ABSTRACT NUMBER:003-0078

the impact of an efficient distribution model FOR the longevity of the SMALLER firm: applicability of syndication TO the mobile content industry

Sixteenth Annual Conference of POMS, Chicago, IL, April 29 - May 2, 2005

Hanna Skytta and Norma Harrison

MacquarieGraduateSchool of Management, MacquarieUniversity,

NSW 2109 Australia

+61 418 477241, ;

the impact of an efficient distribution model FOR the longevity of the SMALLER firm: applicability of syndication TO the mobile content industry

Hanna Skytta and Norma Harrison

MacquarieGraduateSchool of Management, MacquarieUniversity, NSW 2109 Australia

+61 418 477241,;

ABSTRACT

With the advent of consumer take-up of mobile handsets reaching saturation point in many markets, the competition is shifting from simple handset and contract sales towards value-added content. The explosion of new features that are available to mobile phones are a testimony of this. At the same time, a shift from small firms dominating the mobile content industry to larger firms taking over can be observed. Indeed, as the industry life-cycle model suggests, small businesses frequently lose their competitive advantage as the industry matures and large firms start to utilise their economies of scale, specifically in production and distribution. Hence, the question of the most optimal business model becomes central for the survival of smaller firms.

In this study, we discuss the sustainability of prevailing distribution systems in the mobile content industry, and how an alternative model – syndication – might be more constructive for the longevity of smaller mobile content. We assess whether this model could also help players in this industry to increase their competitiveness in the long run. Our exploration concentrates on the mobile gaming industry in particular, and challenges the value of the operator-based distribution system prevalent in the industry. We suggest that, as the industry matures, larger companies have an advantage through their economies of scale. Reconstruction of the distribution network can be possibly afforded through syndication.

NECESSITY FOR BUSINESS MODELS FOR TECHNOLOGY CHANGE

Technological changehas become the driving force of innovation, productivity, growth and development of the economy (McKelvey and Texier, 2000, Evans, 2003, Harrison and Samson, 2002, Cornelius, 2003, Charpie, 1970, Edquist et al., 1998, Edquist and McKelvey, 1998, Edquist and Texier, 1996). At the macroeconomic level, technological development ensures international competitiveness, continued economic growth and wealth creation of a country, region, cluster or other operational unit.At the microeconomic level, it ensures the continued leadership of a company in the marketplace, through the introduction of innovative products or services that meet the customer needs (Harrison and Samson, 2002, Tidd et al., 2001, Paija, 2001).

Generally large corporations are known as significant sources of technological development and innovation due to their extensive research and development capabilities. However, their strict organisational culture often restricts their ability to pursue novel technological opportunities. Therefore, the issues of technological change and technological advancement are especially important for emerging enterprises, which often have the advantage over large established firms to initiate new industries based on new technology (McKelvey and Texier, 2000) and hence act as motors for innovation and economic development at larger scale. However, the time dimension of the industry life-cycle suggests that these emerging enterprises are typically unable to maintain their competitiveness when the industry matures and the large established firms start to dominate by utilising their economies of scale, specifically in production (Abernathy and Utterback, 1978, Utterback and Suarez, 1993).

Thus, one basic insight of the life-cycle model is that the focus of innovation, as well as type of firms innovating,changes over time suggesting that the existence and growth of the small firms that initiated the industry may be threatened. Typically in a situation like this, small firms have the choice of either merging with another company, or trying to compete. What is common to both of these strategies is that the relationships with other companies become of critical importance – firms are continuously benchmarking each other to find the most powerful partners in the networks they are embedded in. Furthermore, in their efforts to keep up with this ever rising performance bar, firms try to develop new managerial practices and unique business models. However, the constant emergence and fading of firms as well as the acquisition of small firms challenge the development of business models which are successful and sustaining. More knowledge is needed to guide managers to effectively develop appropriate and sustaining business models that enable them to survive through the turbulent stages in business life-cycles.

elements and trends of Mobile Content Industry

With the rise of the knowledge economy, the old realities of industrial economics - fixed physical assets and slow moving information – are removed and the impetus is given to the formation of flexible and fluid networks of businesses. In the increasingly competitive information and communication technology (ICT) markets, characterised by rapid technological convergence, the de-facto phenomenon has been the teaming up of companies from different sectors of ICT industry to provide more advanced end products and to enhance the efficient and flexible distribution . These business networks, largely built on effective utilisation of the internet and other technologies, enable not only the development of innovative products and services but also innovative approaches to business, technology, and network management.

Despite the opportunity brought about by advanced ICT to reconfigure the business networks (Jagdev and Thoben, 2001, Akkermans et al., 2004), many industries have arranged their value networks in the manner which once was efficient in the era of industrial economics. However, technological convergence, environmental turbulence, and globalisation increase dynamism of the business landscape and create the need to develop appropriate business strategies. Further, there is a need to develop an industry-wide network strategy which recognises the redistribution of power within the value chains, and is based on aligned objectives as well as agile and adaptable processes and relationships (Lee, 2004).

For instance, whereas in early stages of the ICT industry – and the mobile industry in particular – the value chains were dominated by equipment manufacturers, the power now seems to be shifting to operators, and continually shifting along the value chain. With mobile voice services becoming increasingly commoditised, network operators are turning to mobile data-related offerings to boost their revenues, thereby further shifting the chain power towards content providers. The mobile services that are predicted to generate the majority of mobile revenues in the near future include short messaging system (SMS), multimedia services (MMS), music, graphics, games, gambling and “glamour”.Together with such applications as ringtones, wallpapers, and icons, that serve as a cheap medium to personalise mobile handsets and that are increasingly seen as fashion items, mobile games are seen as an attractive way to boost operators’ average revenue per user (ARPU) Additionally, operators’ interest in mobile applications (and games in particular) is driven by their complementarity to popular online games. This allows the mobile operators to gain additional revenue from the game-related ringtone, character, and short messaging service (SMS) invitations to gaming partners (Banerjee, 2004).

Operator-based distribution

The key to the efficient cooperation of different players in this mobile ecosystem seems to be an effective distribution mechanism as mobile content without effective distribution would not result in expected return on investment. Hence, the mobile content market has to become increasingly involved with devising an effective distribution of the product to consumers. This means assessing the potential cost savings and revenue opportunities afforded by retail, independent, and operator-based distribution, as well as considering some alternative approaches. In another words, the ultimate question is whether the prevailing operator-based distribution is the most appropriate in the era that is characterised by constant change, and that calls for a highly agile and adaptable distribution model.

Some reasons why operators are the preferred direct channel of mobile games is that they have trusted brands and subscriber information, which places the operators in a strong position in the mobile ecosystem. However, there are some significant disadvantages with the operator-based model. Whether looking at the issue from an operator or gaming house perspective, managing numerous potential customers and suppliers may be a daunting task particularly to the smaller gaming firms. Furthermore, the game developers are burdened by the different platforms, which they have to master in order to guarantee the serviceability of their games on different handsets and markets. These factors decrease the competitiveness of smaller mobile gaming houses. The larger, more resource-rich companies are then in a more favourable position, ultimately leading to possible mergers or acquisition of smaller players. In addition, the time required to establish relationships with operators, and assure them about the merits of particular games, can be a significant barrier to rapid market entrance and launch of new games.

Threat of new entrants

Despite the drawbacks of the prevailing distribution system, the rapid growth of mobile gaming industry is attracting new entrants to the market, many of which are from traditional media such as publishing and entertainment industries. These players often possess significant economies of scale, giving them a competitive advantage. The increased number of acquisitions in the mobile content industry is a testimony of this. Even if such a phenomenon is generally viewed as highly undesirable from the acquiree point of view, it can be viewed as an opportunity to reconstruct the industry setting in a way that not only allows the survival of the small mobile gaming firms but also benefits all the other players of the evolving mobile ecosystem. In the following section we discuss one alternative way of such reconstruction, syndication, and the benefits that it may bring to different players in the mobile content industry.

Application of Syndication to mobile gaming industry

There are numerous issues to consider when examining the potential of the applicability of syndication to the mobile gaming industry. In the following paragraphs we examine the requirements of syndication, as well as benefits and challenges it brings for the mobile gaming industry.

Requirements of Syndication

Syndication offers companies an innovative way of structuring their business. It works only for information goods that can be “consumed” without “wearing out” (Werbach, 2000). Therefore, it is not limited to the distribution of content but can also be applied to other business functions and operations such as commerce and human resources processes. Syndication also requires modularity of the syndicated product as the syndicated product rarely is an end product itself but has to be combined with other products or services. Furthermore, syndication requires many independent distribution points. Table 1 summarises some strategic and managerial aspects that make syndication remarkably distinctive from the traditional business model. The table also provides some insights of such aspects from mobile content industry.

Traditional Business / Syndication / Insights fromMobileCommunications Industry
Structure of Relationship / Linear supply-and demand chains / Loose, web-like networks / Shorter product life-cycles and environmental turbulence has increased the need to form agile, adaptable networks.
Corporate Roles / Fixed / Continually shifting / The channel power in mobile industry is in constant change; it has already shifted from equipment manufacturers to operators to a large extent.
Value Added / Dominated by physical distribution / Dominated by information manipulation / The mobile content rarely constitutes the entire end product but must be combined with other services
Strategic Focus / Control scarce resources / Leverage abundance / Low barriers to entry increase the players in mobile content markets.
Role of Corporate Capabilities / Sources of advantage to protect / Products to sell / There still is some protectionism of corporate capabilities as the value network is largely built on realities that support such protectionism.
Role of Outsourcing / Gain efficiency / Assemble virtual corporations / The emergence of virtual companies is taking place especially in mobile handset markets where OEMs are increasingly broadening to include R&D, design and network management.

Table 1: Strategic and managerial aspects traditional business model and syndication model (adapted from Werbach 2000)

Opportunities and Challenges of Syndication

Currently the global mobile application market is highly fragmented due to the numerous platforms used by companies in different regions. This is a severe obstacle to game developers as they have to make sure the games are serviceable on these numerous platforms and, at the same time maintain control over costs and assure quality. With syndication, whether it is a downloadable game, browser-based game, or messaging-based game, the responsibility for the serviceability of the game could be shifted from the game developers (originators) to the syndicators thereby allowing the game houses to concentrate effectively on game development.

With syndication, challenges which could be lessened include those associated with the operator-based distribution such as the challenge in getting consumers to pay for premium mobile content such as games,that of implementing attractive revenue-share systems, and utilising micro-billing systems for third-party content, and the need to master multiple mobile platforms yet maintaining quality and cost in order to service various carriers. In addition, syndication does not restrict flexibility, the factor that is critical in the rapidly changing ICT industry, as all parties in syndication network can quickly adopt different roles to reflect the changes in their external environment: the time that is required of companies to reconfigure their roles and relationships within their value networks is no longer measured in days or even hours, but in seconds.

In addition to the technological benefits, syndication brings opportunities for more efficient the promotional campaigns of the games can be integrated with other campaigns of traditional media, such as films and console games, the reputation of which can benefit the mobile game download significantly. Indeed, a significant benefit of syndication is that it does not prohibit the traditional media to take advantage of the gaming market’s huge market potential, but can lead to a setting, where the increasing synergies between the traditional media and mobile content business enable the interaction between the industries and can lead to mutual benefit. Evidence of the mutual benefits of such conversion is already seen in the video game industry, which has significantly benefited from the collaboration with film industry. Given the promise of mobile content market, the conversion of games and films are not expected to stop at online games, but are soon entering mobile gaming markets as well. In order to defend itself from the invasion of the traditional media, the mobile gaming industry should adopt an industry-wide strategy that enables the existing firms to stay in the market yet allow them to take advantage of the benefits that collaboration with, say, the film industry provides. This provides significant opportunities for syndication.

Conclusions

Traditionally, telecommunication operators have sought to control the entire value chain of telecommunications by controlling all of its components from networks to services and content. They have also been the preferred channel for distribution of the mobile content. This has become a significant component in the operators’ revenue stream in the future, if they are able to maintain themselves as the preferred channel of distribution for mobile content. However, competition within the mobile content industry suggest that this operator-based distribution system may not be the most beneficial in the long run. This is based on the observation that as the industry matures, the efficient distribution system gets significant value as a determinant for the continued success and survival of a small mobile content firm.

Looking at the issue from the mobile content firm perspective, the increased number of acquisitions suggests that in order to negate the value of economies of scale, an alternative distribution strategy should be adopted. Syndication in distribution poses some potential in providing mutual benefits to all players in the mobile content industry, including the new entrants from traditional media that are taking expansion to mobile application market seriously in every conceivable area ranging from games to football to music. In fact, through syndication the entertainment industry and mobile content industry can take advantage of their synergies and achieve similar benefits that the video game industry and film industry have realised through their collaboration.

References

Abernathy, W. J. and Utterback, J. M. (1978) Patterns of Industrial Innovation, Technology Review, (80), 41-47.