability to be substituted. The
more complex notion of capabilities, defined as the ability to perform "a
coordinated set of tasks utilizing organisational resources" (HELFAT &
PETERAF, 2003, p. 999), emerged from this work. KAY (1993) considers as
'distinctive' those capabilities that competitors do not possess and that are
sustainable.
The conditions under which temporary competitive advantage emerges
Since 1990, a debate has emerged in the field of strategic management

about whether competitive advantage is sustainable or temporary in nature.
The ways in which firms adapted to disruptions and transformations in their
industries led researchers to suggest a state of permanent transformation
(SAAS & MTAIS, 2001). The evolution of the console and video game
industries has been viewed as typical of such dynamics (SHANKAR &
BAYUS, 2002; JOHNS, 2006; VENKATRAMAN & LEE, 2004).
Numerous researchers have proposed the term of temporary competitive

advantage, also known as 'transient', 'fleeting' or short-term advantage. In
his groundbreaking book published in 1994, D'AVENI introduced the concept
of hypercompetition. He explains that competitive advantage is, by definition,

destined to disappear in such a context and that it is futile to attempt to
defend a sustainable competitive advantage. The only sustainable position is
that of movement and long-term, or sustained, above-average profitability is
not feasible. D'AVENI et al. (2010) thus propose "the age of temporary
advantage" as an alternative concept. A competitive firm should constantly
be able to reposition itself in terms of its value proposition, its savoir-faire
and its financial capacity in light of the changing entry barriers and time
frames of evolving competitive dynamics. Hypercompetitivity thus
presupposes permanent transformation of competitive advantages. Other
authors (such as HAMEL, 2000) have also highlighted that firms in
competitive industries are almost systematically seeking the same temporary
advantages, rather than focusing on more sustainable long-term strategies.
Debating notions of duration and sustainability of competitive advantage
Despite its importance in the field of strategy and competitive advantage,

sustainability has not been clearly defined and different theoretical positions
persist. COYNE (1986) explains "perhaps it is because the meaning of
'sustainable competitive advantage' is superficially self-evident that virtually
no effort has been made to define it explicity" (p. 54). Two approaches can
be distinguished in relation to the interpretation of competitive advantage:
Sustainable competitive advantage is linked to a time continuum.
PORTER (1985), for example, illustrates this logic in describing competitive
advantage as "the fundamental basis of above-average performance in the
long run" (p. 12). HILL & JONES (2004) also do so when they consider that
an organization "has a sustained competitive advantage when it is able to
maintain above-average profitability over a number of years" (p. 76). What
'long run' involves is not specified, nor is the exact number of years.
Sustainable competitive advantage is not directly linked to time but to
the possibility of duplication by competitors (LIPPMAN & RUMELT, 1982).
"A firm is said to have a sustained competitive advantage when it is

implementing a value creating strategy not simultaneously being
implemented by any current or potential competitors and when these
other firms are unable to duplicate the benefits of this strategy"
(BARNEY, 1991, p. 102).
The concept of the business model is key to understanding the new ways
that firms seek to create and capture value in order to re-inforce competitive
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advantage and sustain it. The two concepts of competitive advantage and
business models are thus intimately linked.
Business models, competitive advantage and strategy
As with sustainable competitive advantage, the concept of the business

model (BM) is not yet very well defined in academic literature. The term
includes the means by which the firm generates revenue by creating value,
the resources and competencies needed and the organization of
transactions between the participants. The BM explains how the resources
and competencies are mobilized by a firm to develop a value proposition for
its various client groups and how it organizes its internal value chain and
value network (DAIDJ & ISCKIA, 2009).
A BM is the direct result of strategy but it is not strategy itself

(CASADESUS-MASANELL & RICART, 2010). Strategy is a dynamic vision
that positions the firm in a value network while the BM is a static vision of the
most satisfying way to generate revenues for a given solution and position in
a value network. These links between BMs and strategy have previously
been analysed and the framework has been applied to manufacturers of
video game consoles (DAIDJ & ISCKIA, 2009).
The BM should reflect the coherence of internal and external choices

made by the firm. Resources and competences are elements that actively
contribute to creating value, generating revenue and are necessary to
develop an offer for the end-client, for whom the product is made. The
company's value chain reflects the internal value creation processes
(resources and competences), while the value network reflects the external
value creation processes. The BM is a link between these two areas.
BMs are closely linked to competitive advantage. ZOTT et al. (2011),

among others, consider that the BM can be a source of competitive
advantage. The concept of both sustainable and temporary competitive
advantage and the consequences of each on BM are compared (Table 1)
and several conclusions emerge from the comparison:
Competitive advantage both sustainable and temporary can be
explained by both external (environment, market, etc.) and internal
(resources, competencies, capabilities and dynamic capabilities) forces. The
same concepts are used to explain the development of both sustainable and
temporary advantages.
BM has generally been associated with the concept of sustainable

competitive advantage and defined as a "concise representation of how an
interrelated set of decision variables in the areas of venture strategy,
architecture, and economics are addressed to create sustainable
competitive advantage in defined markets" (MORRIS et al., 2005, p. 727).
Competitive and technological evolutions, however, have modified this vision
and a more turbulent environment (STIEGLITZ et al., 2009), in a context of
hypercompetition, has obliged firms to develop temporary advantages and to
propose new BMs. Nonetheless, the authors add that, unlike what might
appear to be intuitively the case, a flexible strategy and a new BM are not
necessarily the best responses to a turbulent environment.
Understanding BMs also involves defining the nature of innovations, as

CHRISTENSEN (1997) has done with the concepts of disruptive versus
sustaining innovation. He has shown how the dominant positions of large
firms can prove to be an obstacle to their adaptation in phases of radical
change and disruptive innovation where such firms need to adopt innovative
BMs to compete with aggressive new entrants. In more recent work,
JOHNSON, CHRISTENSEN & KAGERMANN (2008) have defined five
conditions that justify adopting new BMs:
"The opportunity to address through disruptive innovation the needs of

large groups of potential customers who are shut out of a market
entirely because existing solutions are too expensive or complicated
for them [], to capitalize on a brand new technology by wrapping a
new business model around it [] and to bring a job-to-be-done focus
where one does not yet exist []; The need to fend off low-end
disrupters [] and to respond to a shifting basis of competition"
In relation to the video game sector, as technology converges and the

video game ecosystem outlined in section 1 becomes more complex,
business models become more difficult to define. As with all computer
related systems, the advances on technology mean that BMs evolve as the
technology matures and existing BMs may be rendered obsolete by
disruptive innovations (CHRISTENSEN, 1997). From the elements outlined
in Table 1, it is not clear that innovative BMs will allow firms to systematically
develop a sustainable competitive advantage. The following analysis
considers how the video game industry will evolve in light of the above
discussion on the nature of competitive advantage. The key research
question is "will firms in this industry have to choose between sustainable or
transient competitive advantage or will business models emerge that make it
possible for the two types of competive advantages to co-exist?"
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50 No. 94, 2 Q. 2014
Table 1 - The evolution of the concept of competitive advantage: from sustainable to

temporary theoretical approaches and consequences on business models
Sustainable "long-term" advantage Temporary, transient, "fleeting" advantage
- "The fundamental basis of above- - The durability of a competitive advantage is limited

average performance in the long run" because strength and weakness sets change
(PORTER, 1985, p. 7). significantly over time (D'AVENI, 1994; SIMON et
Conceptual - "In a dynamic and competitive al., 2010).
framework / environment, the real source of - "Developing a temporary advantage is not just
Definitions of competitive advantage is underlined by about protecting or creating strengths, but also
competitive the organisation's ability to consistently addressing weaknesses" (SIMON et al., 2010, p.
advantages meet environmental changes, as well as 1404).
(CA) to change industry structure" (CARMELI, - IANSITI & LEVIEN (2004) point out the fragile
2004, p. 111). nature of competitive advantage "in situations of
significant technological and market upheaval" (p.
9).
- Lower cost and differentiation (Porter, - Dynamic capabilities can accelerate the process
1985) of acquiring temporary advantages (LEE et al.,
- Gaining a sustained competitive 2010).
Potential advantage is determined by fast and - Adoption of focus strategy rather than flexibility
sources of effective responses to the five forces strategy: "Strategic focus reaps temporary
competitive (see above) advantages in more turbulent environments, while
advantage - Distinctive resources and core strategic flexibility is viable in less turbulent
competencies (see above) markets." (STIEGLITZ et al., 2009, p. 1).
- Intangible resources and capabilities
(COLLIS & MONTGOMERY, 1995).
- What kind of BM leads to sustained Constant adaptation
competitive advantage? "It is thus necessary to constantly adjust the
- A firm's existing kind of distinctive configuration of resources, the nature of the offer
resource or core competence allows for and the relationships with partners according to
decisions on the type of BM best suited evolving competitive conditions and the
in a given competitive situation. opportunities that present themselves. This position
- Long-term sustainable competitive is not natural or comfortable, however, and
advantage seeks to maintain technical demands that companies be able to break or exit
advantage through BMs based on the dominant logic that shapes their BM" (DAIDJ &
ongoing innovation. ISCKIA, 2009, p. 34).
Uncertainty and BMs
"The focus logic suggests that the trigger points that
allow pursuit of new business opportunities should
be raised when uncertainty increases. The intuition
Consequence
here is that getting lured away from a proven
s on business
business model will be unprofitable because the
models (BM)
firm loses direction in its pursuit of questionable
opportunities that come and go with increasing
pace" (STIEGLITZ et al., 2009, p. 4).
"Reinventing" BMs
"Companies should not pursue BM reinvention
unless they are confident that the opportunity is
large enough to warrant the effort. And, there's
really no point in instituting a new BM unless it's not
only new to the company but in some way new or
game-changing to the industry or market. To do
otherwise would be a waste of time and money"
(JOHNSON et al., 2008, p. 67).
Does exploiting a temporary competitive advantage
allow a firm to develop a long term BM?
Source: summary of the work of the authors cited

Sustainable competitive advantage and temporary

competitive advantage in the video games industry
In order to evaluate the relevance of the concepts of sustainable
competitive advantage and temporary competitive advantage in the video
games industry, we have chosen to compare two alternative scenarios for
growth in the industry; The first scenario, taken from figures published by
industry consultants (IDATE, 2013) forecasts that revenues from console-
based games (hardware and software) will reach over 44 billion in 2017,
representing 155% of sales in 2013. Non-console-based revenues are
forecast to grow to almost 38 billion, representing 150% of the 2013 figure.
We chose to develop a more "pessimistic" scenario from the perspective of
console manufacturers, forecastings sales of only 30 billion in 2017, which
amounts to only 104% of 2013 revenues. Forecasts for non-console-based
revenues, on the other hand, are more optimistic with revenues at over 50
billion, representing a doubling of revenues compared to 2013 (Figure 4).
Figure 4 - Alternative scenarios for growth of console-based games

and non-console based games ( billion)
Source: adapted from IDATE, 2013, and authors' forecasts
Presenting two different scenarios in this way contrasts a five-year view

in which existing firms will continue to benefit from relatively healthy growth
levels, comparable to those experienced previously, with a more radical
vision of competitive dynamics over the next five years. Ironically, it is the
video games industry that was used by DOWNES & NUNES (2013) to
illustrate their concept of "big bang" disruptions that displace incumbents
with an entirely different set of technologies, customer target and business
model. In their illustratation, it was the emergence of video games in the
1990s that led to the demise of the pinball industry, which has since been
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52 No. 94, 2 Q. 2014
confined to a niche market. The challenge for the actors who have
succeeded in what has now become the "traditional" video game sector is to
consider if and how they need to reconsider their sources of sustainable
competitive advantage.
To investigate the academic question of whether firms must choose

between sustainable and temporary competitive advantage when faced with
changing competitive dynamics, the video game industry was seen as ideal.
The methodology chosen (Box 1) was one which allows the research to
track on-going events in a fast-moving industry.
Given the potential for disruption posed by the non-console-based

alternatives, secondary research and interviews were used to consider how
each of the two scenarios would play out and how key actors in the sector
would need to ask key strategic questions about their BM (Table 2). In the
first part of the table, the details of the scenario are explained and in the
second part, the impact is outlined for different actors in the industry.
Box 1: Research methodology

The question of convergence that is facing the video games industry is one which has
already significantly transformed the telecommunications industry. The competitive,
technological and market landscape that has emerged from the transformation of the
telecom industry was not one that could have been foreseen. Having examined the impact
of convergence on the telecom equipment industry (CARPENTER et al., 2003) and the
media sector (DAIDJ, 2011), the authors are committed to a research approach that seeks
to understand the decisions made by firms in a context of rapid change. While such
dynamic and unpredictable environments are complex to research, they are also
particularly relevant in management studies as they are often forerunners of phenomena
that will appear in other sectors. Once it is regularly subjected to critical input from industry
actors, this research approach offers a promising means of "catching up with history"
(LAZONICK, 2012).
To analyze the competitive landscape of the video game sector, secondary data have been
collected. Research reports on industry and company developments reviewed and
downloaded include:
- XERFI: Consumer electronics groups - 4 reports, 2013-2014.
- MarketLine: Company profiles - 5 reports, 2012-2014.
- IDATE: DigiWorld Yearbook - 2 reports, 2012-2103.
In addition to secondary research, the authors conducted in-depth interviews with senior
executives in firms considered to be representative of the sector. In all, ten interviews were
conducted in France in 2013 and 2014 with senior executives within firms of different sizes
(1 console manufacturer, 1 editor, 4 developers, 2 studios and 2 telecom operators). Two
interviews with experts from IDATE and IDC were also conducted. All these interviews
were open-ended based on facts, events and opinion and were used to question the
researchers' understanding of sectoral dynamics, on the one hand, and of the potential
impact of such changes on actors' strategies, on the other. These discussions thus led to a
more fine-grained understanding of the technological, competitive and market-based
changes that are perceived as significant by industry actors and that need to be included as
potential variables in the scenarios developed. In addition, the potential impact of the
scenarios developed was refined and revised with input from actors considered
representative of the decision-makers in the sector.
The premise of the two scenarios presented is that the first column
represents the situation of least disruption in which existing console
manufacturers and their partners can continue to sustain the competitive
advantage that they have built up over previous generations of console
technologies. In this scenario, consoles and their associated AAA games will
dominate the competitive landscape. The oligopolistic nature of the sector is
not undermined by the new technologies and players, but each of the two
markets continues to grow successfully. High barriers to entry persist in the
console-related businesses and the profits generated allow for both
traditional growth and diversification into areas of non-console gaming, but
these are considered primarily as a means to support the core business.
New sources of growth in emerging markets, notably China, will further
enhance the existing business model.
For Sony and Microsoft, as diversified players, the key technological

challenge will be to pursue convergence of terminals and to position
themselves to take a share of future revenues from the combined TV-PC-
console home entertainment market, increasingly known as the household
"media center". For Nintendo, as a pure player, the challenge will remain to
find the means to add value to its consoles, both home and mobile, and to
leverage its successful franchises, such as Mario Bros, in new ways.
The partners of the console makers, be they publishers or studios, will

continue to develop close relationships with console manufacturers, but they
will also be active in seeking out new opportunities in the fast growing
market that is not linked to consoles. This temptation will be stronger for
those studios that can mobilize their existing capabilities to take advantage
of new opportunities in mobile and PC video games, where the barriers to
entry are lower.
In the scenario presented in the second column, the sector is facing a far
greater market fragmentation and a more rapid fall in revenues from the
console market. This is closer to the 'big bang' event that video games
wrought on the pinball market some 30 years ago. There will be a host of
new entrants as mobile and tablet forms of gaming grow in sophistication
and game play. Many new entrants may be from China and other emerging
markets where mobile and PC gaming have developed without competition
from consoles. While barriers to entry are lower than before, they will
nonetheless reemerge in the form of technical and marketing prowess and
the financial commitment needed to build such video games across multiple
platforms and terminals.
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54 No. 94, 2 Q. 2014
Table 2 Comparison of key strategic dimensions for two scenarios
Scenario Scenario 1 Scenario 2

outlines "maintain competitive advantage" "build temporary advantage"
Significant part of the dynamics of the video A more significant part of the market switches to non-
games market continues to be driven by the console usage.
investments made by console a. Mobile and tablet games become more sophisticated
Assumptions manufacturers in: and challenging.
of growth a. The development of new consoles. b. Asian consumers, studios and publishers grow in
dynamics b. The commercialization of new usages importance, spending and revenues.
based on these consoles: multi-player
gaming, cloud gaming, increments to AAA
games on mobile devices.
- Oligopoly situation continues with game - Market becomes predominantly fragmented as
console as driver of innovation and market consumers use multiple devices to consume games.
growth with the launch of each new Value of gaming linked to consoles declines.
Market generation of consoles. - Lower barriers to entry than for console-based gaming
structure - High barriers to entry, technological and but new barriers in marketing and technology
marketing. nonetheless emerge.
- Overall market size grows as non-console - Structured mobile and on-line platforms and
gaming also steadily increases. communities emerge and grow in importance.
1. Penetration of new emerging markets 1. Significant growth from growing opportunities for
with existing consoles. games on social networks and mobile devices.
Primary
2. Introduction of new generations of 2. Players from emerging markets developing their
sources of
consoles in 5-7 years. gaming insights in developed markets.
revenue
3. Marginal growth from small pockets of 3. New usages for mobile gaming and social gaming in
growth
opportunities for games on social networks the household, workplace and in educational
and mobile devices. establishments.
- Diversified console makers seek to - Diversified console makers (Microsoft and Sony) seek
optimize convergence with other hardware presence across all forms of access to content further
platforms in their portfolio. diversification seeking synergies from hardware and
- Specialized console makers seek software in different interfaces.
differentiation via AAA games and - Specialized console maker (Nintendo) dependent on
Business
ergonomics of console. key games and strong franchises that can be adapted to
model for
- Console subsidized and profits generated other manufacturers' devices.
console
from games. - For both, greater number of partnerships to keep
makers
- For both, partnerships with publishers and maximum options in play.
studios key to successful console - M&A seen as a way to diversify into non-console
development. segments.
- "Entry level" console(s) developed for emerging
markets.
- Close relationships with console - Develop strong relationships with studios to provide
manufacturers key to maintaining existing access for console manufacturers to multiple knowledge
gamers and attracting new gamers. sources.
- Multiple relationships with studios to - M&A seen as a way to diversify into non-console
access new technologies, new forms of segments.
Business
gameplay and new usages that are - Larger companies will be at an advantage as they can
model for
complementary to AAA games. learn from a larger variety of studios and navigate
publishers
transitions but they will need to adopt "fast fail"
methodologies, where they learn to leave non-performing
businesses rapidly and 'pivot' to new areas of potential
growth.
- Increasing use of beta versions of products.
- By developing specialized technological - Develop specific technological and marketing
skills, they may become partners with knowledge across new areas of growth for gaming: Free
established firms, via open innovation, or to play, Play stay and pay, Freemium, Ad-funded,
they may be acquired. Derivative products, Buzz management, Social network
Business
- Start-ups with a vision of a new game "virality", community management, Addictive content
model for
attract venture capital or raise finance from development
studios
friends, public grants or borrowing. - Multiple products in development in parallel,
- May consider games not linked to development of comparable gameplay for multiple
consoles, inspired by high level of returns to platforms.
high-profile success stories. - Increasing use of beta versions of products.
Supply-driven Demand-driven Supply-driven Demand-driven

- Financial strength *** - Gameplay *** - Financial strength ** - Gameplay ***
Key success - Cost reduction - Price - Cost reduction - Price **
factors management *** attractiveness ** management* - Variety
* = relevant - Supply chain - Variety of games - SCM - Distribution
** = management*** *** - Technological excellence* - Buzz insight***
important - Technological - Distribution *** - Creativity*** - Viral marketing***
*** = crucial excellence *** - Brand - Social relevance***
- Creativity** management*** - Connectivity***
- Addictive nature***
Existing players will not remain static in light of the emergence of a faster
than expected decline in their revenues. Diversified console makers will
push for greater synergies between their devices and Nintendo will seek to
benefit from the greater transferability of its video games for handheld
devices to the new mobile terminals. Console makers will accelerate M&A
activities and actively partner to a greater degree with start-ups and growing
firms in the new non-console landscape to acquire capabilities. "Entry level"
consoles may be developed for emerging markets to maintain global market
share. All console manufacturers, and, more particularly, editors will be
called upon to accept a higher rate of failure and to adopt more rapid "fast
fail" procedures to ensure they are willing to drop projects faster and move
on to new ones. Such a development will mean that the level of financial
commitment to each project may be reduced and the creative process and
project planning procedures will have to be revised. Studios will transform
themselves more rapidly to adopt the new toolkit of non-console-based video
games. Both studios and publishers will experiment to a far greater degree
with the practice of launching beta versions of their games to generate
feedback on content, gameplay as well as buzz and viral impact.
Overall the greatest challenge to existing players is evident in the final

row of the comparative table. In column one, the key success factors
contribute to their existing competitive advantages. These are both supply
driven and demand driven and all firms in the industry have shown
themselves capable of building world-class organizations, be it in terms of
financial might, technological prowess or marketing expertise. However, the
scenario presented in column two does not allow such competitive
advantages to continue to generate higher performance. The key success
factors that are likely to generate such superior returns are situated in areas
such as viral maketing and community management, which, for traditional
firms, have only had a marginal impact on their prior performance. Their first
mover advantages are not going to be of use to them in this type of context
and they will find themselves in a landscape where more is uncertain to
them than is familiar. To succeed in the new environment, they will be called
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56 No. 94, 2 Q. 2014
upon to operate in a more agile way and to accept a higher failure rate for
new projects than has previously been considered reasonable or profitable.
Clearly, the incumbent firms be they console manufacturers, publishers

or video game studios will be monitoring the progress of the substitute
market for console-based video games and they will react to the market
signals as they emerge. Paradoxically, much remains to be understood in
the field of strategic management about how firms make such transitions. At
sectoral level, returns can be compared between firms in the same industry,
but this is not the same thing as a case-by-case analysis of the decisions
taken by firms to address such disruptive change. Many internal factors may
explain why certain firms are more successful than others at taking the
necessary steps to reconfigure competitive advantage.
A key question that remains unanswered is that of the co-existence within

the same firm of both sustainable competitive advantage and temporary
advantage. For McGRATH (2013), who refers to "transient advantage", such
co-existence is not possible; the author sees the very existence of
sustainable competitive advantage as limiting firms' willingness to seek out
signals that their advantage is becoming outdated. She thus encourages
firms to practice "healthy disengagement" and leave existing businesses
even before the opportunity has been exhausted in order to transition more
readily to new opportunities. D'AVENI et al. (2010) prefer to leave the
question open to further research and suggest both wave theory and chaos
theory as promising new avenues for investigation. They even suggest that
the hypercompetition scenario may represent a specific form of Porter's five
forces with low barriers to entry and growing threats from substitution, high
power of buyers and suppliers and rising industry rivalry.
Conclusion
Our analysis of the evolution of the video games sector has suggested
that it is an area in which the sustainability of competitive advantage will be
increasingly called into question. While we are not in a postion today to
predict the future market evolutions, we have proposed two scenarios in
which to consider the impact on sustainable competitive advantage of a
significant change in competitive dynamics. We believe that asking such
questions in advance of real-world market evolutions can contribute to the
emerging literature in the area of temporary competitive advantage.
An entirely new set of competitive dynamics may emerge with the entry
of significant players from other industries, such as Facebook with its Oculus
Rift acquisition, Apple potentially launching a TV and Amazon a set-top box.
On-going, granular observation and analysis of the real world developments
of different actors in the video games sector over the coming 5-10 years will
be of great relevance to the field of strategic management. Such research
should seek to identify possible opportunities for strategic adaptation for
game console manufacturers as they experiment with developing temporary
advantages and, over time, can include a performance perspective as the
results of such adaptations play out in the emerging marketplace. The
research will use the video game console market to address such questions
as: Which console manufacturers are adding temporary advantages to their
sustainable competitive advantages? Are they able to maintain both and, if
so, how did they do it and how did it improve performance? If not, does it
damage their performance? How have their business models had to be
adapted and how have they managed to overcome their inherent path
dependency? As this type of information is, by definition, emerging as firms
take decisions in reaction to on-going events, it would suggest a research
project conducted in close collaboration with industry actors.
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58 No. 94, 2 Q. 2014
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'Few to Many': Change of Business Model
Paradigm in the Video Game Industry
Thierry RAYNA
Novancia Business School, Paris
Ludmila STRIUKOVA
University College London
Abstract: Abstract: Based on an exhaustive and integrated business model framework,

this article examines the critical differences between the two main business model
paradigms the one inherited from PC/console games and the one promoted by mobile
and online games in regard to the five main business model components: value
proposition, value creation, value delivery, value capture and value communication. It is
found that, despite an increasingly tighter integration of the market, significant differences
remain between the two paradigms in most components.
Key words: video games, business models, paradigm, value creation, value proposition,
value capture, value delivery, game consoles, online games, mobile games.
D
espite its relative youth (about forty years), the video game industry
is one of the most profitable entertainment industries. In 2012, its
revenues were comparable to those of the movies industries and
five times those of the music industry (MARCHAND & HENNIG-
THURAU, 2013). Overall, over 25 years, the video game industry has grown
yearly between 9% and 15% (ZACKARIASSON & WILSON, 2010).
However, after 20 years of relative stability (in terms of market structure,

players and business models), this industry has been significantly disrupted
by the advent of mobile and online gaming. In just four years, the share of
revenues absorbed by mobile games has increased from less than 6% to
above 20%, while the share of console games has fallen from 71% to 62%.
Online games, smartphones and tablet games are even expected to reach
over 57% of revenues by 2016 (PwC, 2012).
The new entrants on the market have put market incumbents in a

challenging position, not because competition is new to them, but because
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62 No. 94, 2 Q. 2014
the 'rules of the game' have changed. Before, leadership would be achieved
through technological innovation: the better the game, the bigger the gains
(BADEN-FULLER & HAEFLIGER, 2013). Mobile and online gaming,
however, relate to radically different gaming experience and expectations
that make technological innovation less relevant (especially on a 4-5 inch
screen) and require new strategies to gain competitiveness.
Hence, the role of business model innovation has become particularly

crucial (MATTHYSSENS et al., 2006) and the advent of online and mobile
gaming has led to a paradigm shift in regard to business models. The
question of business models in the video game industry has been addressed
in the literature, for instance, by ZACKARIASSON & WILSON (2010); DAIDJ
& ISCKIA (2009); DILLON & COHEN (2013); MARCHAND & HENNIG-
THURAU (2013); ZACKARIASSON & WILSON (2012); WALDNER et al.
(2013); DILLON & COHEN (2013). However, the focus was generally put on
one or a few particular aspects of the business models.
In contrast, this article makes two important contributions. First of all, it

provides an exhaustive and integrated business model framework that
enables a comprehensive analysis of all aspects of business models and
how they interact with one another. Secondly, this framework is used to
conduct an in-depth review of main business model paradigms in the video
game industry. A particular emphasis is put on how the differences between
these paradigms are reflected in each key component of the business
model: value proposition, value creation, value delivery, value capture and
value communication.
The article is organised as follows. The first section presents the

integrated business model framework and its main components and
subcomponents. The next section discusses the business model paradigm
change in the video game industries. Each of the subsequent sections is
devoted to the analysis of the different paradigms in relation to one of the
five main business model components.
Business model framework
Business models underpin firms' ability to create and capture value

(IESTAD & BUGGE, 2013). Although there are differences amongst
scholars about what constitutes a business model, there is a broad
consensus around five critical components (although most scholars only
Thierry RAYNA & Ludmila STRIUKOVA 63
focus on two or three of these components): value proposition, value

creation, value capture, value delivery and value communication. The
following paragraphs detail these main components and the resulting
integrated business model framework is presented in Figure 1.
Figure 1 - Integrated business models framework
Value proposition relates to how the products and services of a firm are
put forward (offered) to customers (CHESBROUGH, 2007; GIESEN et al.,
2007; JOHNSON et al., 2008; ABDELKAFI et al., 2013). This is how
companies convince customers that their products and services can fulfil
their needs (JOHNSON et al., 2008). As value comes at a cost, pricing
model is a part of value proposition (GIESEN et al., 2007). In this respect,
the pricing model itself can be a source of value if it is particularly suited to
consumer needs (e.g. rental vs sales, volume discounts).
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64 No. 94, 2 Q. 2014
Value creation is a critical element of business models (CHESBROUGH,

2007; ABDELKAFI et al., 2013; NG et al., 2013). The value created by a
firm, through its products or services, is a function of both internal (core
competencies, key resources and governance) and external (complementary
assets, value networks) factors. Complementary assets consist, among
other elements, of existing complementary products and services (e.g.
software/hardware), customer base, business alliances and partnerships,
reputation (TEECE, 1986). Value networks relate to how a firm
encompasses and leverages the relationships with both upstream (supplier)
and downstream (distributor and customer) channels (GIESEN et al., 2007;
KOEN et al., 2011).
Value delivery relates to how value is delivered to customers and

consists of the various distribution channels employed by firms to deliver
products or services (OSTERWALDER et al., 2005; CHESBROUGH, 2007).
Because value is often delivered differently to different groups of customers,
target market segments are also a part of this component (OSTERWALDER
et al., 2005; CHESBROUGH, 2007; JOHNSON et al., 2008).
Value capture is, along with value creation, one of the most critical
elements of a business model. Besides the obvious revenue model
(OSTERWALDER et al., 2005; JOHNSON et al., 2008) that enables firms to
directly capture a part of the value created by their products and services,
this component also encompasses issues related to cost structure (Johnson
et al., 2008) and profit allocation (ZOTT & AMIT, 2002; HOLM et al., 2013).
Value communication corresponds to the way companies communicate

with their customers and partners about the value that is created by their
products and services (BIEGER & REINHOLD, 2011; ABDELKAFI et al.,
2013). It also relates to the way a company communicates about its story
and ethos.
Change of paradigm in video game industry:

from few to many
The specific details of business models and ecosystems in the video
game industry, as well as their evolutions have been thoroughly studied in
the literature, for instance in ZACKARIASSON & WILSON (2012); DILLON &
COHEN (2013); MARCHAND & HENNIG-THURAU (2013).
From this literature, it is clear that two very distinct business model para-
digms have to be considered. The 'old' business model paradigm is the one
that prevailed from the early 1980s to the late 2000s. Characterised by large
studios producing games for consoles and PCs, this paradigm can be
described as a 'few to few' model 1.
Indeed, after the early boom of home video games in the early 1980s,
this model mainly revolved around a combination of increasingly
concentrated oligopolies. A few large studios, such as Activision Blizzard,
Electronic Arts, Sega and Ubisoft produce games for three game console
manufacturers (Microsoft, Nintendo, Sony) and (mainly) two Personal
Computer operating systems (Microsoft Windows and Apple Mac OS X).
Games are full-featured products sold 'boxed' (cartridge, optical disk),
usually through specialised or general distributors, at a price in the $4060
range. Considering the relatively high price point, this model also implies
relatively few customers 2. While in relative decline (-10% since 2008), this
model still accounts for a large share (61%) of industry revenues
(MARCHAND & HENNIG-THURAU, 2013).
The new business model paradigm that emerged in the mid to late 2000s
is radically different. It is a 'many to many' paradigm: many (independent)
developers (nowadays 280,503 active publishers on the U.S. Apple App
Store alone 3), many devices and distribution channels (e.g. online games,
social media platforms, tablets, smartphones, PCs, connected TVs and set
top boxes), very low prices (the average game price on the Apple App Store
is $0.75 4) and, consequently, a massive number of users (in December
2013, in the U.S. alone, over 100 million games were downloaded on the
Apple App Store 5).
While the games corresponding to this new paradigm largely 'outsell'

traditional games, their revenue share, while growing (6% in 2008 vs 20% in
2012), is still inferior to those of traditional games (MARCHAND & HENNIG-
1 While there are differences between console games and PC games, in particular in regard to
value chains and market structure, they indeed belong to the same 'few to few' paradigm.
Furthermore, as noted in DAIDJ & ISCKIA (2009), consoles have become increasingly close to
PCs over the past few years.
2 The role of second-hand markets and piracy, which significantly increase the number of actual
users, will be discussed in the next sections.
3 http://148apps.biz/app-store-metrics/? mpage=appcount
4 http://148apps.biz/app-store-metrics/
5 http://www.xyologic.com/app-downloads-reports
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66 No. 94, 2 Q. 2014
THURAU, 2013). Thus, despite its almost instant success the new paradigm
has not replaced the 'old' business model paradigm.
Based on the framework presented above, the following sections provide

an exhaustive review of the differences between these two paradigms in
relation to all five business model components.
Changes in value proposition
Product offering and service offering
Video game industry was originally a product industry (games were sold
to customers as fully featured final products), so value proposition mostly
related to product offering. Yet, while major players in the industry did not
embed services in their value proposition, other actors did (e.g. game
rentals, second-hand games trades) and this third-party service offering
increased the value proposition.
The advent of Internet in the 1990s created more opportunities for

services. Yet, while the openness and connectivity of PCs enabled game
publishers to rapidly develop online multiplayer platforms (e.g. Blizzard
Entertainment's Battle.net in 1996), console manufacturers waited several
more years before offering similar services. After Sega's ill-fated attempt in
1999, the first 'Internet capable' console, Microsoft Xbox, was released in
2001 and Xbox Live, the associated online service, in 2002. Nintendo and
Sony followed four years later with WiiWare and PlayStation Network.
Beyond communication means (online chat, video conference) these
services mainly enabled users to download additional content: small-scale
games, music and videos (MARCHAND & HENNIG-THURAU, 2013).
In the mid 1990s, game publishers started to use online services as core
components of PC games, for instance Massively Multiplayer Online Games
(MMOG), which usually involve a 'persistent world' where thousands of
users can play together. By the early 2000s, some MMOG (e.g. World of
Warcraft) had become very successful, with several million subscribers. Yet,
while value proposition started to include more elements of service, the
participants in the business models (major game publishers, console
manufacturers, retailers) remained essentially the same.
The first radical change arose because of new market players that had
no choice but to offer an entirely different kind of product. In the second half
of 1990s, online 'browser' games, produced by independent developers and,
originally, remakes of simple historic games (e.g. PacMan, Tetris, Snake),
became increasingly sophisticated (MICHAUD, 2012). In the late 2000s,
browser games morphed into social network games (generally hosted on
Facebook), in some cases with an instantly large success (for instance,
Zynga's Farmville reached over 10 million daily active users in a matter of
weeks 6). With such games, value proposition changed from what used to
be originally a pure product offering to a full service offering ('Software as a
Service' or SAAS).
Although it retains the 'product' aspect of games, the other radical

change came from mobile games. Before mobile phones and smartphones,
mobile games were first available on PDAs (Personal Digital Assistants, e.g.
Palm, PocketPC). Although increasingly sophisticated games became
available for mobile phones, it was only in 2008, with the launch of the Apple
App Store for iOS devices (iPhone, iPod Touch, iPad) that mobile gaming
started to become ubiquitous.
The tight control of Apple over its App Store and iOS third-party software
(all apps have to be validated by Apple before they are distributed to end-
users) has had radical and long lasting effects on the video game industry,
as it considerably changed product offering. Beforehand, mobile games
were sold like any other game, usually at a price of $15-40 7. Since prices
were relatively high, trial versions of mobile games (which would stop
working after some time or had limited features) were generally available for
free.
Apple radically changed this model by forbidding demo and trial versions
of software on App Store 8. Developers rapidly realised that without trial
versions, they were unable to sell their games at the usual $15+ price. This
led to the 'lite + premium' strategy, whereby developers were simultaneously
developing two different versions of their games, one with more features
than the other. The introduction of in-app purchase, first for paid apps (June
2009) and then for free apps (October 2009) removed the necessity of this
6 http://www.sys-con.com/node/1084929
7 Handango online software store for PDA (Internet Archive).
8 App Store Review Guidelines state that "Apps that are 'beta', 'demo', 'trial', or 'test' versions
will be rejected" (2.9) and "Apps that are not very useful or do not provide any lasting
entertainment value may be rejected" (2.12).
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68 No. 94, 2 Q. 2014
dual distribution strategy and created the concept of 'progressive' games, in

which additional levels or content could be purchased 9. As one of the most
significant departures from the original business model paradigm, games no
longer needed to be sold as a whole fully-featured finished product, but,
instead, could be sold 'bit by bit'.
This new model rapidly became a necessity (DILLON & COHEN, 2013).
Because of the large number of independent developers entering the
market, capturing a critical mass of users became crucially important. This
led developers to start releasing games as soon as they had a minimum
amount of critical features ("Minimum Viable Product" or MVP) in order to
gather early feedback and trigger viral adoption, while developing additional
features in the meantime. While this 'bit by bit' release model has been
mainly adopted for smaller-scale apps and by independent developers,
major game publishers have also began to complement console games with
additional downloadable content (MARCHAND & HENNIG-THURAU, 2013).
Yet, there are sill significant differences in product offering between

'traditional' console/PC games and mobile games, as each type of game
corresponds to a different usage. While the former correspond to a leisure
activity per se, the latter are generally used in between other activities (e.g.
during transit, while waiting for an appointment). Product offering has
evolved accordingly. Console/PC games are still designed for a playing time
between 30 minutes and several hours. In contrast, mobile games have
game objectives that can be completed within a few minutes or allow
frequent interruptions. To this respect, most major PC/Console game
publishers (e.g. Electronic Arts) have adapted their mobile games to match
these new constraints.
The different usage of mobile games has also had critical impact in terms
of product innovation. Indeed, for PC/Console games, technological
innovation has remained, to this day, the pinnacle of competitiveness. Better
image quality, better animations, better 3D rendering, better controls
typically lead to greater profits (BADEN-FULLER & HAEFLIGER, 2013). For
mobile games, however, technological innovation is hardly as effective,
because of the context of use and of the limitations of mobile hardware (e.g.
a mobile device with 'small' screen and stereo sound vs. a 40-inch TV
screen with 5.1 surround). Consequently, innovation for mobile games
9 In-app purchase had been used for online multiplayer games, but not for single games.
mainly relates to gameplay, as attested by the tremendous success of

mobile games with very simple graphics (e.g. Flappy Bird).
Thus, to summarise, value proposition has evolved from a pure product

offering to a greater mix between product and services. Games have
evolved from finalised and static titles to modular products. Yet, there are
still significant differences: console/PC games have remained closer to the
original paradigm, while online and mobile games developers have adopted
far more innovative value propositions.
Pricing model
Until the mid-2000s, the game pricing model was rather simple, with
games sold at a fixed price, usually in the $45-$85 range. Prices have
remained fairly stable, with a slight decrease in real terms over the past
10 years to $45-$60.
Yet, this simplicity hides a far more complex reality. Indeed, while video
games are durable goods, their subjective durability (the amount of time the
game remains played) is shorter (RAYNA, 2008) and it only takes a few
weeks before new game titles are available second-hand (HENNIG-
THURAU et al., 2007). To continue selling, game publishers have no choice
but to decrease prices and, after a few months, the price of games usually
drops to $10-$20.
Thus, in practice, the fixed pricing model gives rise to a form of second-
degree price discrimination, either temporal (same product an unused
game available cheaper at a later date) or differentiated (two products
unused and used games available at the same time at different prices).
Furthermore, a $0.00 'price point' should be added to the two others.

Indeed, video game piracy is almost as old as the industry itself. It appeared
with PC games and exploded when console games switched from
proprietary cartridges to optical discs. Despite many attempts to curb piracy,
using Digital Rights Management systems (RAYNA & STRIUKOVA, 2008a,
2008b) and other anti-piracy technologies, piracy rate has remained very
high 10.
10 Recent account by Ubisoft CEO Yves Guillemot claimed a piracy rate of above 90%
(http://www.pcgamer.com/uk/2012/08/22/pc-gaming-has-around-a-93-95-per-cent-piracy-rate-
claims-ubisoft-ceo/).
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70 No. 94, 2 Q. 2014
Thus, in spite of game producers and console manufacturers (who,

besides trying to prevent piracy, have also attempted to restrict the second-
hand market 11), the fixed pricing strategy of the 'old' paradigm leads to a
traditional three price points 'Goldilocks' pricing.
As some games began to move towards service, game publishers, in

particular those offering MMOG and online persistent environments,
switched to a subscription model (in most cases around $15 a month).
Although this was effective for some games (e.g. World of Warcraft had 7.8
million paying members in December 2013 12), in other cases, this
prevented keeping a sufficiently high number of players engaged 13 (a large
number of active users is a key requirement for MMOG). Consequently, less
popular online platforms switched to a 'freemium' model free access to the
game with paid-for additional content (ANDERSON, 2008).
Freemium also became rapidly prevalent for mobile games, in part

because of Apple's App Store validation rules 14. As soon as 'in-app'
payments were made available on iOS, many developers started to use a
'two-part tariff' second-degree price discrimination. However, in most cases,
the sheer number of competing apps simply does not allow to charge
anything for the 'basic' version of the game. The 'fixed' part of the two-part
tariff (which gives access to the basic service) dropped to zero and
developers have to rely on in-app purchases (the variable part in the two-
part tariff) as a source of revenue.
A further issue for iOS Developers is that the basic version of the game
(available for free) has to provide 'lasting entertainment' for the game to be
validated by Apple. Hence, 'crippled' games that necessarily require in-app
purchases to be playable are forbidden. The challenge is that if the basic
version of the game is good enough, who will pay for premium content?
Some developers therefore adopted, instead, 'hurdle' price discrimination, by
11 For instance Microsofts plan to restrict access to used games on the new Xbox 720 console
(http://www.wired.co.uk/news/archive/2013-02/08/xbox-720-games-drm).
12 http://www.mmo-champion.com/content/3741-WoW-Up-to-7-8-Million-Subscribers
13 The critically acclaimed Star Wars: the Old Republic, despite a promising start, had to switch
to free to play with in-app purchases after just few months (DILLON & COHEN, 2013).
14 Although such strict validation rules do not necessarily exist for other platforms (e.g.
Android), Apple's rules changed consumers' expectations and had spillover effects in the whole
industry.
introducing artificial delays and pauses in the games that can be by-passed
by paying 15.
Thus, in summary, the traditional video game model relies on a fixed

pricing model, which leads, in practice to an unwanted three-tier second-
degree price discrimination. The 'new' paradigm also relies on price
discrimination, but this time, willingly. The key difference is that in-app
purchases enable an unlimited number of tiers and can even lead (as a form
of 'versioning') to individualised pricing (ACQUISTI & VARIAN, 2005). A
second key difference between the two paradigms is the price level.
Whereas PC/Console games are still sold at a price above $40, mobile
games (even the most sophisticated ones) are seldom sold above $10 and
most are available for free (freemium model). Yet, as noted in WALDNER et
al. (2013):
"Business models [] have changed from selling fixed items with a

onetime sales value to more service-based products, with virtual
commodities, value-added services, and advertising-based strategies".
While the 'old paradigm' remains alive and well in the case of PC/console
games, it has nonetheless evolved towards the new model prevalent in the
mobile world.
Changes in value creation
The paradigm shift in the video game industry has also led to changes in
the way value is created. In the old paradigm, core competencies, which
reflect a company's fundamental knowledge (PRAHALAD & HAMEL, 1990),
are an important factor in value creation. For example, one of the reasons
why Atari failed in the 1980s was because of a lack of in-house capabilities
to create new software. Similarly, the success of Sony in developing the first
PlayStation can be partially explained by their previous experience in the
field of electronics.
In the recent years, however, strategic positioning began to gain

importance over core competencies (DAIDJ & ISCKIA, 2009), as many
games nowadays (especially on mobile devices) are much simpler both in
15 A typical example is provided by Electronic Arts' Real Racing 3, which is free to play but
requires time for cars to be repaired or upgraded, unless the player pays.
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72 No. 94, 2 Q. 2014
functions and graphics and do not require the same competencies.

Furthermore, greater care has been taken by some platform providers to
simplify game development. Unlike previous platforms, Apple's iOS
development kit is renowned for being particularly intuitive and easy to work
with. Likewise, Sony PlayStation 4 was specifically designed to make it
easier for independent developers to contribute to game development 16.
Similarly, the distribution of key resources, such as labour (programmers)

and available investment, has changed. The old paradigm, still in use for
PC/console games, is characterised by a very high cost of game
development. Over the last decade, the average price of developing a
console game rose from $14 million to around $20 million 17, whereas, the
cost of developing mobile, web-based and indie games is significantly lower
(NOYONS et al., 2012).
Furthermore, new funding models, such as crowdfunding, enable

independent game developers to access core competencies that were
before out of their reach. While early attempts to crowdfund games only led
to relatively small amounts of funding (e.g. $100,000 for Venus Patrol in
October 2011), the first truly successfully crowdfunded game, Double Fine
Adventure, raised more than $3 million (for $400,000 initially requested) on
Kickstarter in February 2012, which made it the highest funded project on
Kickstarter at the time. In July 2012, a low-cost game console, Ouya, raised
more than $8 million. Overall, eight game projects in excess of $1,000,000
were financed in 2012 and 21 projects in 2013 18.
As of early 2014, games remain the most popular category on

Kickstarter. 8,742 game projects have been posted and successful projects
(35%) generated over $189M in funding from 2.15M pledges 19. 'Crowd'
investment has more than doubled since 2012, when around $83M was
generated in this category 20.
16 http://www.forbes.com/sites/davidthier/2013/07/19/why-sony-is-betting-on-indie-games-for-
the-ps4/
17 And even reached $265,000,000 for Grand Theft Auto V, the most expensive game title to
date.
18 https://www.kickstarter.com/discover/
19 www.kickstarter.com/help/stats
20 http://venturebeat.com/2013/01/08/kickstarters-best-of-2012-2-2m-backers-319m-raised-
18109-projects-funded/
As the video game industry shifts towards more online content, player
interactions and social gaming (where firms and communities build value
together), cognitive resources (e.g. communities) increase in importance
(BURGER-HELMCHEN & COHENDET, 2011). An increasing number of
competencies, such as production, accumulation and circulation of
competitive knowledge, are delegated to communities (SCHULZ &
WAGNER, 2008). While this key resource is not controlled directly by firms,
it can still be integrated into the business model by large companies and
independent developers alike.
The role of complementary assets in business models is also changing.

Often this subcomponent relates to complementary products and
new/additional features to existing products. Adding complementary goods
and services to core products has the potential to strengthen business
models, whereas failure to do so may result in a subsequent failure of core
products (BONARDI & DURAND, 2003).
Whereas in the 'old' paradigm, complementary products were often

neglected, their strategic use is now increasing. Large studios do not
typically focus on providing special/additional features in their games as
much as independent developers do. For instance, out of more than 1200
Wii games produced, only 75 use Mii characters 21 and 33 are compatible
with 'Wii Motion Plus' (Wii advanced motion detector mechanism). In
contrast, almost from the very start, myriads of iPhone independent game
developers started exploiting its gyroscope. Unlike large studios that usually
develop games for several platforms and aim at saving on development
costs, smaller developers usually focus on one platform and spend more
time exploiting its key features.
Value networks are also changing, in particular in relation to how

developers encompass and leverage relationships with customers.
Increasingly, consumers take an active part in the game development, from
sales to production (ZACKARIASSON & WILSON, 2010). BURGER-
HELMCHEN & COHENDET (2011) mention three types of active users:
'testers', who test the game, 'players', who enhance, fine-tune a game or
produce additional content, and finally 'user-developers' who produce the
whole game (e.g. Open Source). The increasing user participation can be
partially explained by the development of technologies (e.g. Web 2.0) that
simplify collaboration with video game companies, as well as between users
21 Personalised avatars that were expected to be at the core of the Wii environment.
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74 No. 94, 2 Q. 2014
(RAYNA & STRIUKOVA, 2010). While user participation in game

development is not entirely new (users have been always trying, often
without authorisation, to 'mod' games), game developers can now use it
strategically to strengthen their business model.
Another important change is that developers start treating users as

individuals, rather than, as it used to be the case, as segments
(MARCHAND & HENNIG-THURAU, 2013). Modern technologies enable
game developers to collect personal data about gamers and use it
strategically. For example Zynga collects data about users' game scores and
uses Facebook's advertising feature based on the score distribution among
friends (BADEN-FULLER & HAEFLIGER, 2013). Not all developers,
however, have yet embraced this new opportunity. Although Sony collects
data about usage patterns through PlayStation Network central, this has not
yet led to enhanced and tailored offers (MARCHAND & HENNIG-THURAU,
2013). Yet, the strategic use of such 'big data' can change not only the value
creation component of business model, but also value proposition.
Changes in value delivery
Another critical change is the proliferation of distribution channels. Until

the late 1990s, gaming required a dedicated hardware: a personal computer,
at the very least, or, for better performance, a dedicated console. The advent
of the Internet and the multiplication of connected devices (smartphones,
tablets, connected TVs, set-top box) has changed this and made gaming
available through many channels.
Furthermore, recent advances in high capacity cloud computing have

enabled to reduce hardware requirements (Michaud, 2012). Services such
as OnLive offer high performance gaming on any device, as games are
'calculated' and rendered in the cloud and then streamed to the device. Yet,
current smartphones and tablets are as powerful as PCs just a few years
old, so even the most portable devices can nowadays offer a significantly
good gaming experience.
Nonetheless, not all developers have adopted these new distribution

channels. Whereas PC games started to be distributed online in digital
format a few years ago, none of the current game consoles has fully
embraced this mode of distribution and, besides smaller-scale games, most
games are still distributed 'boxed' through physical retail channels.
The situation could not be more different for mobile games. Indeed,
whereas games typically begin their life on a particular platform, they
generally cross over to multiple other platforms. For instance, Angry Birds,
originally developed for Apple iOS platform, was then made available on
Amazon Kindle, Blackberry, Google Android, Mac OS X, Nintendo DS and
Wii, Nokia, Palm Pre, PlayStation, Roku, Windows Phone and Windows 7,
Xbox, and even as a web app.
This multiplication of distribution channels has also enabled to reach new

market segments. Traditionally, game consoles were seldom purchased by
'casual gamers' and mass-marketed PCs were often not powerful enough to
run advanced games. Departing from the traditional console marketing
strategy, generally targeted at gaming enthusiasts, Nintendo designed the
Wii with families in mind. This foray into casual gamer market enabled Wii to
outsell all competing consoles. Yet, mobile devices have now captured away
casual gamers, most of whom are likely to find their smartphone, tablet, TV
or just a web browser just good enough for gaming 22. In regard to value
delivery, the differences between the two business model paradigms are still
significant. PC/console games have retained the same distribution channels
and target market segment (serious gamers), while opening the door to
online delivery of more casual content (most likely with the aim to help
'justifying the cost' of purchase within a household). Meanwhile, mobile
game developers tend to do just the opposite and make their games
available to as many market segments as possible through as many delivery
channels as possible.
Changes in value capture
With regard to Value capture, there are also significant differences

between the two paradigms. While the new one offers many ways to create
value, capturing the resulting value is particularly challenging and, so far, the
revenues of mobile games are still lower than those of PC/console games
(MARCHAND & HENNIG-THURAU, 2013).
Value capture for mobile games has mainly changed because of the
switch of revenue models from 'pay to play' to advertisement-based (usually
22 http://www.bloomberg.com/news/2013-12-02/nintendo-seen-missing-target-as-sony-microsoft-
sales-dwarf-wii-u.html
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76 No. 94, 2 Q. 2014
with in-app purchase) models. Beforehand, MMOG had experienced the

same issues when the decline in subscriptions forced them to find new
revenue models (DILLON & COHEN, 2013).
Currently, 90% of game revenues on the App Store come from freemium
apps, the most successful one being Puzzle & Dragons, which brought more
than $1 billion in 2013 in in-app purchases 23. However, capturing value with
such a revenue model requires a very large customer base, as only 1.5% of
gamers make in-app purchases and 50% of revenue is derived from the top
10% of those players who do make purchases 24.
Another source of revenue is in-game advertising, a market worth $1

billion annually 25. Nowadays, an increasing number of games make use of
dynamic in-game advertising and enable advertisers to tailor ads to match
geographical locations, time, points, or players' in-game behaviours
(TURNER et al., 2011). However, no matter how high the potential revenues
are, the number of developers and games has become extremely high and
the distribution of revenues is very skewed, thereby calling into question the
ability of any given game to earn enough revenues to cover development
cost.
The increasing importance of complementary goods and services in

value creation lead them to play a more important role in value capture. For
example, successful games earn revenues from other entertainment media,
such as books and movies (MARCHAND & HENNIG-THURAU, 2013). In
2012, Rovio (Angry Birds) earned 45% of its $71 million profits from
'consumer products' 26.
Finally, value capture can be improved by using new distribution

channels, which enable to increase profit margins by eliminating retailing
and manufacturing costs, e.g. disks and boxes (MARCHAND & HENNIG-
THURAU, 2013). In fact, the new paradigm can be considered as 'costless',
once the product has been developed.
23 http://www.gamasutra.com/view/news/210021/GungHo_reaps_over_1_billion_in_Puzzle
_Dragons_revenue.php
24 http://www.swrve.com/company/press-room/swrve-finds-0.15-of-mobile-gamers-contribute-
50-of-all-in-game-revenue
25 http://www.officialplaystationmagazine.co.uk/2013/11/01/when-ads-invade-games-in-game-
advertising-is-worth-over-1-billion-a-year/
26 http://techcrunch.com/2013/04/03/rovios-revenues-up-101-to-195m-non-games-45-of-that-
net-profit-71m/
Once value (or a part of it) is captured, the next important question is how
it is allocated. In the mobile ecosystem, profit allocation between developers,
operators, suppliers and application store owners depends essentially on
their respective market power (FEIJO et al., 2012). For developers using
external platforms (e.g. Facebook, AppStore) a decision has to be made of
whether to run transactions via this platform or to bypass it. Also, as users
are now increasingly involved in game design and production, this might
create further profit allocation issues in the near future. When comparing the
'old' and 'new' paradigm, one could get the impression that the former
enables PC/console game publishers and hardware manufacturers to
capture value more easily. Although it is true that such games tend to
generate more revenue, they are also significantly more costly to produce
(technological innovation is still critical for PC/consoles) and second-hand
markets and consumer piracy also hinder value capture.
Changes in value communication
Changes in value communication have been highly instrumental in the

success of the new business model paradigm. For PC/console games, value
communication generally takes place through communication channels (e.g.
ads in magazines, television, cinemas) that are, generally, out of reach for
independent developers. Recently, however, the availability of many more
communication channels, in particular social media, has enabled
independent developers to communicate about their games to a large
audience. Furthermore, besides YouTube, Facebook and the likes, platforms
themselves play a critical role for mobile games (e.g. 'Best new games'
category on the App Store).
While still using traditional communication channels, large studios and

console manufacturers have, in contrast to their occasional reluctance to
adopt new technologies and to follow new trends, eagerly adopted social
media as communication channels, just like independent developers.
Nowadays, most game developers, whether small or large make use of
YouTube, Facebook and Twitter to promote their games.
With regard to ethos and story, more established companies are, of

course, in a better position to communicate about it than newly funded
companies (generally associated with the mobile games), although
occasionally an independent developer gets in the spotlight (e.g. hundreds
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78 No. 94, 2 Q. 2014
of news articles published about Flappy Bird developer and his story). Yet,
as noted in GENVO (2013), there have been significant changes in the ethos
of gaming over the past few years, in particular with a further expansion of
video gaming towards educative gaming and 'serious gaming'. To this
respect, independent developers, because of their greater flexibility, shorter
time to market and ability to occupy niche markets, have taken the lead,
while traditional game studios have mainly continued to release titles that
correspond to the traditional gaming ethos.
Conclusion
By providing an exhaustive overview of the two major business model

paradigms in the video game industry, this article has shown that they are
indeed different in almost all components.
While this could have been expected, what is more surprising is the co-
existence of radically different business model paradigms and, despite the
progressively tighter integration of both markets (with PC/Console game
publishers being very active on the mobile front and mobile game
developers reaching PCs and consoles), the relative lack of evolution of both
paradigms. On the one hand, console game publishers and manufacturers
still employ the same model they have been using for the past 40 years,
despite the ever greater share of revenues captured by new entrants. At the
same time, mobile and online games, despite their large success, still
struggle to capture revenues and turn them into profits.
Overall, the question is whether either paradigm is particularly adapted

for a world of intense competition. As mobile games are catching up in
quality and features with even the most advanced console games, the
question is for how much longer, aside from the most hard-core gamers, are
consumers going to upgrade their consoles to the next generation. With
regard to the mobile app paradigm, the question is whether, in an
environment where consumers have access to hundreds of thousands of
games for free, consumers will still want to spend a significant amount of
money on in-app purchases for all but a few 'superstar' games. Moreover,
just as competition has forced game developers to drop the price of 'lite'
versions of the games to zero, is it not possible that the price of in-app
purchases will also drop significantly? Despite its long lasting success and
very large revenue, could it be that the video game industry is a giant with
feet of clay?
In light of these questions, two interesting avenues for further research

would be, firstly, to consider the changes in internal structure and
organisations of firms operating in the video game industry, in particular in
relation to greater user an community engagement, secondly, to draw
comparisons with other sectors of the cultural industries, as the recent
changes (and those ahead) in the video game industry have the same roots
as those affecting other cultural industries.
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Paid and Free Digital Business Models
Innovations in the Video Game Industry
Myriam DAVIDOVICI-NORA
Institut Mines-Telecom/Telecom-ParisTech, Paris, France
Abstract: Digitalization of distribution has led to the creation of a broad range of digital
business models in the video game industry among them freemium, subscription,
advertisement, free-to-play. What are the borders of each model and on what economic
grounds can we compare them? This paper proposes an interdisciplinary approach based
on microeconomics and on business models literature to provide insights into the
components and the economic architecture in paid and free business models. This
framework enables also to understand recent hybrid paid and free business models in the
video game industry.
Key words: free-to-play, pay-to-play, video games, business model, innovation.
F
rom $10 billion in 2006, the video game industry is today the
dominant entertainment industry reaching $66 billion worldwide in
2013 before other entertainment industries. A substantial part of this
growth comes from the democratization of gaming today thanks to
new technologies, innovations in game designs and new business models.
135m people play at least one hour per month. Most of these new gamers
are casual gamers and have been attracted to the gaming world by social or
free-to-play games (MACCHIARELLA, 2012). In the US, 70% of PC gamers
play casual games, and 50% play casual social games in 2010. Interestingly
enough, casual online games appeal to all segments, including hardcore PC
gamers (McKINSEY, 2011). The industry had nevertheless to adapt to digital
distribution, though certainly before other cultural industries. Digital
distribution fosters also new clusters of services around the game and cross-
platforms gaming (mobile devices, PC, console) and gave birth to a broad
range of pricing and contents, among them advertisement, freemium,
subscription or free-to-Play (F2P) model (about 50% of current iOS games
are F2P). How can we compare these models? We need to think about the
scope of each model, its economic architecture and its values to clarify the
landscape of digital business models today. This should help developers to
choose the most relevant business model and other cultural industries to find
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84 No. 94, 2 Q. 2014
a source of inspiration to adapt their business model. However, today there

is too little economic theoretical underpinning in the literature of digital
business models applied to the video game industry 1. The aim of this paper
is to apply economic thinking to the main "models" of digital business models
to find a generic way to make their process and their values explicit to fill this
gap.
Litterature on digital business models innovation

in the video game industry
Based on MAGRETTA (2002), CHESBROUGH (2010), YANNAPOULOS
(2013) and EL SAWY & PEREIRA (2013), it is acknowledged that a
business model is concerned with value creation for the consumer and the
producer, the revenue model and the key processes and resources to
deliver value.
Importantly, EL SAWY & PEREIRA (2013) say that though the literature
focused progressively on the design of business models for services
provided through digital platforms, some research still remains to understand
these new models. The comparison among digital business models relies on
three main components (See WEILL & WORNER, 2013, pp. 74-75): content
(what is consumed?), customer experience (how it is packaged? including
tools, recommendations, business processes, interface) and platform (how it
is delivered?, partner, proprietary/public networks; types of platforms =
external platform like mobile devices, computer or internal platform like
customer data, customer analytics, human resource, finance, ...).
The evolution of business models is necessary to adapt to a changing

environment and competition or to exploit a new source of values
(YANNOPOULOS, 2013). In the competitive environment, developers must
indeed pay more and more attention to their players' base satisfaction and
digitalization is seen as a new way to innovate in service customization. The
literature supports also the use of experimentation or gradual changes in the
process of business model innovation (CHESBROUGH, 2010).
1 In this paper, we use the term video game to cover all games whatever the platforms
(computer, mobile and console).
Myriam DAVIDOVICI-NORA 85
How does this theoretical framework apply to the video game industry?
Here is a list of the main digital business models found in the literature
(OLSSON & SIDENBLOM, 2010; VAN DREUNEN, 2011; MOREL, 2012,
BEHRMANN 2012, MACCHIARELLA 2012, VANHATUPA 2013, CECI
2014): digital distribution, subscription, virtual goods, Free-to-Play, Free and
advertising, freemium, crowdfunding, early access, premium unit price,
hybrid, player to player trading. F2P model is often confused with freemium
model. In F2P games, the basic game is free and the players can buy
optional virtual items and services to enhance the quality of the basic game
experience. It is also called "microtransactions model". The range of virtual
goods can cover all parts of game service and are available in a dedicated
in-game shop for a price range between $1 and sometimes thousands of
dollars 2.
However, the literature does not provide an in-depth economic analysis

to make comparisons possible and to assess the respective strengths and
weaknesses of each business model. We propose to construct a map of
business models and their main components and values from players' and
developers' points of view to clarify their underlying processes.
Innovations in the business model economic

architecture: P2P vs. F2P models
We analyze here the building blocks of the two main digital business
models available on all gaming platforms. We focus on consumers and
producers' rationalities.
P2P business models have a simple and linear economic architecture:

Development-Monetization-Acquisition-Retention (D-M-A-R)
P2P architecture consists in three stages from the point of view of the
consumer: Monetization (the player first buys the game), Acquisition (the
player discovers the gameplay) and Retention (the player enjoys the game
2 In the game Dark Orbit (Bigpoint), a rare item (the Zeus Drone) was sold at about 1000
(CRAWLEY 2011). See DAVIDOVICI-NORA (2013a) for a typology of virtual goods available in
F2P games.
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86 No. 94, 2 Q. 2014
and repeats gaming) 3. Retention is at the end of the process and is

independent from the monetization stage. Once the price is sunk, the quality
is tested and the player is more or less retained. The content is said to be
sold on a premium basis which means that for a unique price, the player has
access to a unique and all encompassing service. Retention must be strong
enough to motivate the player to wait for the next sequel of the game.
With the P2P model, the traditional producer's economic behavior

consists first in building the collective demand for the game. In the traditional
economic approach, the consumer's behavior is figured out by the demand
(or consumption) function. For one consumer, it indicates that he buys less
quantity of the item with the increase in the item's price. At the market level,
the collective demand indicates how many consumers (or players) are willing
to pay a certain price level to acquire one unit of the item. The average
market price is governed by competitive advantages and competitor pricing.
The P2P developer then makes the following economic calculus: (production
and marketing costs + margin)/average market price = profitable market
target size. There is a balance between the unique market price level, the
demand for that price and production and marketing expenses.
Figure 1 - P2P and F2P consumption functions

Price or Inversed
willingness to pay Demand
function
P2P price
F2P price
Quantity
Market
target
(games sold or number of players)
Source: DAVIDOVICI-NORA (2013b)
3 Retention and addiction concepts are very similar to the game designer's view. Retention
means that the game has enough elements of attraction to make it popular and to increase the
player's replay value under the constraint of staying fun for the player (e.g. if addictive elements,
grinding tasks, are too emphasized, they alter the experience and reduce the overall enjoyment
of the game). Compared with slot machines, HARRIGAN et al. (2010) put forward that retention
is not based on winning real money but more on skills.
Consumers with willingness-to-pay higher or equal to the P2P price will

buy the game (in Figure 1 above, three consumers are willing to buy the P2P
game at P2P price) and the others are not. In the P2P model, there is a unit-
price scheme satisfying a limited quantity of consumers in the market (the
market target).
F2P business models have a complex and interactive economic

architecture: A-R-M-D
Since the monetization stage has been pushed to the end of the process,
it is now optional to pay. It happens when the player has a certain
experience of the game (engaged players) and hence profitability is less
certain. The architecture of the F2P business model is more complex, for it
generates multiple interactions among components and not only a one-to-
one relationship (as in the linear P2P architecture). We will explain the
underlying economic reasons.
The behavior of consumers playing a F2P game
The objective of F2P business model is to put emphasis on experience

before monetizing it. Since the game is free, the acquisition stage looks like
an easy and automatic stage: players enter freely and generate network
externalities on other players in acquisition and retention stages (viral
marketing, popularity and quality signal). Free is a means to accumulate a
huge user base (that is why this model has been first adopted mainly by
social games that required maximum friends to play with). If the player is
addicted to the game, he is locked in and will not quit the game. Based on
the theory of engagement, the longer a user plays, the more chances he
buys virtual items. In this analytical context, the F2P business model looks
easy to manage: the developer must fix the price to zero and sell digital
items. However, notably based on an empirical observation of few
successful financial switches from P2P to F2P business model 4, the reality
4 Notable exceptions are Anarchy Online (sci-fi MMO by Funcom), Counter-Strike Online
(MMOFPS by Valve and Nexon), Team Fortress 2 (RTS by Valve) and FIFA14 App (Football
game by Electronic Arts). Anarchy Online, released in 2001 gradually became a hybrid F2P
game based on advertising and subscription. The game faced technical problems upon its
release (including problems of stability, registration and billing), and therefore earned a bad
reputation. In 2002, a free trial for a limited period of days was introduced, in an effort to build a
bigger subscribers base. The popularity of the game declined in 2008 after reaching a peak of
two million subscribers ("Funcom celebrates 7 years of Anarchy Online" (2008/07/01),
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88 No. 94, 2 Q. 2014
seems that succeeding with a F2P business model looks more complex.
Indeed, F2P games have a specific design as J. Allen Brack, production
director of World of Warcraft reminds us:
"We didn't make the game to be free-to-playWe would have to

rework the game pretty significantly in order to make it free-to-play. It's
not something we're currently considering" 5.
From the producer's point of view, the F2P model should embrace the
whole market (the long tail) (see arrows in Figure 2) since its price is zero.
This attractive unlimited collective demand for the game cannot be
monetized at this stage. The first economic problem is that with no entry fee,
profitability is based only on performances of items sales. In other words,
F2P games developers cannot use collective demand (total number of
players of the game per unit of time) to assess profitability but rather they
must use the individual micro-demand for each item. The second difficulty is
that these individual micro-demands are contextual: there is no absolute
price-elasticity but variable price-elasticities depending on the level, gaming
profile, constraints, etc. faced by the player. It is not possible to give
objective value to each item. Items will then be priced subjectively between
one dollar and a thousand dollars with marketing threshold (price points).
This is all the more prevalent that digital items are pure public goods: they
are non-rival and non-excludable and they cost almost nothing to produce.
Economic theory adds also that players will get a greater willingness to
pay for virtual items if items are tailored to their individual preferences. Since
individual preferences are changing while playing, the F2P game developer
must offer a wide variety of differentiated items to potentially satisfy all
changing and diversified individual preferences to capture the maximal
consumer's surplus. However, contrary to HAMARI (2009), there is no
perfect discrimination in F2P as defined in microeconomic theory because
each item has the same unit-price for every player.
Consequently, the F2P developer must consider the game as market with
dynamic consumption and production functions where price is no longer the
main driver of equilibrium: the economics of "contextual" micro-transactions
http://www.funcom.com (2014/01/21). Team Fortress 2 released in 2007 became a F2P in 2011

where players can sell items they created and revenues are shared with Valve. In 2013, Valve
paid out over $10m to users who created contents (ROWLINGS 2014). In 2013, EA launched a
very successful F2P version of FIFA 14 for iOS and Android ("FIFA 14: un succs norme pour
la version Free to play", (2013/11/12), http://www.jeuxactu.com).
5 Source: www.eurogamer.net (2013/11/09).
governs the F2P model. These economic conditions are the main reason
why the F2P developer runs the "game market" and the e-shop with specific
metrics based on real-time data management 6 (choice of items, types of
items purchased, etc.).
Dynamic players' base and changing consumers' preferences
In the absence of a collective demand function for the F2P game

(Monthly Average Users can actually be a good proxy of the potential
maximal market share), the only economic variable available is the individual
micro-demand per item. On Figure 2, we represent the global average
spending per month for different consumption profiles of players. Aggregate
data are useful only to assess profitability of the game. Individual micro-
demands for each item are obtained with items on the horizontal axis and
real spending on the vertical axis.
Figure 2 - Dynamic Players' base and items consumption functions

Items average spending / month
Willingness to pay / month
Whales
Price or
Moving axis
Dolphins
Minnows
Free game
Paying Players Free Players Players base

1-10% 90-99%
Source: DAVIDOVICI-NORA (2013b)
LOVELL (2011) qualifies small, medium and high paying players

respectively as minnows, dolphins and whales. When the access to the
basic gaming experience is free, all potential or acquired players are first
6 See DAVIDOVICI-NORA (2013a) for metrics tables and definitions.

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90 No. 94, 2 Q. 2014
free players. The strategic objective is to make the game profitable firstly by
switching some players from the majority of free players to the minority
group of paying players (becoming minnows) and secondly by inducing
paying players to pay more (becoming dolphins and whales) 7. On Figure 2,
this strategy is represented by black arrows. It may seem counter-intuitive
that the optimization of monetization does not take into account the
maximization of the players' base. The main indicator remains indeed the
global profitability but it can be reached with a large base of whales (but
seldom) or also with a very large base of small paying players or with a small
base of large paying players.
Based on personal gaming experiences, the segmentation is not as

simple anyway: the size of players' base and the average spending of
players change with time and with play. Some players keep on the same
consumption profiles while others can be repeated minnows (becoming
dolphins) one month, free players the next month (grey arrows in Figure 2).
These dynamics are due to changing willingness-to-pay over time,
depending on the game genre, on the exact moment of playing, on the
environment, on the constraints of the gameplay and on the price of the item
and its value for the F2P player.
Because players don't pay to get the game but to improve their gaming
experiences, even inside a same profile, there are individual variations: a
paying player can be a dolphin because he buys one more expensive item
or many repetitive cheap items. It turns out that the items micro-demands
are not constant functions. It becomes complicated to make an easy and
trivial relationship among fun, experience and monetization under these
conditions. F2P requires a dynamic micro-management of each player and
of its gaming experience. Items are used to differentiate the individual
experience of players and to capture a consumer's surplus based on the
contextual value of the item in relation to the gameplay. All the difficulty
consists now in managing the monetization stage of the F2P and to
coordinate it with other stages.
We propose to examine the working of each stage to focus on their

cross-relationships 8.
7 According to MACCHIARELLA (2012), most titles monetize only 5-10% of their active player
base.
8 For further details, see DAVIDOVICI-NORA (2013b).
Acquisition is not obvious
Free means there is no barrier to entry to test the game. However,

because of competition among free models (free iOS app of the day,
freemium, diffusion of F2P), free is not enough to reach visibility. To acquire
players, the developer must sink more and more expensive marketing cost
(including ad campaigns) and induce viral user acquisition (wall posts,
notifications, etc.). The risk is that many new players massively test the
game and get committed but without enough paying players among them.
Growth of players' base and monetization must be concomitant otherwise
costs (maintenance, server, marketing) to manage the base will quickly
exceed revenues. Only 2-6% of F2P players pay whereas the average cost
per user in the US is over $1.50 for iPhone (MOREL 2012).
Retention is volatile
The player is addicted to the game (the replay value) but is not yet
financially committed. It is necessary to emphasize emotional commitment
through narrative techniques, customization, quality of gameplay and
different push marketing techniques to stay connected to players (assiduity
rewards, regular new contents) and to use analytics to manage engagement.
To convert free committed players into paying players, they must have
incentive to pay and not consider paying as a constraint to level up but
rather as a means to increase the fun of its experience. Emotional
investment will translate into financial investment if the player considers it to
be necessary (FREEMAN, 2011). However, it is easy to damage retention
and make players quit the game because of any slight in-game change
(STUART, 2011) or because the monetization pressure is too intrusive and
breaks immersion (OLSON & SIDENBLOM, 2010). To maximize
engagement, it is necessary to make the game fun for free and paying, high
and low levels players. A bad retention increases acquisition costs and
decreases monetization. Happy engaged players will increase viral
acquisition.
Monetization is complex
One of the main astonishing paradoxes of F2P model is that the game
can be a hit without being profitable (which is impossible with a paid model).
Profitability depends indeed on the number of paying players and how much
they spend independently of the size of the base. In turn, this depends on
the management of monetization (running e-shops with events and sales,
the choice and value of items, and balancing paying vs. free items) and the
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92 No. 94, 2 Q. 2014
contextual marketing of items (right place, right price, right time, right player)
with its inherent risk of deterring addicted players.
No entry cost combined with long tail reaching means that minnows and
free players who form the big majority of players must be convinced to pay
for micro-transactions. It is necessary to get the psychology and the
frustrations balances right to make the player purchase based on his
perception of value (DAVIDOVICI-NORA, 2013a). Incentives to pay are
connected to utility of items in the game (to level up, to increase time to play
or number of lives, to team play) 9. To make free players pay, room still
remains for innovating in new means of monetization targeted to players'
playing profiles other than those existing today. The average spending
amount is nevertheless not correlated to the purchase power of players: if
the player of a puzzle game has a "champion profile", his objective is to level
up as high as possible without paying. He is not sensitive to waiting time or
in other words less impatient (he can replay the same level without paying
as long as he thinks it is feasible to him). LU (2014) confirms that whales'
players are not a demographic target but can be anyone. The focus should
therefore rather be on the quality of games for all players' profiles. As long
as value to the player exceeds the cost, he buys items. According to LU
(2014), the player is even more likely to become a dolphin or a whale if the
items have a long-term value to him.
A well-managed monetization has a positive impact on retention.

Creating new items, offering paying items freely or making possible
craftware of items by players 10 are some means to increase monetization or
virality 11 and finally to improve player's satisfaction 12. If monetization
strategy does not fit the gameplay or if the e-shop is badly managed, an
engaged player willing to pay will not be induced to pay for virtual items.
9 The subjective pricing of digital items accounts also for incentives to purchase or not: see the
$174.99 Halloween package in Team Fortress 2 (Valve).
10 Items created by players are sold in the e-shop and the revenues are shared between player
and developer (often with a tax system).
11 According to STUART (2011), Bejeweled Blitz (PopCap) increased engagement by
increasing the frequency of players receiving special gems because they were most likely to
share the gems with their friends than any other things.
12 For example, if to monetize, the player must kill a dragon and if 90% of players failed to kill
the dragon, the dragon becomes a bottleneck to monetization. The developer must not remove
it or make it easier but can deliver in-game messages or hints, challenges and free goods to
keep the players engaged (STUART, 2011).
The performance of the global A-R-M process depends on the

management of the relationships inside A-R-M loops but also on its
relationship to development/design (D) of the game. F2P success means
managing the complexity of interdependent A-R-M-D dynamics and
monitoring every player (Figure 3). The developer must understand precisely
the gaming profile of each player and must segment on a real-time basis its
players' base appropriately. Since the company can record transactions and
integrate analytics, it understands more accurately the in-game economy
and makes informed real-time game design changes to increase global
performances of A-R-M-D. The developer has access to continuous learning
and can identify behavior patterns with metrics. STUART (2011) calls it the
"funnel analysis". As in the literature on business model innovations, the
developer also runs simulations to test the impacts of new contents on the
global balance of the gameplay 13. The F2P design implies unlimited
development (the game has no end) as long as the game is profitable: the
free core experience and the paid optional components evolve together.
Figure 3 A-R-M-D Dynamics in F2P games
Acquisition Development
Continuous metrics
monitoring
Retention Monetization
Source: The author
13 Both Clash of Clans and Hay Day are updated every few weeks with new content (items, in-
app purchases, characters). To keep Clash of Clans balanced, Supercell runs an automated
testing simulation that runs thousands of battles one after the other, throwing in randomly sized
armies with different soldier types each time, and then correlates the data to see whether there
are bad balances that could potentially ruin the game (ROSE, 2013).
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94 No. 94, 2 Q. 2014
Values of paid and free business models: P2P vs. F2P
Based on the economic process inside architectures of P2P and F2P

business models, we propose to list their economic values from the
consumer's and producer's points of view. To put forward the specific values
of each model or its DNA, we first propose to list the common values of paid
and free models based on empirical observations:
All digital models can be adapted to games' sizes and genres.
Contrary to LEE (2013), F2P is not limited to casual and short games (e.g.,
F2P MOBA League of Legends, RTS World of Tanks, RTS Team Fortress 2,
FPS Hawken, CSR Racing, RTS Clash of Clans, MMORPG Maple Story).
Size or complexity of the game impacts on development time and
does not depend on the choice of digital model: from 1 year (for F2P RTS
Clash of Clans Apps, Supercell) to about 6 years (F2P MMORPG Maple
Story 2's development started in 2009 and the beta version is planned for
2014) 14.
Free testing is not only a F2P feature: All hybrid P2P models have a
free period/demo version to test the game (contrary to LEE 2013).
Customization options are not larger in F2P than in P2P: Players can
always customize their experience with more or less choices but in P2P they
are all included in the price.
Balancing virtual worlds and items is a specific issue to all multiplayer
online games and not only to F2P games.
Paid and free business models require a combination of community
building and branding strategy to keep players engaged and to enlarge
audience.
In paid and free business models new regular contents/levels/items
are created by developers or players to extend the lifespan of the game
(e.g., Blizzard, King, Rovio developers).
Now, we can apply the theoretical components of digital business models

(see the first part of this paper) to shed light on the remaining values that are
the most discriminant for developers (D) and players (P) in paid and free
business models :
14 Sources: "MapleStory2 Development Officially Confirmed by Nexon" (2009/07/12) and

"MapleStory2 Debuts, Beta Test Coming Next Year" (2013/11/06) from
http://news.mmosite.com
Revenues timing (D): discrete for P2P (mainly in the first months after
release) vs continuously for F2P (less seasonal)
Revenues amount (D): limited for P2P (price of the game) vs.
unlimited for F2P (unlimited purchasing)
Profitability risk (D): higher before the distribution in P2P vs. higher
after the distribution in F2P.
Content management (D): outside the game in P2P vs. inside the
game in F2P.
Innovation/development process (D): discrete and slow for P2P vs.
continuous and reactive for F2P
Player's experience (P): possibility to speed up leveling by playing in
P2P vs. paying in F2P
Consumer risk (P): value of the game in P2P vs. controlling amounts
spent in the e-shop in the F2P
Playing with real friends (P): limited to some friends in P2P vs easier
with any friends in F2P (no financial barrier to entry).
We agree with STUART (2011) that F2P management is more

microeconomic (continuous-incremental-iterative-real-time) based on
specific metrics on A-R-M-D balances contrary to macro-management of
P2P games. A minimalist version of the F2P game is first produced by
reactive and agile teams. Because non-financially committed players can
easily quit, new types of items (comfort item to reduce waiting time and
booster items to double experience gains from a quest) are created in F2P
to remove players' constraints in gameplay (time, patience, social network).
The switch to F2P by traditional P2P genres with no in-game items (sport
and puzzle genres) induces the creations of both items and immersive
narration 15. Managing a F2P game means managing production and
consumption at the same time in a co-creation process within A-R-M-D
dynamics. The inner innovation process is different between P2P and F2P.
Old and new skills are required to be successful with a free business model.
Both paid and free models require a great concept to be successful
(FREEMAN, 2011). The retention stage, which is a traditional skill of the
developer, is therefore the most important success of the condition of
15 e.g. the difference between the first shareware "Bewejeled" game with simple graphics and
challenges and more recent puzzle competitors with richer narration and items choices (e.g.
Candy Crush or Diamond Dash).
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96 No. 94, 2 Q. 2014
monetization and acquisition strategies (without retention, acquisition and

monetization have no value). The new skills are managing:
- innovations in the game through iterations and simulations based on
real-time testing of levels and items: launching, testing and fine-tuning
the experience constantly and observing how players react, listening to
feedback and re-building;
- a heterogenous players' community with paid and free players on an
individual basis. This requires key technical resources such as CRM and
expertise in providing services and infrastructures to accommodate huge
customer bases of millions of players;
- an e-shop and micropayments systems for all players;
- narration in games and especially for genres that didn't used to have
one (especially sports and puzzle genres) 16.
We have delimited the borders of paid and free models. Based on this
section, we propose in the next section to analyze a recent evolution of the
business models in the video game industry: a mix of paid and free
components to deliver a more comprehensive service to players.
Hybridation of paid and free business models: towards

a comprehensive service-based business model
Beyond the DNA of each business model, we now focus on the core and
optional components to highlight the recent trend of hybridation of models.
Core and optional components of P2P and F2P
Historically, digital business models were mainly based on providing a

free or paid access to the essential or core contents. With time, developers
have given access to extra contents and have diversified their main source
of revenues.
16 In-game Innovations should be managed carefully since they are new components (and
skills) for casual gaming developers. For example, in PlantvsZombie2, there are more choices
of plants and more narration (the player travels through time on a map before playing levels).
However, the player must replay two, three times the same levels to win stars or bones to open
doors to level up. From our point of view, the gameplay is not as much fun as in the Pay-to-Play
first version.
Evolution of P2P models
The basic unit price model for a premium version has survived to
digitalization and the economic architecture has remained the same
(purchase, download and play). It has been enriched by out-game services
provided by distribution platforms. For example, Steam (public platform 17)
or Battlenet (private platform) have innovated in services around the paid
game: automatic updates and patches, dynamic pricing and special deals,
easy access to sequel, add-ons and additional contents such as mods by
players and e-sport service, etc. Then, the paid model has extended to
provide for a continuous online gaming service, especially for MMO games.
The subscription model was introduced with or without a unit price to get
access to one game or a bundle of games (e.g. on TV or on multigames
platforms on PC like BigFish 18). Freemium is another evolution of P2P: it
has a free trial period at the end of which the player must pay a unit price to
access the premium version. A freemium full version is a finished product:
the game has an end and the player must wait for the next sequel to be
available to keep on playing.
Evolution of F2P models
First, the free model was only supported by ads (or out-game revenues)
and was mainly used for small casual games (e.g. Addictive games, Pogo.fr,
Yahoo !Games portals). The game is free as long as an ad is viewed. To
skip the ads, the player must pay a unit price. It looks like paying for comfort
(and this idea will be reused later by the F2P model). However, players
highlighted two main drawbacks of this model: either the game was of lower
quality due to lower budget or less fun because of the interruption of ads
(OLSSON et al., 2010). From developers' view, advertising can generate
significant revenue but only for the top-selling games. The model evolved
into the F2P or microtransaction model where the access remains free but
revenues are based on the sale of in-game items using real-money. The
revenues can come also from other types of in-game transactions: player to
player transactions. A fee is collected by the developer as a percentage of
the amount of the transaction either for earned items or UGC items (e.g.,
Team Fortress 2). Advertisement can nevertheless keep on being a
17 In a public platform, the owner gives access to games also produced by other developers
and is not limited by the distribution of games only developed by the owner of the platform
(private platform).
18 BigFish generated $130m in revenues in 2010 (CHANG, 2010).
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98 No. 94, 2 Q. 2014
complementary source of revenue for the F2P model if it is embbeded in the

gameplay (i.e., being a source of rewards for the player watching it).
Evolution towards hybridation of paid and free models
The current trend in digital business models is that monetization is no

longer a unique source of revenues but a combination of options.
Progressively, mixing components of pure digital models delivers richer and
more customized experiences to players though it also blurs the borders of
each digital business model.
Below are some examples of hybrid models:

- Sherlock Holmes : Le chien des Baskerville, edition collector on PC:
Freemium games (free limited access for 1h + unit price/subscription of
11,99),
- Red Dead Redemption and Borderlands: unit price + downloadable
contents/items as missions and new characters (yielded Take 2
Interactive $34m in digital sales in late 2010) 19,
- Diablo3: unit-price + in-game taxation of real-money transactions in in-
game auction house among players 20,
- FIFA13 and Ultimate Team mode: unit price + out-game real-money
transactions of cards on PC and mobile phones to customize and
manage teams 21,
- Minecraft: unit-price + out-game real-money purchase of modding
options for mini-games (Minecraft),
- World-of-Warcraft: Unit price + subscription+ free limited period + out-
game on-demand items/services sales (transferring a server, a name
change or avatar's appearance change) + downloadable paid (sequels) +
free (mods) contents,
19 Source: VAN DREUNEN (2011).

20 In Diablo 3, there are two auction house systems: one based on in-game gold found and one
based on real currency. The real-money auction house in Diablo 3 provides a safe way for
players to buy and sell loot they find in the game for a maximum price of $250. It works like an
auction platform inside the game and Blizzard, the developer, catches a $1 fee charge for an
equipment item that is unique (weapon, armor, accessories) and 15% of final sales price for
commodities (gems, materials, dyes, recipes non unique items). (Source: "Transaction Fees
for Diablo 3 Auction House" (2012/05/01),
http://www.gentlemensdiablo3.com/2012/05/transaction-fees-for-diablo-3-auction.html)
(2014/01/13) and "Gameplay-auctionhouse-fees" (2011),
http://us.battlenet.net/d3/en/game/guide/items/auction-house#fees (2013/04/05).
21 Source: "FIFA Ultimate Team", http://www.easports.com/fr/fifa/fifa-ultimate-team/xbox360
(2014/01/14)
Team Fortress 2: F2P + premium access for paying players (who

bought the game when it was P2P or an item in the e-shop) + e-sport (since
2009). Premium account gives access to different services/items (crafting of
special/rare items and tools, upgrades items/services, bigger backpack,
giving gift, special rare and cosmetic items) 22.
In 2013, some producers (e.g., Electronic Arts FIFA) introduced the
sale of additional mobile companion app with a F2P model as part of the
console P2P video game where the player can perform activities related to
the smain game. The aim is to capitalize on cross-platform gaming.
We now propose to map more precisely the components of player's

experience and of the content of the game in the digital business models in
the video game industry. It appears that the main components are: the
access to the game (free or paid), the scope of the accessible gaming
experience and contents (premium and full experience or limited
experience), the types, extent and prices of complementary optional services
around the core service such as items (including hints, extra contents),
subscription for extra services (such as modding), accounts management, e-
sport, the access to other players and their price (friendship/social, trading,
chatting, helping, creating together), the locus of transaction of
complementary services (in-game or out-game), the currencies (only virtual
or real or both) and the sources of monetization (direct and indirect: ads,
extra services, relationships with other players, items, etc.).
Since digital business models can be finely tailored to meet players'

segmentation, we agree with LEE (2013) on the absence of superiority of
one model over the other. It is the whole gaming experience bundle that
creates the values and that is a basis for differentiation in a competitive
environment.
Conclusion
With the diffusion of the Internet and mobile devices gaming, digital
business models in the video game industry have evolved from paid to free
models with a broad variety of hybrid models. Experimentation with new
revenue models has changed the business models and the management of
22 Source: http://www.teamfortress.com/freetoplay/faq.php (14/01/14).

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100 No. 94, 2 Q. 2014
innovation. Nevertheless, models have been mainly discussed in industry

but little in academia. Grounded in an interdisciplinary microeconomic and
business models literature, this paper contributes to the literature by
providing insights into the economic architectures of paid and free digital
models. We make explicit their DNA to provide guidelines to choose the
correct business model. We map the diversity of hybrid models based on
concepts of core and optional services to help other sectors to develop their
own business models based on video game industry lead-user innovations.
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Exploring Mobile Gaming Revenues:
the Price Tag of Impatience, Stress
and Release
Denis LESCOP & Elena LESCOP

Institut Mines-TELECOM, TELECOM Ecole de Management, Paris
Abstract: The mobile gaming industry is growing at a rapid pace. Smartphones, tablets
and other mobile devices are new channels to deliver games to customers. However,
since the birth of Internet, users have been accustomed to getting things for free. How
then are mobile game companies able to make billions in revenue? What are the main
drivers of profitability in this sector? Our objective is to dissect the freemium pricing
strategy that is frequently used in the mobile gaming sector. With the help of the case
study of Gameloft, we explore the method and the path for converting free into profit by
playing with the users' frustration and stress.
Key words: Mobile Gaming, Business Model, Pricing.
A
lthough smartphones began to enter households in the late
nineties, it was not until the introduction of the Apple iPhone in
2007 and its successful adoption, that the smartphone global
penetration rates started to climb, reaching 23% worldwide in
2013. Concurrently with the dawn of a new era of mobile communication, the
video gaming industry began to expand into the mobile device segment.
The video game industry has its roots in the arcade gaming, the age
which began with Atari's Pong over forty years ago. Since then, the video
game industry has been creating content for several support types, including
personal computers and game consoles, with content prices ranging from
twenty to seventy Euros per title. More recently the content creation started
to concern mobile devices and smart TVs. Interestingly, the price range
applied to the titles of the hard core video game industry did not transpose
onto the prices of content for these devices, marking the range from only
zero to about 20 per title.
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104 No. 94, 2 Q. 2014
The above phenomenon of non-transference of content pricing across

the support types is attributed to at least two events. First, there is a
historical tendency for the telecom operators and device manufacturers to
make a limited number of mobile games available free of charge to the end
users of feature phones. Both telecom operators and device manufacturers
believed that mobile phone content, such as games, adds value to the
device and increases its attractiveness; they were purchasing and pre-
installing content directly onto the mobile devices, hence making the end
user accustomed to having the content free of charge. Second, Apple's entry
into the mobile sector caused the breach of the value chain of the sector
(LESCOP &LESCOP, 2013). This led to remodelling of the barriers to entry
for application developers, causing the developers' pool to swarm with
hundreds of thousands of amateur developers, who wanted to try their luck
in the newly emerged marketplace, alongside with a limited number of
professional entrants, who were spawned by the established video game
developers. As mobile device content became vast in number, it helped
shape the customer expectations as well as the rules of the industry, leading
to emergence of the need to re-vamp the pricing strategy as well as re-
shape the approach to the customer with the intent to capitalize on the
content that the customer was expecting not to pay for. Mobile gaming is the
most active sector in terms of development, revenues and downloads on
application stores. In 2013, games represented 77% of total application
revenues 1. Game developers collect 90% 2 of their revenues on application
stores through a very particular freemium business model: free download
with in-app purchases. Only 6.1% of their revenues come from paid
applications without in-app purchases: a rather surprising result at a first
glance, considering the fact that the gaming industry was built on a pay to
play model.
This paper uses a descriptive and exploratory case study approach to

investigate the main drivers of the business models of mobile gaming
companies. The first section studies the mobile gaming industry and
highlights its main characteristics. In particular, we draw a typology of
developers' strategy and business models. In the second section, we study a
representative firm: Gameloft. Through this case we focus on pricing
strategy with the intent to explain how zero price can be converted into the
sector revenue of 9.46 bn in 2013 3. The third section highlights the main
1 Source: Forbes, November, 1st, 2013.

2 Source: Distimo, "Unveiling the Secrets behind App Store Category Dynamics", March 2014.
3 Source: Gartner, "Forecast: Video Game Ecosystem, Worldwide, 4Q13", October 2013.
Denis LESCOP & Elena LESCOP 105
drivers of the developers' business models, inferred from the case study.
The last section concludes the paper.
The mobile gaming industry
Overview of the industry
A subset of the video game industry, the mobile gaming sector

specializes in provision of gaming content for mobile devices. Although the
content comes in a variety of genres, it is composed nearly entirely of casual
games; these games are intended to appeal to a mass audience due to their
gentle learning curves. Social games, the subset of casual games, are the
games deployed on the social networks with the intent to meaningfully use
the player's existing social relationships and hence stimulate mass game
play. The content is available to smart phones, large-screen devices such as
tablets, as well as other mobile devices such as feature phones.
Over the last three years the size of the video game industry has
expanded from 40 bn in 2011 to 66.66 bn in 2013 4. With the growing
global penetration rates of mobile devices, the mobile gaming sector nearly
tripled from 3.45 bn in 2011 to 9.46 bn in 2013. In 2011, about 80% of
the revenue was shared among the top four players, jointly representing
52.9% of registered users in the sector. Two years later, in 2013, the market
has evolved beyond recognition. The first player in the ranking, King,
exhibits a market share of 14.2%, while the top four players jointly represent
only 49% of the sector's revenues. DeNA, GREE, and Zynga have
experienced a noticeable decrease of their revenue between 2012 and
2013. Over the same period, the revenues of King, GungHo and Supercell
have skyrocketed. Dominance of the top-ranked players has diminished
dramatically. Among the top fifteen players in mobile gaming in 2013, only
one entered the mobile gaming sector prior to the year 2000 (Gameloft),
while six entered in the year 2006 or later. The prevailing majority of the
companies originate from USA, followed by Japanese-based companies.
The detailed depiction of the revenue shares can be seen in Table 1.
4 Source: Gartner, op.cit.

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106 No. 94, 2 Q. 2014
Table 1 - The 15 Largest of the mobile gaming industry in 2013
Company Entry Origin Revenue 2011 Revenue 2012 Revenue 2013

(in M) (in M) (in M)
King 2002 England/Sweden Nk 117.5 1347
Gung Ho** 2002 Japan 67.2 180.6 1140
DeNA (Mobage) 2006* Japan 827.9 1260 1100
Gree** 2007* Japan 449.1 1100 1060
Disney Interactive** 2000 USA 703.8 605.6 762.6
Supercell 2010 Finland Nk 72.4 639.4
Zynga 2007 USA 766.9 823.4 546.2
Tencent(MVAS)** 2000* China 400.6 424.8 Nk
Rovio 2003 Finland 75.4 152.2 156
Electronic Arts Mobile 2004* USA 162.2 192.8 286.7E
Kabam 2012 USA Nk 129 258
Gameloft 1999 France 164.4 208.3 233.3
Activision Pub. 2008* USA 119.7 117.5 119E
Big Fish Games 2002 USA 14 Nk 95.3
Glu Games Inc. 2001 USA 51 77.4 75.3
Total revenue 3450 6652 9467
* corresponds to the date of entry of the mobile gaming division of the parent company, ** non-
segregated data, E estimated value.
Source: annual reports, Gartner, 2013
Over the past few years, players in the mobile gaming sector have
created value. Starting from nearly nothing before the emergence of
smartphones in 2007, the sector generated nearly 10 bn in 2013. These
players did so by using their unique capabilities in tandem with leveraging
the resources of the central players, such as Apple and Google, in an effort
to reach vast audiences to develop their businesses.
Delivery channels and pricing
Mobile games can be delivered through four delivery channels: pre-

installation on a mobile device, device manufacturer's platform, telecom
operator's portal or own platform. The mobile device manufacturer can
choose to purchase a license from the game developer for a flat fee in order
to pre-install the game into the mobile device prior to selling it to the final
consumer, who in turn can play the game at no additional cost. In cases
when the game is subjected to distribution via the device manufacturer's
platform, or via the telecom operator's portal, the game developer pays the
platform/portal owner a fee, which represents a fixed percent of the game
sales, usually close to 50%. Although it is attractive to distribute the games

through developer's own platform as it is fee-free, the sales are usually far
less effective. Some of the reasons for this include low visibility and barriers
imposed by device manufacturers to impede third-party content installation.
As for game pricing, there have emerged several distinct strategies: paid
download, freemium, ad-supported, and other. Paid download is the core
traditional pricing method where the end user makes a one-time payment to
purchase the title. Once paid for, the user gains access to download the
game, which is then installed to and played on a single mobile device. The
freemium strategy (ANDERSON, 2009) is a pricing method where the end
user is granted access to download and play free of charge; all the in-game
features are available at extra cost, with no obligation to buy them
whatsoever. As of February 2014, over 90% of the revenue from mobile
games developed for iPhone is generated through the freemium business
model 5.
Aside from benefiting from self-advertising, developers of freemium

games are relying on in-app purchases such as micro-transactions and
sales of virtual goods, effectiveness of in-game advertisement of their own or
third party products and services, as well as in-game sales of real products
such as game-related merchandise.
Another pricing strategy is various methods of ad-support, including

development of advergames 6. Advergames are casual games that are
funded by and meant to advertise a sponsor. These games can be
educational in nature, aiming to acquaint the gamer with the range or
specifics of the advertiser's products. Such games are available online free
of charge, or can be bundled with a tangible product. In ad-supported games
the sponsor's brand names or distinct product images appear as part of
gameplay. Appearance of such an advertisement is either static, i.e. the
brand name is displayed passively and blends into the background, or
dynamic, i.e. the brand name or a distinct image is used as an interactive
component in certain parts of the game.
Other pricing strategies include subscription as well as hybrid strategies

such as paymium, sub-freemium, or free-paymium. With paymium pricing,
5 Source: Distimo, op.cit.

6 The term "advergames" was coined by Anthony Giallourakis in January 2000, founder of
www.advergames.com
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108 No. 94, 2 Q. 2014
the user first pays to download, and then is expected to participate in micro-
transactions to enhance his/her gaming experience. Subscription typically
requires a term commitment where a flat monthly fee is charged to the user.
Sometimes subscription-based games are made available as free-to-play for
a limited time during or immediately following the commitment term of the
subscription. Some firms practice a pricing approach where the subscription
fee endures for 6-9 months, and then morphs into a freemium strategy,
referred to above as sub-freemium hybrid strategy. Other firms offer
promotional days when users can download the non-freemium game for
free, and then make in-app purchases. In-app purchases are often not
required to successfully complete any given game; they are meant to greatly
enhance the gaming experience by alleviating stress due to impatience and
frustration of the user. As of March 2014, on the Apple App Store, mobile
game revenues are generated at 7:
- 92% from fremium business model with in-app purchases,
- 6% from pay per download business model,
- 2% from pay per download business model with in-app purchases.
The share of paid download games is consistenly shrinking, yielding their

share to ad-supported games and games featuring micro-transactions.
Elements of the business models of the top-ranked firms
The mobile gaming industry is young and fast-paced. As a consequence,

business models and design have not yet become stabilized. It is a typical
case of high velocity environment (BOURGEOIS & EISENHARDT, 1988).
For WIRTZ et al. (2007):
"The central feature of a high-velocity environment is the rapid,

discontinuous and simultaneous change in demand, competitors,
technology and regulation. These characteristics indicate that
information is time-sensitive and imprecise, or even unavailable. As a
result, market boundaries are blurred, successful business models
have not yet manifested and the roles of market players continuously
change. Complex and unpredictable changes are frequent and come in
the form of market jolts".
Virtually non-existent barriers to entry, continuous flow of innovation,

fierce competition, enthusiastic consumers, and youth of the mobile gaming
7 Source: Distimo, op.cit.

sector, - all contributed to the business model instability and this is what
probably explains the lightning success of game developers like SuperCell,
Rovio and GungHo.
Table 2 - Elements of the strategy of the 15 largest of the mobile gaming industry in 2013
Company Entry Strategy Main Functions Main Revenue Model

King New entrant specialized in Develop and Publish Freemium
mobile games its own game
Gung Ho From an adjacent market Develop and Publish Freemium
(online auctions) its own game
DeNA From an adjacent market Develop and Publish Freemium
(Mobage) (e-commerce, m-commerce) its own game
Platform
GREE From an adjacent market Develop and Publish Pay per download
(social network) its own game Freemium
Platform
Disney From an adjacent market Develop and Publish Freemium
Interactive (entertainement) its own game Pay per download
Supercell New entrant specialized in Develop and Publish Freemium
Zynga New entrant specialized in social Develop and Publish Freemium
game its own game Pay per download
Tencent From an adjacent market Develop and Publish Freemium

(MVAS) (mass media, mobile, etc.) its own game
Rovio New entrant specialized in Develop and Publish Freemium
Electronic From adjacent market Develop and Publish Pay per download
Arts Mobile (video games) its own game Freemium
Kabam New entrant specialized in free Develop and Publish Freemium
to play games for social network its own game
Platform
Gameloft New entrant with a strong link Develop and Publish Freemium
with an adjacent player (Ubisoft) its own game Pay per download
Activision From an adjacent market Develop and Publish Pay per download
Pub. (video games) its own game Freemium
Big Fish New entrant specialized in Develop and Publish Freemium
Games premium casual games its own game Pay per download
Distribute
Glu Games New entrant specialized in 3D Develop and Publish Freemium
Inc. mobile games its own game
Source: annual reports
Today, the market is composed of a myriad of small developers creating

a mass of casual mobile games, while the fifteen largest players represent
nearly 90% of the 2013 sector revenues. The smaller players are here to try
their luck in the hope of developing the $1 billion app that will attract
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110 No. 94, 2 Q. 2014
hundreds of millions of players. In the majority of cases they are individual

developers or small groups of developers. They are not necessarily
organised into a firm. They often sell their development through distribution
platforms like DeNa or GREE; they sometimes abandon their own brand in
favor of the platform brand. These small players enter and exit the market
very quickly. This creates a hyperactive competitive fringe that tries to
contest the position of the fifteen biggest players. In this sense, the mobile
gaming market appears contestable.
Table 2 exhibits some relevant elements of the business models of the

top fifteen players in the mobile games market.
We observe three different types of entry in the mobile gaming market

among the top fifteen players:
Creation and Specialization
This category hosts new entrants specialized in a particular type of game:

3D, social network games, mobile games and casual games. Seven of the
top fifteen players are new entrants founded specifically to operate in the
mobile game sector. They are pure players in the market even though some
of them are beginning to expand their activities to other platforms (PC,
Consoles, TV) or other products. Some of them exhibit a business model
that relies on one or two blockbuster games which generate over 80% of
their total revenues. Prominent examples of such are SuperCell (Clash of
Clans, Hay Day), GungHo (Puzzle and Dragons), Rovio (Angry Birds) and
King (Candy Crush). Their business models are very fragile and suffer from
inability to renew their games catalogue. Rovio's business model is
interesting: Rovio took advantage of the success of its blockbuster (Angry
Birds) and developed a derivative market and brand licenses. These players
strive to ensure the survival and continued attractiveness of their games.
Nearly all of them were quick to succeed. They all follow a freemium strategy
with in-app purchases that relies on a vast audience. Their main strategy is
to hold the players' attention by continuing to develop their successful
games through adding new features, scenarios, puzzles, characters, players'
interactions, etc.
Adjacent entry from the entertainment market
Four entrants among the top fifteen players come from the adjacent
markets: entertainment and video games. These players are historical
incumbents that have been leading their own markets for decades: Disney,
Activision, Ubisoft (with Gameloft) and Electronic Arts. These firms are
exploring the mobile distribution channel by adapting some of their existing
games to mobile devices (smartphones and tablets). The mobile activity
represents a very small part of their total revenue and does not appear to be
highly strategic.
Adjacent entry from other markets
Four entrants among the top fifteen players come from online auctions, e-
commerce and m-commerce markets. These players enter the mobile
gaming market by leveraging their social network (GREE) or their customers'
base. GungHo follows an entry strategy similar to that of a pure player based
on one successful game: Puzzle and Dragons. GREE and DeNA leveraged
their existing platform strategy by allowing third party developers to propose
games to GREE and DeNA customers.
The main functions of the top fifteen players can be broken down into
three elements:
Develop and publish
This is the core activity of mobile game companies. They use a

differentiation strategy by proposing a new game experience to consumers.
This function requires creative and innovative developers who are able to
understand the demand and expectations of players. Often, games are
launched as beta versions and evolve throughout their lifetime in response
to the user experience of different game features. Developers must be
reactive to create correct metrics to assess and modify the most lucrative
feature of their game. This presupposes having to listen to users and then
adapting the game accordingly. Most of the developers create blogs or a
game-bound website to provide support to players and collect feedback.
Since 2012, the most successful games are casual games, either
puzzle/dungeon or battle/strategy-like.
Distribute
Some players like Big Fish Games develop and publish their own games,
and distribute the games of third party developers and editors through their
platform. Big Fish Games is specialized in premium casual games: the
company presents itself as the leading online marketplace for such games.
Big Fish Games offers third party developers a multi-channel distribution
approach by making games available on PC, Mac, iPad, iPhone, Android,
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112 No. 94, 2 Q. 2014
Kindle, Nintendo Wii, Nintendo DS and retail. More than a market place, Big
Fish Games is a distributor (merchant model).
Platform
This last function expands the distributor's role to embrace the

firm/market equivalency strategy. GREE and DeNA chose such a strategy
by opening up their platform (through SDK and API) and customers' base (or
social network) to third-party developers and by monetizing their investment
through the transactions issued between developers and customers.
DeNA/Mobage provides developers with expertise and knowledge
(production support), marketing (users acquisitions, promotion), SDKs (iOS
or Android), analytics (to monitor the performance of games in real-time and
to tune the game accordingly), global distribution (worldwide publishing),
quality gamer network (about 30 millions active and engaged users). DeNA
is providing support to developers to attract them, along with their innovative
ideas. Small developers are attracted by such platforms since they can
benefit from the support, the customers' base and reputation of the platform
owner. They hence increase the probability of success of their game and, in
a way, appear less anonymous. By doing so, DeNA and GREE create
clusters of developers around their platforms within the app stores system.
They also improve the creativity of their value proposition.
In the mobile gaming industry these main functions are cumulative. We

observe three possible sets of functions: 1) develop and publish; 2) develop,
publish and distribute; 3) develop, publish, distribute, and be a platform
(since a platform is also distributing third party developers' games). We do
not observe a strategy of pure platform or pure distributor. All of the top
fifteen players are developing and publishing their own games. Among them,
eleven are playing the pure strategy of developing and publishing their own
games. The biggest platforms (GREE and DeNA) are developed by entrants
coming from very specific adjacent markets (social network and e-
commerce/m-commerce). The side-competitors from the adjacent markets of
entertainment and video games (Disney, EA, Activision, Ubisoft) follow the
pure strategy of developing and publishing their own games. Big Fish
Games is the only example of a distributor, and is highly specialized in
premium casual games.
The forementioned elements highlight several main characteristics of the

mobile gaming industry. This industry exhibits low barriers to entry and a
high level of risk pushing firms to continuously innovate and provide players
with new game experience. Moreover, the market is still growing at a rapid
pace making barriers to entry almost irrelevant: leading positions are

therefore not stabilized and new leaders can emerge quickly. The shift
towards a dominant freemium revenue model forces developers to compete
fiercely for a mass audience. Mass audience is the key to transform micro-
transactions (in-app purchases) into tremendous profits. This means that
developers need to release attractive games that will meet the player's
expectations. These games also need be available for all devices (spatial
competition). A corollary of the freemium model is multi-homing: developers
avoid exclusivity (for instance: iOS or Android) because to reach a wider
audience they must port their development to other operating systems.
Exclusivity, as it used to be in the console games market, is not the rule
here. Most of the developers, in particular the top fifteen, develop for several
platforms.
However, simply having the presence on several platforms is insufficient:

developers need to be visible. The traditional way to improve visibility is via
multi-channel advertising (websites, blogs, application stores, etc.). This is
surely very costly for a small developer. When one game is successful, in-
game advertising can be used to transfer the players to a new game. Even if
these firms compete, some of them cooperate. The basic forms of
collaboration are in-game cross-advertising and licensing. They also co-
develop and co-brand some games to share their experience and reputation
with partners: Gameloft regularly cooperates with The Learning Company; in
2012, GREE teamed up with Gameloft and Ubisoft to enter the European
mobile social gaming market; Rovio franchised Angry Birds to GungHo. The
extreme level of collaboration is platform openness, where one firm opens
up its platform to other developers.
A typical freemium strategy: Gameloft
The choice of Gameloft
Invention, innovation, new products, and new ideas do not bring value
per se. TEECE (2010) neatly summarized a common theoretical belief:
"In standard approaches to competitive markets, the problem of

capturing value is quite simply assumed away: inventions are often
assumed to create value naturally and, enjoying protection of iron-clad
patents, firms can capture value by simply selling output in established
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markets, which are assumed to exist for all products and inventions.
Thus there are no puzzles about how to design a business - it is simply
assumed that if value is delivered, customers will always pay for it".
This theoretical ideal is just a "caricature" of the real world and cannot
explain the revenue generated in the gaming industry. In particular it cannot
explain why customers decide to pay at a point in time. Business models
and business design matter (BADEN-FULLER & MORGAN, 2010; BADEN-
FULLER & HAEFLIGER, 2013; WIRTZ et al., 2010) and are of tremendous
importance in the Web 2.0 and Internet industry (AMIT & ZOTT, 2001; ZOTT
& AMIT, 2010).
This case study relies on the design of business models to understand

the profitability of firms in the gaming industry. Our research is in its essence
descriptive and exploratory and uses the single case study method (YIN,
1994). By providing a detailed description of the revenue model of the
chosen company, we aim to find and clarify the main ingredients of its
success in terms of profits. More precisely, the objective of the case study is
to dissect the freemium pricing strategy frequently used in the mobile
gaming sector. With the help of the case study we explore the method and
the path for converting free into profit. We collected secondary data and
information from publications (industry studies, books, and articles), Google
search, players' publications (press releases, financial reports, and activity
reports) as well as from writing by experts and consultants, who specialize in
the relevant sectors.
We had several reasons to select Gameloft for this case study. Gameloft
pioneered mobile gaming in 1999. It is the earliest entrant into the mobile
gaming sector among the top fifteen largest developers and publishers in
2013. Gameloft is the early signal from the French-based video game
developer Ubisoft, the parent company, to step into an emerging adjacent
market, with intent to multi-home on all available platforms. Gameloft
employs over 6391 people among which are 5200 developers. It has
published over 500 games for mobile devices. Gameloft relies heavily on
freemium pricing strategy with emphasis on micro-transactions and in-game
advertising. Gameloft displays a stable business model and strategic
positioning. As for 2013, Gameloft is still among the top ten publishers
worldwide in terms of total downloads on iOS and Google Play (ranks
second after Electronic Arts but before SuperCell or Gung Ho), top games
downloads on iOS and GooglePlay (ranks fourth) and revenues (ranks
twelveth) 8. In 2013, Gameloft counted twenty million daily users, one million
daily downloads and one billion downloads to date of its free to play games.
Gameloft commercializes its games in fifteen languages in 100+ countries
over 4000 different models of smartphones. Gameloft develops its own
games and franchises (Asphalt, Real Football, Modern Combat, Order &
Chaos) and works in collaboration with international companies like Marvel,
Hasbro, FOX, Mattel and Disney. Gameloft is undoubtedly an example of
success with a rather stable business model. For all these reasons we
consider Gameloft as a model for the mobile game industry.
The Gameloft model: the price tag of impatience and release
The free to play with in-app purchases model represents 85% of

Gameloft revenues in 2013. The applications come either pre-installed on
the mobile devices and at no additional charge to the final user, or can be
downloaded from the device manufacturer's platform. 98% of Gameloft's
revenue is sourced from their mobile applications business segment.
We have reviewed a number of freemium Gameloft games with respect

to the pricing strategy and conversion of the non-paying users into a revenue
contributor. All of the games we reviewed shared common elements. With
the help of an example of the game entitled "The Oregon Trail: American
Settler", we highlight these elements and explain how the game compels
non-paying users to convert to paying customers.
The game starts out presenting the user with a need to manage a limited
number of resources: coins, cash, wood, food, energy and hearts. Coins,
wood and food can be obtained by doing chores and quests throughout the
game. Each of the actions is time sensitive: there is a timer assigned to each
action, and the user needs to wait until the timer expires in order to be able
to collect resources like food and coins. The cash, energy and hearts are
scarce resources. In the beginning of the game, the user is occasionally
presented with these resources in form of a bonus. Hearts can be collected
by helping a neighbouring town to do chores, and can be further used to
upgrade buildings in the user's own town to increase coin payoff, or to play a
lottery, where the user can win in-game items, cash or energy. Lottery can
also be played for free once every 24 hours. Hearts can also be purchased
8 Source: App Annie Index: 2013 Retrospective, The Top Trends of 2013, App Annie, January
2014.
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with cash. In the second half of the game, the option to earn hearts
disappears, and only the option to buy hearts with cash remains. Energy is
needed to do all actions in the game that yield payoffs. Energy resource is
limited and builds up to a maximum of fifty energy points as the user
progresses within the game. There are several ways to replenish the energy:
win a lottery, using hearts or cash to participate; level-up by doing chores to
earn experience points, which in turn promotes the user to the next level;
wait three minutes to replenish one point of energy for a maximum of three
minutes x 50 points = 150 minutes; earn as a bonus for doing chores; or buy
more energy with cash.
Cash is the most curious resource of all. In the beginning of the game,
cash is frequently offered as bonus. The user also has an option to get free
cash by watching short 20-30 second advertisements of other Gameloft
games. For each of the advertisements watched, up to a maximum of five
per each 24-hour period, a user is offered one unit of cash to be spent within
the game. Later in the game, Gameloft advertisements disappear, and in
their stead appears a list of Gameloft partners who advertise their products
and services with the help of Gameloft. In exchange for filling in your
personal information or purchasing real merchandise from these partners,
Gameloft grants cash for use in-game to the participating user. The cash can
be spent to buy all other resources, including the scarce resources, to hurry
production, hence eliminating the need to wait until the timers elapse, or to
buy in-game items. The in-game items can be either functional (e.g.
providing or enhancing coin resource), or decorative (e.g. outfit of your game
character or the character's gender). The cash, in turn, can be purchased for
real-world money using your credit card. The rates are presented in such a
fashion that they compel user to buy a larger pack of cash rather than a
smaller one: see Table 3 for details.
Table 3 - Cash pricelist
Amount Bonus Name of Cash Pack New Name of Cash Pack (2013) Price
10 0 Baby-sized Pack Pouch of Cash 1.79
25 1 Starter-sized Pack Bushel of Cash 4.49
50 5 Medium-sized Pack Sack of Cash 8.99
100 20 Big Pack Barrel of Cash 17.99
250 100 Extra-Large Pack Wagon of Cash 44.99
500 300 Super-sized Pack Bale of Cash 89.99
What compels the users to buy these packs of cash? What drives some
of the users to convert into paying customers? Since the beginning of the
game the user is faced with real-time delays throughout the game:
production of collectable resources takes real time, and each item in the
game (house, business, farm animal, etc.) has an associated timer. Upon
the expiry of the timer the resources can be collected (taxes, items
produced, harvest, etc.). Each action of the user's character costs one unit
of energy. Energy recuperation is also associated with a timer. Moreover,
free lottery, free cash, and land expansions are associated with a timer. The
farther the user is progressing into the game, the more yield there is from
each producing entity, but also the longer the time delay is. In addition, the
larger the town becomes, the farther it stretches, the longer, in real time, it
becomes for the character to walk from one place to another in order to do
the chores. The user has a choice to make in-game purchases of virtual
content that will enable the character to walk faster and to rush the in-game
timers. Such items are offered exclusively in exchange for in-game cash.
Hence, playing on the impatience of the user created by the need to wait all
the time, the game is offering a quick solution to relieve impatience through
purchases of packs of cash, which can then be spent to purchase the play
time (in lieu of wait time).
How does the game publisher manage to attract millions of registered

users? How does the company manage to retain their user mass? With a
wide selection of free games with high-quality graphics, it appears to be a
challenge. However, one of the keys of success of the social games is their
aim to employ the user as vector of advertisement among the user's social
connections. The game tries to become "social": it encourages the user to
invite friends through social networks (e.g. Facebook) to join the game by
offering bonus in-game resources and ability to interact with the befriended
users and their games. Such offer of interaction encourages so-called items
race: your town must be better than the towns of your friends. Other
important factors are the appearance of the game as free-to-play, the
game's addictive qualities as well as visibility throughout major application
distributing platforms (App Store, Google Play, etc.). By providing the game
that is free to download, the user bears no risk by trying the game. Once the
game is on the mobile device, it needs to possess an addictive component,
such as limiting the play time. If the user is not satisfied with the length of
duration of the game, he will play again shortly thereafter (when his energy
has been refilled). In addition, the game is encouraging the users to play
daily by offering daily, weekly and monthly attendance prizes. The prizes are
only earned if the game is accessed on a daily basis. Another method used
to ensure that the user returns to the game often is the reaction of the in-
game characters to the absence of the user: when the user does not check
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back regularly, the mood of the in-game characters decays from jubilant to
depressed, which affects the production yield. This contributes to user's
motivation to interact with the game daily.
Analysis and discussion
Although there is no one universal formula for generating revenue in the

mobile gaming sector, we can infer five main drivers of profitability from the
case study.
First driver: Be visible
Since the entry into the mobile gaming sector is nearly barrier-free, over
the past several years the device manufacturer's application distribution
platforms have been flooded with talented amateur game developer
wannabes, small developer firms as well as heavy-weight entrants from the
side market (video game industry). Gaining visibility in this sea of
competitors is key. Multi-homing is a necessity: the time of exclusivity in
gaming is over. Multi-homing on multiple platforms ensures the maximization
of the potential audience.
Second driver: Be free
The mobile gaming customers expect the content to be provided to them

free of charge. This does not bereave the game developers from generating
profit, yet they were in a position to re-vamp their pricing strategy and source
their revenue from sales other than application sales. This need has
prompted the roll-out of the freemium pricing strategy as the dominant
strategy in the mobile gaming sector. Free to play strategy ensures that a
vast number of users will try the game: acquisition of players seems easy,
but retention is a more complex issue. In April 2014 Swrve, a US consulting
company, specialized in mobile apps and games, published a report, The
Swrve New Players Report, on the behavior of new players in the mobile
games industry. They found that 19% of new players played the game only
once and 45.5% abandoned it after 5 sessions. Only 5.5% of new players
are still active in the game after 30 days.
Third driver: Be addictive and "stress and release" your players
For Mike LU (2014), VP of Product at GREE:
"One of the elements that make free-to-play unique is that we give the
games away for free and then are dependent on players enjoying the
game and any new content enough to spend within that game".
Being addictive and using methods at hand to frustrate the user, such
that the user eventually cracks and pays up, are the top ingredients in value
generation and capture. As we observed with Gameloft, the games are built
in such a way as to put the time pressure throughout the aspects of the
game. This time pressure does two things. First, it takes away the ability
from the user to saturate himself with the game by overplaying; limited
gaming periods in which the user does not have an opportunity to finish all
actions/chores/quests that they want make them return to play the game
later. In addition, the game encourages daily playing by offering bonuses.
Second, the time pressure gradually builds up a level of impatience so that
the user is either converted to a paying customer or simply stops playing.
Both of these scenarios can be viewed as desired by the game developers
when the objective is not necessarily to maintain the large-number user
base: instead it is advantageous to maximize the revenue per active user.
Moreover, addicted users use their social networks to make their friends play
as well, hence bringing more potential paying customers to the game
developer. Another ingredient appears useful to hook the players: "stress
and release". To the question "Do you try to erase the user's stress with
design [of your games]?", Kenji Kobayashi, Director at DeNA, answers:
"It's not that we erase it; we control and release it. When you think
about what games are at the core, they are about delivering stress to
the user. It wouldn't be fun if it's something that anyone could finish --
you put up obstacles for the user, and they feel a sense of
achievement when they overcome them, which is fun."
The underlying idea is very basic: you should know your players and
know what they like to provide them with the best playing experience.
Fourth driver: Capitalize
Even though there is a lot of effort made to retain the user, the game
developer's ultimate goal is not to maximize the number of registered users,
but to maximize the conversion of active users to paying users. As is evident
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with the mobile gaming leaders, having highest profit per user is superior to
managing the highest number of users.
Capitalization in the mobile gaming sector with dominating freemium

pricing strategy lies in selling limited spans of the user's attention to
advertisers, as well as generating value from user stress and impatience by
encouraging them to participate in micro-transactions. The companies in this
industry are able to afford a vast number of non-paying users due to nature
of the product: virtual content. The non-paying users, however, may play a
role in advertising the company's products and attracting new users who
may eventually convert into paying users. The non-paying users are also
often needed to ensure the playability of the game: in certain games a good
balance between paying and non-paying users should be kept, otherwise the
resulting unbalance may affect the playing experience of the paying users.
Capitalizing is not an easy task. The average revenue per user or per
th
paying user does not give a clear image of reality. According to 5 Planet
CEO Robert Winkler 9, 40% of revenue comes from 2% of players spending
$1,000 or more per year, 90% comes from players spending $100 or more
per year. Some top players can even spend up to $6,700 per year. These
kinds of players are often referred to as "the whales". They represent only a
small percentage: about 3-4% of paying users. As of now, developers are
not able to outline their profile: are the whales old or young? Are they
managers, doctors, employees, etc.? There are no specific demographics
that can help to distinguish the whales from other players. Lu (2014)
explains that these players are not compulsive: they spend in-game
strategically and only if they feel it is worth doing so. To track these players,
developers have invented batteries of metrics and analytics able to
accurately measure and develop the economic design of their games: how
and when are the players buying? What are they buying? At what level of
the game are they ready to spend? These metrics make their game more
agile and adaptable.
Fifth driver: Offer more
To strengthen their customer base, in addition to taking the steps as

described above, the game developers try to up-sell and cross-sell to their
existing registered users. This includes advertising other games, including
9 See: http://venturebeat.com/2013/03/14/whales-and-why-social-gamers-are-just-gamers/
games of their own and third-party developments, if the latter are willing to
pay for the in-game advertisement. By offering more, the game developer
eliminates the need for the registered users to wander around and check out
the competitor's products. The game developer strives to create a
playground - or platform - for its users to be able to find things to their liking
once they are tired of their current game, hence keeping the potential and
actual paying customers from leaving. Moreover, contrary to console games,
users on mobile devices play several different games at the same time and
can jump from one game to another very quickly: suturing the playing time of
each user is of great importance.
Conclusion
In the high-velocity environment of mobile gaming, companies are still on

the quest for an ideal business model and an ideal way to reach the players.
Our paper highlights five crucial drivers that may help mobile gaming
companies to ensure their survival. These five principles are implemented by
the top fifteen players when they propose free-to-play games. Metrics and
analytics on the data of players ensure the on-going adaptation of their
design and revenue model. The detailed knowledge of the characteristics
and habits of the players is undeniably a key factor of success.
Consolidation has not yet occurred but is on its way.
A regulatory risk is threatening the industry. Some consumers' unions are

complaining about the way mobile game companies are billing. Recently, in
the UK the Office of Fair Trading (OFT) investigated the industry practices of
online and app-based games. They observed (OFT, 2014) "industry-wide
practices that were potentially misleading, commercially aggressive and
otherwise unfair": lack of transparency of items' pricing, misleading
commercial practices, exploitation of children's inexperience and
vulnerability and quasi-automatic payments taken from accounts holders
without their knowledge or explicit authorization. The OFT published a list of
principles 10 that should be implemented by online and app-based games to
comply with consumer protection law. The principles most notably force
mobile gaming companies to detail precisely all the costs associated with the
games (especially for in-game purchases) and impose that in-game
payments must be authorized by the account holder (or rejected). As of now,
10 Available at : http://www.oft.gov.uk/shared_oft/consumer-enforcement/oft1519.pdf
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these rules only apply in the UK. However, other regulatory bodies may
follow the example of OFT 11. The first impact of these rules will be on the
fluidity of the revenue flows. Regulation may force companies to adapt their
business model again.
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11 See the FTC in-app purchasing complaint against Apple. Apple recently offered 32.5 M $ in
refunds to any Apple account holder who can prove they were billed for in-app purchases made
by their children.
Interview with
Yves GUILLEMOT
Co-Founder and CEO
Ubisoft, Paris, France
Conducted by Philippe CHANTEPIE

French Ministry of Culture and Communication;
Associate researcher,
Innovation & Regulation Chair, Paris
th
C&S: We have entered the 8 generation of consoles. Do you consider it likely
that this will upset the market positions of publishers and console
manufacturers?
Yves Guillemot: This new generation of consoles brings many changes,
incorporating all the innovations from parallel markets and multiplying their
potential through technological power. These platforms reach an
unparalleled high level of performance, immersion and opportunities which
allow us to create even more powerful game experiences. Each generation
of consoles has large implications for publishers who need to invest heavily
to maximize power and be able to seize the great opportunities that arise.
On the other hand, the strong growth in mobile and PC markets, driven by
social games, permanently connected and free access, is a challenge for
traditional industry players, with new economic and editorial models that
differ from more traditional games. These models started being introduced at
the end of the previous generation of consoles. New platforms like the
Playstation 4 or Xbox One have fully integrated these developments and
allow us to put the player at the center - before, during and after the game
experience - and to give him/her an increasingly active role in changing
content.
Casual gaming has grown rapidly and has already started occupying a
predominant position. Do you think it is likely that this will continue to
increase?
Casual gaming is not a new phenomenon. In 2006 the Nintendo Wii had
taken a big step towards attracting video games and a new audience, part of
which is now plays more traditional games. The rise of social networks,
mobile games and online greatly amplified this phenomenon and globalised
the supply and the audience to which it is intended. The video game market
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124 No. 94, 2 Q. 2014
today encompasses nearly 2.5 billion players, compared to 500 million

previously. This is a pool of significant growth for our industry. For example,
one of our flagship brands Just Dance is a dance game first released on the
Wii, which has sold 49 million copies since 2009. It was particularly popular
during the Christmas season.
We are witnessing significant changes in revenue models. Are these new

models mature enough and able to renew the game console segment?
These new models are growing dynamically and also continue to evolve.
Some examples or experiences have shown us the difficulty of maintaining
high market shares and good consistent results. Without a miracle, renewal
is necessary to adapt to a changing marketplace. Ubisoft deploys and uses
these models, while consolidating and diversifying a portfolio of original
brands for which we control the entire creative and commercial process.
Beyond the video game, our goal is to increase the visibility and
attractiveness of our franchises by being increasingly present on new media
such as television, with the Raving Rabbids TV series, and soon the cinema
with the adaptation of franchises like Assassin's Creed or Splinter Cell. The
Raving Rabbids Futuroscope theme park attraction, open for several
months, is also a success.
Do you consider that the development of competition in the video game

industry will lead to transform the production system of game publishing and
how?
In recent years, production of video games has become considerably more
professional. Our industry is constantly evolving: our businesses, the
technologies we use, as well as the habits and customs of the consumers,
such as being permanently connected with their phones. These changes are
revolutionizing the way we design our games. We must constantly renew
and adapt to propose the most innovative and immersive creative
experiences. For example, a game like Watch Dogs allows our players via
mobile applications connected to the game console, to play anywhere and
anytime; it also allows their friends who do not have game consoles to help
them progress in the game. Our mission is to provide our players ever
stronger and enriching experiences while finding technical solutions allowing
us to reduce our costs and therefore our risk. To remain agile and ready to
face these challenges, we actively invest in R & D in France and abroad.
Which factors do you think are the most disruptive of the game economy
factors present or future: free to play, an actor like Steam, etc.?
The free-to-play model was born in Asia to circumvent the problems of
piracy of the PC game business model. This model has experienced
significant growth in recent years in Western markets. By removing entry
barriers, it allows players to experience games and be free to invite their
friends and invest if they like the content. This model has now gone beyond
Interview with Yves GUILLEMOT 125
the sphere of casual games in which it was previously embedded to move

towards more traditional experiences and platforms such as consoles.
Ubisoft has been present in this segment for some years with games like
Settlers Online, Howrse, and more recently with Trials Frontier, and The
Mighty Quest for Epic Loot.
The Montreal studio set-up seems to be a supporting model of this industry.

What elements of this support do you consider are the most strategic to
strengthen the ecosystem of this sector?
Canada, but also other territories around the world, has been able to
highlight craft, creativity and innovation as a driver of economic
development. These territories were able to discern the many benefits that
the digital creation industry and jobs with high added value could bring. In
addition to the direct incentives, education is also specialized in these areas
to form a diverse pool of talents. Two key factors in this success that are
important in the eyes of the gaming industry are the unique efforts and the
simplicity of public procedures.
Interview with
Daniel KAPLAN
Business Developer
Mojang, Stockholm, Sweden
Conducted by Peter ZACKARIASSON

University of Gothenburg, Sweden
C&S: Minecraft is, by any standard, a very successful game. How much of this
success do you ascribe to your business model?
Daniel KAPLAN:
I think it played quite a big role since it was discounted for quite a long time.
The game was discounted from day one, since it was released during very
early development. The whole idea was to release it early to see if there was
an interest and to see if the project could bear fruit. A lot of people who
bought it initially, I think, felt that they had somewhat invested into the project
and the ones who were on from the beginning made quite a good deal.
Do Minecraft exploit any specific previous business model, or has it paved its
way with a unique model to generate profit?
There are other games that were the inspiration for this model, Mount and
Blade from TaleWorlds for instance. They also released their game before it
was finished for a discounted price and continued the development with the
community.
Today Minecraft has become a phenomenon that is not only tied to the game
itself, but there are many physical product spin-offs. How important is this
brand extension for Mojang?
We are still a game company but it definitely helps. I think there is a fine line
in between how much you can do with a brand before it feels too stretched.
We try to create merch/products that we would like to have ourselves, rather
than try to fill gaps with our brand with various products. It is sure a fine line
and I think a brand can be too exposed and become too stretched.
Is it possible to become too successful? That is, having produced Minecraft

is it possible to repeat that success? What about the next game of Mojang?
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I think the problem with becoming too successful is that you will always be compared
with your success, regardless of what you produce after that. It is important to not
lose focus and continue to deliver things regardless of what they are so you dont
stagnate.
I think that it is almost impossible to create a success like Minecraft again. A lof of the
cred Mojang got was because it was an up and coming company/person during the
initial development of Minecraft, and the whole story around Notch (the founder of
Mojang) was a classic David and Goliath story, which we cant reproduce anymore.
We have a whole different starting point now in comparison from where we started.
The next game we are working on, Scrolls, is already profitable and was released in
a similar manner to Minecraft. We are super happy about the game being profitable
even though it is not close to the success of Minecraft. It is a bit silly to try to
compete/compare our projects with Minecraft to be honest.
What directions do you see the video games industry taking when it comes to
generating sustainable business models? Last year Minecraft was one of the
two pay per play games in the US top 20 mobile games. Not adopting a free to
play business model, is it a conviction or the best way to be different within a
serious competitive framework?
I dont know what will happen in the future. You see different trends all the
time and you see companies not following the trends and they are
successful. I think that the mobile business will continue growing and will
continue to have different business models for various types of games or
apps. I think it is hard to say that everything will be x or y. Considering the
widespread presence? of mobile devices, it allows for more niche products
too which will let you create products that dont follow the trends and can still
be successful.
Interview with
Alain LE DIBERDER
ARTE,
Managing director
and head of programs,
Strasbourg, France
Conducted by Laurent MICHAUD

IDATE, Montpellier, France
C&S: How do you see the video game industry today?

Alain LE DIBERDER: The industry is facing a deep shift of its main
business model. Its not a problem of overall market size. Even if the
macroeconomic environment is rather dull, even if the new mobile market
works with very low price levels, most of the firms are able to adapt
themselves to the new revenue framework. Instead the main issue is the
changes needed in the corporate organizations. Yesterday, AAA products
were king and the sales department was king of the AAA market. Today the
whole process starting from an idea and ending in an actual consumer
needs to be reshaped. Unfortunately marketing, technology and price policy
are far more flexible than human behavior.
Video games are reaching their full potential online with multiplayer or
massively multiplayer, social, viral, flash and ubiquitous components. What do
these developments inspire for you?
All these technologies are impressive and improving very quickly. But Im not
sure that they actually drive the industry to a new era. Videogamers were
social from the start, and videogames were viral far before Facebook or
Tweeter. Even in the Eighties, schools and universities were an effective
social media in which gamers and game reputations were debated, built
and destroyed. And they still are. The new phenomenon is that the social
dimension is now included in the code. And there are opportunities to make
money with it. But the videogame industry, for the moment, is not able to
catch the main part of this market, which is dominated by transversal
companies like Facebook, Twitter, Apple and so on.
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What are the effects of globalization on the creation of content, on the

creators?
The videogame industry is probably the first entertainment business being
born global. The movie industry was partly global relatively soon (say around
1910), but even today national and regional components remain important.
Its the same for music industry. The reason why the videogame industry is
different is quite simple: during the first ten years of its history, there was
barely no text inside the games. Remember Pong, Pacman, Space Invaders,
or even the first Mario. Without any words the only text to be translated was
the cartridge sleeve or the instruction sheet on the arcade cabinet. The need
for text and localization only came with PC games in the eighties, but it was
too late for local cultures: the industry DNA was definitively global. Even the
word localization tells the truth. The industry cant be more global than it
was at its birth, and the only thing that could happen in the future is less
globalization, not more. But it probably wont.
Hardware vs. software: are home consoles set to disappear in favor of

streamed games? More generally, won't hardware be reduced to a "stupid
screen?
I dont believe that the console industry holds a strong future. Consoles are
expensive, non-durable and challenged pieces of hardware. Competition
from set-top boxes and mobile devices is stronger and stronger. But
hardware wont be reduced to a stupid screen. There is a bright future for
hardware if you compare the specifications (and price) of a present
smartphone to those of a home computer or a home console from ten years
ago. Hardware is more and more smart, not stupid. In fact the new hardware
standards and the telecommunication networks live together in an
ecosystem in which smart networks need smart home equipments, not
dumb.
Oculus Rift, Google Glass, holographic technology ... what do you think the
next disruptive gaming experience will be?
I cant see such a thing as a disruptive technology in the videogame history.
Technology is an additive process in the videogame industry not a
subtractive one. For instance when the home console began, in 1974, the
arcade market didnt disappear. The computer games started slowly at the
end of the seventies and added their sales to the console market. When the
PC market was mature, in the beginning of the nineties, the console market
exploded too in the 16 bits era. Online games began to be popular before
the web. I remember having wasted many hours playing Microprose Grand
Prix on line in 1992 with a 14.4kbs modem. Today the online market is
strong, but more than 20 years after, between 60 and 80% of the overall
market, depending on what you consider as a videogame sale is still
offline. We could also think of 3D games, Virtual reality helmets, streamed
games and so on. But the truth is that during 40 years many technologies
Interview with Alain LE DIBERDER 131
have been introduced, many have failed (especially with 3D, beware
Oculus!) and many have contributed to the Harlequin suit in which the
videogame industry is dressed.
What are the issues in which the French industry still needs to progress?
There are French developers, French magazines, excellent French
videogame schools, some French companies, but the French industry
doesnt exist. Of course there is Ubi Soft. But Ubi began to develop games in
Asia or Morocco 25 years ago, and regarding the workforce, is more a
Canadian company than a French one. Vivendi invested in big US
companies but they remained American companies reporting to French
shareholders. And Vivendi sold the main part of the shares to Activision.
Infogrames bought many British and American companies and the glorious
brand of Atari, but it failed. From the beginning, the golden era of Ere
Informatique or Loriciels, the French (little) companies have always sold
more than 80% of their products in the world market. Almost all the titles,
such as Another World or Alone in the Dark were in English, even in the
French market. Many French guys have succeeded in the videogames
industry, but as its a global industry, they were and still are involved in a
non-national world. A national videogame industry is a nonsense, except
maybe in Asia.
What remains for us to (re) invent in terms of gaming experience?

Maybe the next frontier could be the physical experience. The Wiimote and
the Ki-nect were a first step, and now the connected object is blooming. It
will probably take time, but I feel that the gamification of personal care is a
strong trend.
Features
Regulation and Competition
Firms and Markets

Technical Innovations
Public Policies
Use Logics
Book Review
Nomad Gaming
A New Era for Video Games? (*)
Laurent MICHAUD
T he mobile games market segment (made up of games on mobile

phones, smartphones, tablets and phablettes) is particularly dynamic
since its inception in the early 2000s. It records steady growth and has
shown acceleration from 2007 and 2010, corresponding to the marketing of
Apple's disruptive devices (iPhone smartphones and iPad tablets) backed by
their App Store.
Figure 1 - Evolution of global sales in the mobile games segment, 2000-2012

(Billion EUR)
Source: IDATE, September 2013
The economics of games on mobile platforms are remarkably effective:

The catalogues have no comparison in terms of number of titles:
150,000 games on Apple Store, more than 110,000 on Google Play in mid-
(*) This paper is a summary of a market report published by IDATE in the framework of the
Video Game Market Watch service of its DigiWorld catalogue. For more information, see:
www.idate-research.com
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2013 against more than 13,000 on Facebook and more than 1,800 on
Steam.
The games available on Google Play only represent 14% of
applications in volume, but 40% of downloads and 80% of revenue.
On average and on the basis of the 20 most profitable games on
Apple Store, the revenue generated over the lifespan of a game are nearly 4
USD per player.
Some titles recorded impressive results: Puzzle & Dragons from
GungHo, is the source of 2.5 million USD per day, Clash of Clans
(SuperCell) takes in 2.4 million USD per day, including nearly 530,000 USD
in the United States.
IDATE estimates that by 2016 the mobile games market segment
should continue to grow and reach a turnover of just over 9 billion EUR.
Figure 2 - Global market for mobile video gaming (Billion EUR)
Source: IDATE, September 2013
These elements refer to a number of questions, in particular on:

- the industrial fabric of the players that make up this market segment
and their financial results, possibly compared to the results of the
established players in video gaming;
- the war of terminals, operating systems and applications stores;
- the level of monetisation of applications stores, applications and
games, and their profitability;
- profiles and usage of players;
- the economic and pricing models put into operation and the ARPUs
generated by games;
- the publication strategies put into operation in the creation of
catalogues and the costs of development;
- new industry trends.
Features 137
This report provides answers and focuses on the impacts of the mobile
gaming market segment on the video game industry. These impacts are as
much challenges as industry trends:
Mobile gaming focuses harsh competition, which now sees the
confrontation of players in mobile, social, casual and AAA gaming and the
aggregation of content and the Web.
The sector's established players must take inspiration from the
technological innovations, services and gameplay supported by players in
the mobile gaming segment freed from the physical market.
Innovation, responsiveness and growth of the mobile gaming segment
highlights a dynamic of discontinuous innovation of the established video
game segments.
Apple obviously holds a special place in the proliferation observed in
the mobile gaming market segment and in the end its influence goes well
beyond the mobile gaming segment.
Mobile gaming exerts competition with console gaming in terms of
time allocation and originality of the experience.
An era of volatility and massivity has emerged with titles such as
Rovio and Clash of Clans. It augurs for a change in dimension the economic
impacts of which are still hard to measure.
A mastery of all trades, from development to marketing passing via
economics and business strategy is now a requirement for studios.
But the development of a good game remains the first rule to apply.
Mobile gaming well supports the ubiquity of games and will provide
them their recognition.
From new worlds, new ways to dream and have fun are created in the
mobile games segment thereby enriching digital culture and entertainment
media.
Social Gaming
Markets and Trends, 2012-2016 (*)
Laurent MICHAUD
I
n 2012 the social gaming market accounted for 36% of the online gaming
market and 13% of the overall video game market. In 2016 its share is
expected to rise to 46% of the online gaming market and 18% of the
overall video game market. This video game market segment is entering the
maturity phase. Its estimated worth in 2012 was EUR 5.4 billion, which is
expected to reach EUR 10.7 billion in 2016. Facebook is by a long shot the
leading social gaming platform, with 235 million active gamers in August
2012.
Key industry trends for the period 2012-2016
While casual games and virtual world games still constitute the majority,
a new generation of social games aimed at different types of gamers (mid-
core or core) is emerging. The arrival of new graphics tools and the
enhancement of game platform performance make it possible to develop
social games offering a much richer experience than before.
Virality is key to a social game's success. But its excessive use by

publishers has prompted social networks to bring these tactics under control.
As a result, publishers are seeing an increase in the cost of recruiting users.
For brands, social games are a means of conquering and building loyalty
among consumers. Brands are in fact becoming aware of the opportunity to
be able to communicate more subtly with a large captive audience, including
by integrating directly with gameplay.
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Facebook introduced its paid subscription system in 2012. This new

business model is a way to better monetise social gaming as well as attract
free-to-play MMORPG publishers.
By opening its development platform up to mobile games, Facebook is

creating a true distribution channel for social applications on mobile devices,
extending the gamer's experience to on-the-go situations. This platform
marks the beginning of a convergence between social gaming and mobile
gaming. Nevertheless, Facebook continues to face challenges in monetising
social gaming on mobile devices.
The major social game publishers are now seeking to emancipate

themselves from the tutelage of Facebook, including by creating their own
social games portals. But these dedicated portals seem hardly viable without
preserving some sort of bond with social networks.
Traditional stakeholders in the video game industry have been slow to

enter the social games fray. Indeed, although they have shown a willingness
to adapt to consumers' new usage patterns, most are not on Facebook.
Those who are see it as a means of attracting new users to their console
games.
World social gaming market, by geographical region (million EUR)
Source: IDATE, December 2012

General Overview of Home Console Market (*)
Laurent MICHAUD
Industrial context of home console segment:

digitisation and new services
The launch of a new generation of consoles (next-gen) is an opportunity

to cover this leading segment of the video game market in terms of value
(hardware excluding accessories and software). By the end of 2014, it
should account for 36.1% of global revenue, or 23.5 billion EUR. By 2016,
this share will increase to 42.6% of 82.2 billion EUR of total revenue, or 35
billion EUR.
Figure 1 - Video game market worldwide by segment, 2013-2017 (Billion EUR)
Source: IDATE, December 2013
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Many are claiming that this will be the last generation for consoles, as
cloud computing and network technologies have shown that they could
make console hardware obsolete. However, this is not going to happen in
the next seven to eight years, which is the typical life cycle of a home
console. Gamers are being treated to an increasingly spectacular and
entertaining experience, and HD is certainly contributing to the quality of this
experience.
The shift from HD to Ultra HD between now and 2016 will require four
times as much bandwidth and networks will not be able to handle this extra
capacity unless users' connections are upgraded. However, the HEVC (High
Efficiency Video Coding) standard will allow a gain of compression of about
50%. Finally the weight of the image will be divided by two.
As technological advances in image quality are moving faster than ultra-

fast broadband deployment to homes, optical media and drives will still be
needed, at least for some video game offerings. This, despites advances in
video compression ratio.
However, console manufacturers and their publishing partners have

already made the transition to dematerialization. This can be seen with the
ability of next-gen consoles to use the cloud for content and data storage
services, content streaming, multiplayer and social features, and even
remote gaming.
In this context, console manufacturers will exploit second screens. These

could be a tablet, smartphone or dedicated platform, and could offer
synchronous or asynchronous, and complementary or substitutable use in
terms of game experience. In other words, players could use a tablet or
smartphone as a second screen for remote access to all or part of a game
being played on the TV. Second screens may be used to acquire additional
content, access their account remotely or locally, access an app store, share
content, start a download, or something else entirely.
Several 'social' features have also been added because social networks
have proved to be important for the gaming experience and for revenues, as
well as for loyalty. Console manufacturers have therefore integrated the
ability to share game images and videos on social networks, such as
Facebook and YouTube. Sony has gone one step further than its competitor
in this area by providing a 'Share' button on its DualShock 4 controller, which
speeds up the process. Cross-game voice chat, which is very popular with
PC gamers, is also offered.
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Players can use the cloud to start playing while the game is still
downloading. Console manufacturers will eventually be offering their own
cloud gaming offerings.
As well as these new features, console manufacturers have retained and

improved their gesture recognition devices and added or improved voice
recognition. Sony is a step behind Microsoft on this one, as the latter
includes Kinect as standard with the Xbox One, whereas Sony's device is an
optional add-on.
Key points of home consoles online services
The online services available to players generally require a paid

subscription. While Sony and Nintendo offer some particularly attractive free
services, Microsoft has made its online services paid only.
Table 1 - The main services offered by next-gen platforms

Xbox One PS4 Wii U
Paid access to Free Paid access to Free Paid access to Free
service via Xbox access to service via access to service via Wii U access to
Live Gold service PlayStation Plus service Premium Set service
subscription subscription purchase
Downloadable
content X X X
Online Multiplayer X X X
Ability of recording
and sharing X X UNAVAILABLE
gameplay
Cross-Game Chat X X UNAVAILABLE
Live Streaming X X UNAVAILABLE
Two games for free
each month X X UNAVAILABLE
Exclusive Game
Content UNAVAILABLE X UNAVAILABLE
Discounts or loyalty
programs X X X
Cloud Storage X X
UNAVAILABLE
(unlimited) (3GB)
Access to Netflix * X X X
Access to Hulu * X X X
Web Browser X X X
* This app requires its own subscription fees

Source: IDATE, January 2014
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Bases of the competition
Competition between the three console manufacturers plays out in

various areas, although Nintendo, which launched the Wii U at the end of
2012, can barely compete with its competitors with regard to social, cloud
services and other 'entertainment' offerings beyond video games.
The catalogue of games available on each console, including exclusive

games, is an important issue for hardcore gamers, who set the tone and
trends in gaming. At launch, Microsoft was ahead of its competition in terms
of volume of games available on physical media or downloadable. But,
according to NeoSeeker , the trend was reversed in the weeks following
launch.
Technical specifications can also distinguish one console from another.

Although the Wii U is clearly behind its competitors in terms of graphics and
processing power, its game library does not necessarily require high
performance hardware. On the other hand, Sony and Microsoft are battling it
out over the respective power of their machines, which is an important issue
for early adopters. In the past, the various consoles performed quite
differently due to the different technologies implemented, but it is becoming
increasingly harder to name a winner with the latest generation. With the
latest consoles, the main difference concerns the speed of its RAM memory
and how it affects various applications
Since the previous generation of consoles, launched in the mid-2000s,

there have been many new technological innovations and these have been
quickly and widely pushed out to consumers by integrating them into mobile
devices (mainly smartphones and tablets) and also into home consoles and
accessories. This success has made electronic components and screens
more affordable to other device manufacturers. We have therefore seen
many initiatives appear in the home console market segment, especially with
regard to home mini-consoles. There are now a dozen challengers, including
Valve/Steam, nVidia, Ouya, GameStick, eSfere, Razer Edge, Bluestacks
and its Gamepop console, Green Throttle, and Mad Catz and its micro-
console M.O.J.O. Few of these will see much success but the Steam
console would be IDATE's favourite to take some market share.
While these new challengers are mainly focusing on video games, the
three leading console manufacturers are continuing to position their devices
as entertainment centres over and above gaming. Microsoft and Sony are
more advanced in this area, which is no surprise given their respective
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origins and traditional activities in other areas of household entertainment.

While not just a pretext, video games are the best way to penetrate homes
and subsequently encourage family members to discover other features that
the consoles offer.
Beyond the game
With regard to agreements with audiovisual content providers, Microsoft

has played the game better so far in the United States and has emerged as
a formidable competitor to Samsung and Roku.
These agreements should continue on for the next-generation consoles

and expanded to accommodate new players.
Table 2 - The major audiovisual partnership agreements in the United States by device
TV Content Microsoft Sony Roku Samsung

TV services
ABC, Watch ABC
CBS
CW, TV Now Xbox 360
FOX Now Xbox 360 TV Set / Blu-ray
NBC
HBO / HBO GO Xbox 360 Streaming Box TV Set / Blu-ray
Online Video
Amazon Instant video Streaming Box
BlockBuster / Dish Xbox 360 PS3 / TV Set / Blu-ray Streaming Box TV Set / Blu-ray
Crackle / Sony Xbox 360 Streaming Box TV Set / Blu-ray
Crunchyroll Xbox 360 TV Set / Blu-ray Streaming Box TV Set / Blu-ray
Dailymotion Xbox 360 Streaming Box TV Set / Blu-ray
Hulu / Hulu Plus TV Set Streaming Box TV Set / Blu-ray
Source: IDATE in "Connected TV Distribution Watch", 2013
Innovations in services and uses
After having initially relied on raw graphics and processing power, the
success of home consoles was later based around consumer electronics
and computing innovations. The previous console generations adopted this
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146 No. 94, 2 Q. 2014
prerequisite and manufacturers innovated by integrating a DVD drive and

later a Blu-ray or HD DVD drive, an accelerometer and inclinometer, gesture
recognition, and Nintendo even incorporated a hard drive in the middle of the
1990s.
For this new generation of consoles, the real innovation is in the software
rather than the technical specifications. They are now pushing services for
the whole family, from VOD and games, to browsing the web. They are also
focusing on the user experience and integrating consumption patterns into
their 'social' features.
Following the console manufacturers' first announcements, financial

analysts - aware of how important it is to innovate, but not realising that
innovation could involve anything other than technology - received the latest
generation of consoles rather poorly. They obviously neglected to recognise
that innovations in services and uses are now the growth drivers for Sony,
Microsoft and Nintendo. It is this strategic direction that has also encouraged
the new market challengers of Valve/Steam, nVidia, Ouya, GameStick,
eSfere, Razer Edge, Bluestacks and its Gamepop console, Green Throttle,
and Mad Catz with its M.O.J.O. micro-console.
Consoles are 'social'. Console manufacturers learned what their gaming

community wanted by looking at the success of social networks and games
publishers such as Zynga, King, 6Waves, Pretty Simple and EA. Their
consoles are now equipped with sharing, trading and linking features,
allowing consoles to take advantage of virality. This can generate huge and
spontaneous sales, as seen with the app stores of Apple, Android and
Facebook.
Consoles will promote second screens and ubiquity of games. Second

screen initiatives already exist in the audiovisual field after having been
implemented by TV channels and ISPs. The video games sector could
certainly give rise to a second generation of second-screen applications by
linking TVs with tablets, smartphones or a personal computer. Second
screens go hand in hand with the growth of content ubiquity. The gaming
community has demanded it and should finally receive it as part of a
structured strategy with this latest generation of consoles.
The next-gen consoles have shifted to dematerialization as

manufacturers have pursued a clear strategy of using the cloud for
processing and data storage. For the time being, the services are mainly of
secondary interest to gamers: remote control, game downloads (not AAA),
Features 147
ranking services, challenges, VOD, etc. There are still many questions
surrounding the console manufacturers' willingness and their hardware's
ability to abandon physical media within the next six to seven years. These
manufacturers have undoubtedly given the issue serious thought already.
Decisions should be made by at least the end of this console generation's
life cycle in light of new HD formats. An Ultra High Definition image will be
four times larger than an HD image and will need significant advances in
compression for it to be carried across networks without restriction.
Book Review
Godefroy DANG NGUYEN & Sylvain DEJEAN

Le numrique conomie du partage et des transactions
Economica, Collection Medias
by Yves GASSOT
Here is a book with a sober and minimalist title: Le Numrique (Digital) (*). It
is only the subtitle (The economics of sharing and transaction) that begins to
give something away. And it would be a mistake to ignore it.
This work by Godefroy DANG NGUYEN and Sylvain DEJEAN is not a

dissertation. It could be called scholarly but in the best possible way. It
delivers a vast exploration of the multiple facets of the socio-economic
issues of the digital age, in a well organised and accessible format, and with
a very valuable set of references.
There are several ways to tackle a book like this. One could read it from
cover to cover. Or one could move through it at random, putting ones faith in
serendipity, a word brought back into the vernacular by several authors cited
in the book, though still faithful to its meaning as coined by Horace Walpole
of "always making discoveries, by accidents and sagacity, of things which
they were not in quest of".
Some of the more serendipitous highlights to emerge from the seven

chapters for us were:
- In chapter 1, devoted to the fundamental economics of information and

communication technologies, the interesting synthesis that is made of the
"paradoxical institutional arrangement" so familiar to we in the West with, on
the one hand, "closed innovation" that defends and protects intellectual
property (patents, copyright) and "open innovation" on the other. The latter
now developing through new forms of cooperation, within a "sharing
economy" built around shared assets and monetising the multitude through
open data.
- Chapter 2 explores network economics and sciences. It takes a look at the

direct and indirect effect of networking, which segues into an introduction to
multi-sided markets and platform strategies that are examined in more detail
(*) Published by Economica, "with the support of the Brittany regional council".
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150 No. 94, 2 Q. 2014
in later chapters. An approach to graph theory also provides insights into

what is hidden behind the small-world networks phenomenon.
- Chapter 3 is equally rich, and provides details on the technical side of

digital. It examines the significance of the dual crisis in the
telecommunications sector: the crisis in Europe (resulting from the methods
used to introduce competition, the dotcom bubble in 2000-2002, the sums
paid for UMTS licences and the ensuing debt that has weighed on telcos
ever since) along with a more existential crisis tied to the need to redefine
business models in the era of IP everywhere. Light is shed on the
particularly complex topic of interconnection between the top content
providers (YouTube, Netflix, etc.) and ISPs.
- The very anthropological chapter 4 takes a more detailed look at the

outcome of the sharing economy through both theoretical explorations (e.g.
on "strong reciprocity") and more illustrative sections, such as those devoted
to Wikipedia.
- Chapter 5, which looks at how markets and competition are organised,

begins by offering some perspective on e-commerce, the different
components of the value chain, the various facets of the selling techniques
developed over the past few decades, winding back to the central role
played by platforms.
- Chapter 6 examines the different dimensions of Internet and digital

governance. It ends with a series of questions, not only on the status of the
bodies in charge of the Web, but also on the multifarious interplay between
competition law, the consumer, privacy, intellectual property,
- The final chapter (7) delves into works that marry the digital and physical
universes, offering a theoretical refresher on the role that ICT play in urban
development, with an interesting foray into Silicon Valley, innovation clusters
in general, and the role that public authorities have in mobilising digital
technologies to increase regional appeal.
The authors conclude by gathering the common threads that run through the
work, the dialectic at the heart of the digital economy between sharing and
transaction, with the fundamental "arrangements" of "conflict," "cooperation,"
and "mutual predation".
We only hope the book will quickly find its way into English, so that it might
receive the wide exposure it deserves.
Author biographies
The Editors
Philippe CHANTEPIE is Project Officer at the General Inspection of the French

Ministry of Culture & Media and Associate researcher at the Chair of Innovation and
regulation of digital services of Ecole Polytechnique/Telecom Paris-Tech/Orange. He
his lecturer at the University of Toulouse. At the Ministry, he was successively
Special advisor to the regulation, cultural industry and IP in the digital economy of
contents, Head of Department of studies and Foresight, Head of Strategy. In parallel,
he was Associate-Professor at the University of Pantheon-Assas, University of Saint-
Denis, Sciences Po Paris, and lecturer at the University of Panthon-Sorbonne.
Before, he worked at the Council of Strategy for the Prime Minister as Project Officer
ICT, after a few years as a consultant in financial and cultural fields. He published
The new economic policy, France facing globalization (1998) and with Alain LE
DIBERDER, The digital revolution of cultural industry (2010).
Laurent MICHAUD is responsible for studies on consumer electronics, digital

home, video games, music and related phenomena: changing uses, new uses and
devices, technology innovation, piracy, content protection and rights management.
Laurent has developed expertise in the field of economic development and
investment project engineering. He is also actually involved in studies conducted by
IDATE for local authorities and their expression to define development strategies
around ICT (Information and Communication Technologies) and CCI (Cultural and
Creative Industries). He carries out techno-economic appraisals for innovation
agencies and incubators on the issues of video gaming and multimedia content
development. He participates in sector-based, market and strategic studies in the
areas of ICT, television, Internet and video. He was the originator of Game Summit,
which takes place during the Digiworld Summit in November each year
(www.gamesummit.pro). Laurent holds a Master's degree in Economic and Financial
Engineering.
l.michaud@idate.org
Laurent SIMON, Ph.D., is Associate Professor, Department of Management,

HEC Montral (http://www.hec.ca/). He conducts research in the area of
management of creativity in an innovation society. His current research focuses on
characterizing the management of techno-creative projects and the study of creative
environments and practices, the management of creative projects, creative
communities, creative territories, and the determinants of creativity in innovation
management. Part of his work analyzes the design and execution of creative projects
and innovative business models, with a specific focus on the video-game industry.
He co-chairs Mosaic (http://mosaic.hec.ca/), a research group dedicated to the study
of the management of creation in an innovation society, a partnership with business
organizations: Bell, Ubisoft, Desjardins, IREQ Hydro-Qubec, Aeroplan and more.
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He is also the scientific co-director of the Summer School on the Management of

Creativity, Montreal-Barcelona (http://ecole-ete.hec.ca/)
Peter ZACKARIASSON, Ph.D., is an associate professor in marketing at

University of Gothenburg, School of Business, Economics and Law. For over ten
years Dr. Zackariasson has studied the cultural industries, how these markets are
constructed and marketed. The video game industry has been a dominant aspect of
this research, as a young and fast growing industry. Together with Timothy
L. WILSON he published in 2012 one of the first edited books on this industry,
providing a base for future research. In 2015 he will publish an edited book on
Gamification, as well as a book on how marketing can drive game development.
The interviewees
Yves GUILLEMOT founded Ubisoft in 1986 with his four brothers, and was
named CEO of the company in 1988. Starting off by importing and translating video
games from England, Yves and his brothers immediately used the distribution
business to fund the creation of games, starting with Zombie in 1990 for Atari ST.
Yves has overseen the phenomenal growth of Ubisoft into an internationally
renowned and respected creator of quality video games with 29 studios, distribution
in 55 countries and with more than 9,200 employees around the globe. For the 2013-
2014 fiscal year it generated sales of 1.007 billion euros.
Born in Brittany of France's west coast, Yves grew up in a family of entrepreneurs.
All five Guillemot brothers worked summers in the family agriculture supply business.
Later, Yves attended business school in Paris, formalizing his education in the
creation and sustenance of an enterprise. Yves is married and enjoys playing video
games with his three children.
Daniel KAPLAN is Mojang's business developer since October 2010.

He was born and raised in Skvde, Sweden. He founded ludiosity.com
Alain LE DIBERDER holds a Ph.D. in Economics. After advising French Minister

of Culture Jack Lang (1989-1991), he moved to France Tlvision under CEO Herv
Bourges (1991-1994) and then on to Canal + as Head of New Programmes (1994-
2000), while he contributed to establishing several landmark cultural portals. He
created Allocin TV, a channel devoted entirely to cinema, in 2010, and joined Arte
as Head of Programmes on 1 January 2013. He has published several books and
papers on digital technology and the media.
The contributors
Marie CARPENTER is an Associate Professor of Strategy at Telecom Ecole de

Management (Institut Mines Telecom). She has a Ph.D. from Dublin City University
Author biographies 153
and an HDR from EHESS. Her research focus is on innovation and on the
organizational and institutional contexts that favor value creation in high-tech firms.
Her book on the great leap forward in France's telecommunications sector in the
1970s was published in 2011. Her work has also been published in the Harvard
Business Review, Industrial and Corporate Change, Grer et Comprendre and
Entreprises et Histoires.
Nabyla DAIDJ is an Associate Professor of Strategy at Telecom Ecole de

Management (Institut Mines Telecom). Her teaching and research interests are
corporate strategy, inter-organizational relationships (strategic alliances, business
ecosystems and coopetitive practices) and corporate governance. She has published
in international journals and conference proceedings and, in 2008, she published a
book about cooperation, game theory and strategic management. Her current
research investigates sources of value creation in international firms operating in the
media and video games sectors within the context of ICT convergence.
Myriam DAVIDOVICI-NORA is associate professor in economics at Telecom-

ParisTech school of engineering. She is carrying out applied research on the video
game industry on various subjects such as closed and open innovation models, on
business model innovations and on industrial organization and competition) mixing
industrial economics and innovation management approaches.
Myriam.Davidovici-Nora@telecom-paristech.fr
Giuditta DE PRATO joined the Institute for Prospective Technologies as a post-

doctoral researcher in January 2009 to contribute to projects on the economic
aspects of the Information Society and on the impacts of Information Society
Technologies, mainly focusing on ICT R&D, the software sector, patents and
innovation. She has a Ph.D. in Economics and Institutions from the University of
Bologna (Italy). Before joining IPTS, she was a software developer and IT consultant
from 1992 to 2005. From 2005 to 2009, she was a contract research assistant,
focussing on research activities on local development, evaluation, ICT and open
source at the University of Bologna, where she also lectured on macroeconomics
and environmental economics. She co-edited together with E. SANZ and J.-P.
SIMON, Digital Media Worlds; The new media economy, Oxford, Palgrave, 2014.
giuditta.de-prato@ec.europa.eu
Claudio FEIJO holds an MSc and Ph.D. in Telecommunication Engineering

and an MSc in Quantitative Economics. Currently he is professor at the Technical
University of Madrid (UPM) and Deputy Director at the Research Centre for Applied
ICTs (CeDInt) where he researches on the future socio-economic impact of emerging
information society technologies, in particular, from an ultra-broadband, mobile and
content perspective. He has been involved in numerous research, development and
consulting projects, both public and private, in Europe, Latin America, and North of
Africa. He lectures regularly in international seminars and postgraduate courses and
has authored more than 200 publications in books, journals and conferences. He is
guest lecturer at IE Business School on digital business and disruptive ICT and
member of the board of the International Telecommunications Society.
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For more than fifteen years, Yves GASSOT has been at the head of IDATE-
Digiworld Institute (www.idate.org), an institute that has established itself as one of
the leading research centres in Europe concerned with the telecommunications,
Internet and media industries. In this position, he has taken part in numerous studies
of the various markets and the strategies being pursued in the telecommunications
sector. He is on the panel of several expert committees, including the Conseil
Gnral des Technologies de l'Information, ITS and the advisory Committees of the
PTC and Iris Capital. He was special adviser of the European Commissioner of the
Information Society during the last regulatory framework review. He serves as
Executive Director of the journal COMMUNICATIONS & STRATEGIES and is scientific head
of the annual DigiWorld Yearbook and DigiWorld Summit. With a background as
rd
DPLG architect, he is a graduate of the Institute of Political Studies, Paris (3 Cycle).
Denis LESCOP is associate Professor in economics at TELECOM Business

School (Institut Mines-TELECOM). After obtaining his Ph.D. in economics, Denis
joined in 2001 the French Regulatory Authority for Telecommunications, where he
managed the telecom markets observatory and the economic studies. In 2004, he
became case-officer for the French Competition Council. He was in charge of cases
related to telecom and media sectors. In late 2006, he joined TELECOM Business
School. In 2007, he participated in the creation of the laboratory CEMANTIC (Centre
of Research in Management and ICT) and managed the Innovation research team.
From 2010 to 2013, he was Director of Research of TELECOM Business School. His
research focusses on economics of ICT regulation, new forms of competition (open
innovation, platforms, business ecosystem) and their impact on both market
structures and regulatory processes. He is author and co-author of numerous articles
published in scientific journals and books in economics, regulation and strategy.
Elena LESCOP is a Ph.D. student at TELECOM Business School (Institut Mines-

TELECOM). She works on the impacts of firms on market architecture and studies
the economics of platform-based ecosystems. Her current research focusses on the
concept of firm/market equivalency and on business models in the mobile gaming
sector.
Christina MORENO received her Masters degree in Networks and Information

Systems from Telecom Bretagne in 2002 and a Ph.D. in Marketing from the
Universit d'Evry et Val d'Essonne. She started her career at ITAM's distance
education laboratory (Mexico City) as a research assistant and subsequently as
general manager and telephone solutions expert in a network solution company.
Christina Moreno joined the GRIN (Graphics and Interactive media) team at Telecom
Sud Paris in October 2010. Christina Moreno's research interests include interactive
enriched multimedia content and augmented reality applications (MPEG
standardisation), innovation adoption processes and economic modeling for
technology.
Thierry RAYNA is a Professor of Economics at Novancia Business School in

Paris. Beforehand, he spent 10 years in the UK, where he held positions at Imperial
College London, the London School of Economics, UCL and the University of
Cambridge. His research investigates the consequences of technological change and
Author biographies 155
digitalisation on business models, innovation ecosystems and the economy as a

whole. Prof. Rayna has served as an advisor for organisations (EU, U.S. FTC, EPO,
WEF) and major companies in the media, telecommunications and cultural
industries. He also mentors start-ups.
trayna@esg.fr
Jean-Paul SIMON is Founder of JPS Public Policy Consulting, a consulting firm

specialised in media/ telecom law regulation and strategy. He held various position in
the telecom industry, worked as a senior scientist at the Institute for Prospective
Technological Studies (IPTS), European Commission, Directorate-General JRC. He
holds a Ph.D. in Philosophy (1975) and is a graduate (MBA) from the Ecole des
Hautes Etudes Commerciales (HEC) (MBA, econometrics, 1971). He has written
several books and articles on communications and public policy. He is a frequent
speaker on telecommunications and media in Asia, Europe and the USA. He co-
edited together with G. DE PRATO and E.SANZ, Digital Media Worlds; The new
media economy, Oxford, Palgrave, 2014.
Dr Ludmila STRIUKOVA is a Senior Lecturer at the Department of Management

Science and Innovation at University College London. Her previous experience
includes working as a market analyst for a statistical agency and as a researcher at
King's College, University of London. She has published extensively in the area of
innovation and technology management and her research work has been used in
numerous EU and governmental reports. She also has used her telecommunications
engineering background to mentor and advise technology based start-ups and
multinationals.
Service Section
Events
Publications
Information for authors

Launch of NEMOG project
New Economic Models and Opportunities
for digital Games
General information
The digital games market is an enormous and fast-growing industry with
extraordinary impact, particularly on young people and increasingly on other
segments of the population. How can we harness widespread enthusiasm
for digital games to contribute to advances in society and science in addition
to economic impacts? An Engineering & Physical Sciences Research
Council (EPSRC) funded project, called NEMOG, (New Economic Models
th
and Opportunities for digital Games) was launched on 11 February 2014 at
the University of York to answer this question.
The project targets a closer synergy between academia and business to

investigate the video games industry under the perspectives of game sector
analysis, business models innovation, data mining & game analytics
potential applications, and games impact on society and science. Value
generation for science and society are the leading factors of the fast-growing
digital games industry. Far beyond the old-fashioned dichotomy profit and
fun, digital games have started unfolding their potential to contribute to
significant advances in science and society.
NEMOG is set up to grasp this potential. The project studies the current
state of the digital games industry in order to identify the emerging market
strategies and suggest policy changes at UK and EU level. By doing this, the
project digs into currently adopted business models for recreational games
and for serious games (i.e. those games aiming at scientific and societal
benefits). The analysis of business models and of business models
innovation is rooted into the close collaboration with project industrial
partners and allows us to create in-depth case studies. Furthermore,
NEMOG addresses the availability, storage, privacy and security issues
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160 No. 94, 1 Q. 2014
around clickstream data from online gameplay and purchases. Crucial to this
purpose is the interdisciplinarity of research conducted by the project units
and in close collaboration with members of the mainstream (recreation-
oriented) digital games industry, scientists, healthcare workers and
representatives of the nascent scientific- and social-goal-oriented digital
games industry.
Overall, NEMOG wishes to shift public, research community and

government perception of games from one based on profit and fun, to one
able to capture the potential of digital games for science, society and
business. Potential benefits can be cultural (e.g. to raise awareness in
important areas such as environmental change), scientific (e.g. to conduct
experiments which use artificial economies to test economic theory), social
(e.g. to educate) and therapeutic (e.g. to understand how we can use games
to increase mobility in stroke patients).
The NEMOG team invites interested scholars and practitioners to get in

touch to explore opportunities to collaborate and set up new international
research projects. Further information on events, partners and staff can be
found on www.nemog.org.
Research team:
Cass Business School, City University London
Professor Feng Li, Feng.Li.1@city.ac.uk
Dr Alberto Nucciarelli, Alberto.Nucciarelli.1@city.ac.uk
Department of Computer Science, University of York

Professor Peter Cowling, Peter.Cowling@york.ac.uk
Dr Daniel Kudenko, Daniel.Kudenko@york.ac.uk
Dr Sam Devlin, Sam.Devlin@york.ac.uk
Durham University Business School, Durham University:

Professor Kiran Fernandes, K.J.Fernandes@durham.ac.uk
Newcastle Business School at Northumbria University

Dr Ignazio Cabras, Ignazio.Cabras@northumbria.ac.uk
Dr Nick Goumagias, Nikolaos.Goumagias@northumbria.ac.uk
1st Africa Regional ITS Conference
May 26-28, 2015, 2014 Accra, Ghana
CALL FOR PAPERS
Africa has witnessed an impressive development of mobile communications during the past
decade. Some African countries have a mobile penetration of more than 100% - illustrating the
widespread take-up, as well as the fact that many subscribers have dual or triple subscriptions.
Even in countries with a high take-up rate, however, there are large segments of the population
and regions where coverage and take-up is low. The Conference will focus on mobile
developments in Africa including mobile Internet.
Another trend which has already attracted much attention is the development of mobile
applications - especially mobile money. This development casts a light on many different social
areas where mobile communications could contribute to better service provision, e.g., learning,
health, governance, etc. The Conference will pay special attention to such developments and
their potential. The Conference will also focus on the use of private applications via social
networks and of user-generated content in general. In the policy area, the focus will be on the
broader information society and on digital governance policies, as well as more specific
regulatory developments whether in telecommunications or broadcasting. The Conference also
welcomes papers on convergence between IT, telecommunications, and the media in African
countries. This means that papers from the telecommunications field as well as from Information
Systems and media researchers will be equally welcome.
Main Tracks
(1) ICT infrastructures and services - technologies and markets
Fixed and mobile developments
Country cases of coverage and take-up
Mobile broadband
Internet developments
Mobile operators
Continental fiber rings
Digital divides
Cyber security
Cloud computing
Broadcast developments
(2) Social and private applications
CT4D and M4D
E- and m-commerce
E- and m-learning
E- and m-health
E- and m-governance
Intelligent Traffic Systems
Agricultural applications
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162 No. 94, 1 Q. 2014
Mobile money and banking

Mobile for disaster management
Social media / social networks
Communication patterns and trends
Age and gender issues
Information Systems approaches to government and business applications
New media
(3) Policy and regulation
Telecommunications regulation
Universal access and service
Competition regulation
Spectrum regulation
Broadcast and media policies and regulation
Regulatory institutions and agencies
Internet regulation
Information society policies
ICT4D governance
Broadband policies
Protection of privacy and identity management
Cyber security policies
Copyright and patent issues
Additional relevant topics are also welcome.
Please note the following important deadlines:

15 January 2015: Deadline for abstracts for papers
15 February 2015: Notification of acceptance
15 April 2015: Deadline for final papers
Awards will be presented for the best overall paper and the best student paper.
For full details on the Call for Papers, please visit the Conference web site at:
http://www.africa-its.org/
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Service Section 165
Spotlight on Plenary sessions

New habits, new services
My Mobile life: current service adoption and new mobile habits in
advanced and emerging economies.
What can we expect from upcoming innovations in mobility? Smart
glasses, the quantified self, location-based apps, in-flight connectivity,
connected cars
Technical innovations
How far can LTE/LTE Advanced go in delivering high-speed Internet
access?
How will Wi-Fi, small cells and the SDN model influence the mobility
landscape?
Will there be a spectrum shortage?
Business models
How will vertical markets redefine their business around M2M and the
lnternet of Things?
Will 4G reinvent telcos business models?
Fixed and mobile advertising: competition or convergence? How to
leverage the additional personal data coming from mobility?
Mobility and video

Will the tablet become the device of choice for watching videos, ahead
of even the TV?
Are LTE-based triple-play bundles sustainable for the TV industry?
Does multi-screen distribution mean only additional costs, or can it also
mean revenue?
Market structure and value chain

How far will telco consolidation go in Europe?
Who will dominate the mobile Internet?
Will net neutrality extend to mobile?
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Spotlight on Executive Seminars

Wednesday November 19 2:30-6:00pm
Future Networks: Fixed vs. Mobile
At a time when the telecom industry is in the throes of a new round of
consolidation, the issue of how to harmonise fixed and mobile strategies is
once again becoming a top priority. What technological shifts do we expect
to see? What wireline-wireless strategies will be put into place? What rate of
investment? What new retail market solutions are in the works?
.
TV Everywhere: Hybrid TV and the cloud TV at stake
As the use of screens becomes increasingly ubiquitous, the question of
providing seamless access to video content, both at home and away, is
getting louder. How are hybrid networks, along with the development of
cloud-based solutions, bringing us closer to the ability to access TV and
video on any device, anywhere, anytime?

Smart city & mobile living : When Smart City goes
mobile
Will the widespread use of smartphones, tablets, smart glasses, etc.
revolutionise city life? What are some of the most innovative future
applications in the areas of culture, mobility, ? How do city governance
and stakeholder strategies need to evolve to help stimulate innovation?
What different approaches are we seeing around the globe?
.
Connected Things Forum: Its show time!
The buzz is growing around the concept of connected things. Its development
is being spurred forward by a host of crowd and equity-funded initiatives, and
significant acquisitions by Internet players. This seminar will provide an
opportunity to explore the central stakes of this rising market, the chief
applications and the objects involved, and the key role played by data, the
resulting business models and the privacy/security concerns being raised.
Thursday November 20 9:00am-6:00pm

2014 Game Summit: Games Reloaded
This edition will take stock of mobile gamings contribution to the game sector
as a whole. The influence of viral, the domination of the free-to-play model
that mobile picked up from the PC and ran with, combined with the allure of
mobility, has turned it into a key money-maker. The Summit will also be a
chance to have a look at the new generation of home consoles, and the
industrial and financial schemes surrounding them.
DigiWorld Yearbook
Key indicators of the digital economy
Every year, DigiWorld Yearbook readers

look forward to its unique round-up of the
telecoms, Internet and digital media
sectors. For the IDATE teams of experts, it
provides an opportunity to update key data
on the geographical markets and market
sectors they track year-round, and to look
back at the outstanding events that shaped
the previous 12 months. It has also become
a report of reference for obtaining a concise
understanding of what makes the digital
ecosystem tick identifying the chief game-
changers of mobility, cloud and big data,
the top players strategies and the changes
at work along the value chain.
CONTENTS
Part 1: DigiWorld Atlas
Chapter 1: The DigiWorld in the global economy
Chapter 2: Markets and players
Chapter 3: Access
Chapter 4: Consumer services and contents
Chapter 5: Internet markets
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168 No. 94, 1 Q. 2014
Part 2: DigiWorld Chronicle

- The e-taxman cometh?
- Will Google take the leap into hardware?
- What does the future hold for Europes telecom sector?
- Aereo wins against the networks and enters US airspace
- Can we expect stricter data privacy regulation?
- True 4G takes its first steps
- Publishers Penguin and Random House merge
- Google launches Chromecast
- Microsoft buys Nokia
- Verizon-Vodafone
- The top UK cableco, Virgin Media, embraces Netflix
- 02E-Plus merger in Germany?
Country Profiles
- France
- Germany
- Italy
- Russia
- Spain
- United Kingdom
- Brazil
- United States
- China
- India
- Japan
- South Korea
Annexes
Glossary
Index
Information/Orders
IDATE, Vanessa SEGURA
Tel.: +33 (0)4 67 14 44 81 - fax: +33 (0)4 67 14 44 00
v.segura@idate.org
www.digiworld.org/yearbook/
Our DOSSIERS
To be published
No. 95 3rd Q. 2014 The future of patents and IPR-protected

technology in the electronic
communications field
Eds: Theon van DIJK, Mathew HEIM
& Yann MNIRE
No. 96 4th Q. 2014 Smart city

Eds: Nicolas CURIEN, Claudio FEIJOO
& Gilles FONTAINE
Latest published
No. 93 1st Q. 2014 EU regulatory framework

for e-communications
Eds: Giovanni AMENDOLA, Yves GASSOT, Marc
LEBOURGES & Ulrich STUMPF
No. 92 4th Q. 2013 Video cord-cutting

Eds: James ALLEMAN, Gilles FONTAINE, Raul
KATZ & Rmy LE CHAMPION
No. 91 3rd Q. 2013 Public-private interplay

in the telecom industry
Eds: Pierre-Michel ATTALI, Edmond BARANES
& Alberto NUCCIARELLI
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170 No. 94, 1 Q. 2014
No. 90 2nd Q. 2013 The radio spectrum: a shift in paradigms?

Eds: J. Scott MARCUS, Grard POGOREL
& Frdric PUJOL
No. 89 1st Q. 2013 Open Innovation 2.0

Co-creating with users
Eds: Gilles FONTAINE, Anna Maria KOECK
& Denis LESCOP
No. 88 4th Q. 2012 Privacy, openness and trust

Eds: Vincent BONNEAU, Marc BOURREAU
& Paul DE BIJL
No. 87 3rd Q. 2012 Internet of things:
A new avenue of research
Eds: Pierre-Jean BENGHOZI, Martin CAVE,
Yannick MEILLER & Samuel ROPERT
No. 86 2nd Q. 2012 Development of ICT in Africa

Eds: Laurent GILLE, Anders HENTEN,
Robin MANSELL & Didier POUILLOT
No. 85 1st Q. 2012 Cloud ecosystem

and platforms competition
Eds: Jacques CREMER, Yves GASSOT,
Bruno LANVIN & Lorenzo PUPILLO
Information/Orders
IDATE, Vanessa SEGURA
Tel.: +33 (0)4 67 14 44 81 - fax: +33 (0)4 67 14 44 00
v.segura@idate.org
www.comstrat.org
Extra papers
COMMUNICATIONS & STRATEGIES also welcomes submissions for

extra papers - off dossier - that typically cover innovative issues in the
sector of the telecoms, internet and new media. If your paper is selected by
the Editiorial committee, it will be submitted to the double-blind review
process.
On the other hand, should you wish to propose a short paper (1500 to 3000
words maximum) for the "Features" rubric, offering factual analyses of
recent developments in the fields of regulation and competition, firms and
markets, technical innovations, public policies and use logics, please contact
Sophie NIGON.
Book reviews are also very welcome should they are in connection with our
usual thematics.
Guide for authors

All papers selected for publication will be reviewed by at least two referees
using the "double blind" system.
Proposals must be submitted in Word format (.doc) and should not
exceed 6,500 words including the abstract and references.
As far as possible, the publisher recommends that you insert some
illustrations (tables, diagrams) in the paper, in order to facilitate the general
comprehension. Please ensure that they are readable in grey scale, and that
they are of high-definition, in order to guarantee the printing quality.
Bibliographical references should be included at the end of the article.
Should these references appear in the text, please indicate the author's
name and the year of publication in brackets
Coordination and information

Sophie NIGON
s.nigon@idate.org
+33 (0)467 144 416
www.comstrat.org
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Foreword

The switch to digital is often presented as the cause of upheavals in sectors

Introduction - The Rebound of Videogame Industry

Author biographies ..................................................................... 151

This issue of Communications & Strategies explores this hypothesis

models, in business revenue and prices, changes in markets and in

The death of an old model?

Strengths and weaknesses of the model

The traditional model formed on production, editing, and retail of AAA

This model results from a quasi-cartel situation involving a small group of

mobile platforms systems, access platforms in a two sided-market logic for

It must be acknowledged that this model still has major advantages:

Emerging markets and new business models

The dematerialisation and democratisation of the video games

Second, with the emergence of online games, especially massively

In this new industrial ecosystem, the structure appears to be very

The age of uncertainty: creativity and diversity

The opening of markets and industrial change

Markets opening, parallel to their internationalization promoted a deep

The evolution of technology helps in supporting more immersive content.

Funding and revenue models

In terms of funding, the former model put publishers in a key position.

Production delays are becoming increasingly shorter, pushing developers

The keys: the ecosystems' changes

The key drivers of change:

These smaller studios are largely independent, operating without the

The dangers of vertical integration publisher focused on creativity to

A richer, more competitive environment

In this period of shifting models and diversification, competition is also

The last two articles that discuss revenue models (DAVIDOVICI-NORA)

In vivo. This issue of Communications & Strategies decrypts the mutation

Yves GUILLEMOT, CEO of Ubisoft, one of the largest video game

Included in this special issue is also an interview with Mr. KAPLAN,

In conclusion, we include an interview with Alain LE DIBERDER, Director

A new global landscape for supply and demand

This impressive growth results from the increasing availability (and

5 3G: HSPA, EV-DO.

Within this framework, the growth of traffic is now mainly driven by

Smartphones and tablets, the new hardware and software platforms

The number of smartphones in use worldwide reached 1.4 billion at the

As a summary, the smartphones and tablets phenomenon allowed novel

The rise of the app economy in a platform ecosystem

A simple figure displays the absolute success of the mobile applications:

Besides, a host of Android-based tablet rivals have also expanded the

Moving to a multiscreen / multichannel world:

In the US, as of December 2012, more than three-quarters of adults

As a summary, gamers a few years ago were mostly using

Changes in the global video game market

Regional markets for video games: Asia rising

Online gaming in the People's Republic of China represented one of the

Figure 1 - The growth of online gaming in China

Table 2 - Top 20 companies by game revenues (*) (2012)

Company Country Revenues US$ million Growth rate

As a consequence, China is witnessing considerable changes in its

US and Japanese companies continue to dominate the market (Table 2)

Declining segments: consoles and PC-based games

There are some significant differences in the dynamics of individual

13 Of the top 25.

fact IDATE forecasts some growth until 2016, to be followed by a decline

On-line and mobile games as engines of growth

On-line and mobile games are characterized by two major business

Box 1 - Tencent. King of SNOW

Founded in November 1998, Tencent has grown into one of China's

As one of the four online platforms of Tencent, Tencent Games (QQ