Game Ecosystems Business Model Innovation in the Digital

Entertainment Sector: Implications for Policy

Dr Vili Lehdonvirta LSE Innovation Co-Creation Lab

vili.lehdonvirta.com Twitter: @ViliLe

Why Games?

�  $65 Billion industry, bigger than music or cinema

�  Digital game companies are pioneers in innovations that drive today’s digital economy �  Games have contributed to the worldwide

development of computer hardware more than any other application

�  What can we learn from business model innovation in the Finnish game industry?

Finnish Game Industry

Turnover 165 M€ – 90% from export (2011)

�  Represents ~0.25% of Finland's total exports

�  CAGR 22%! (2004-2011)

1300 employees (2011)

�  Average employees per company: 16

�  Young males

Business Model Innovation 1: Digital Distribution

Source: Neogames, The Finnish Game Industry 2010-2011

Hurdles:

1.  Fragmented e-payment infrastructure

2.  Fragmented e-commerce regulation

3.  Fragmented taxation systems

Integrated distribution platforms (App Store, Steam) solve this – but at the cost of 30% of revenues to California

→ Policies aimed at creating a seamless digital market

Business Model Innovation 1: Digital Distribution

Business Model Innovation 2: Virtual Economies

Developer redeems Virtual Currency for earnings from

publisher

Consumer uses Virtual Currency to

buy content / Creates content

Consumer buys Virtual Currency

Consumer earns Virtual Currency

through gameplay or ads

Consumer sells content to other

consumers to earn money/VC

�  From credit card payments to stored value and micro-payments (virtual currency)

�  Users and third-party developers not only consume but also create value (user-created content, microwork)

�  Users and third-party developers can redeem virtual currency for real money

Regulatory hurdles:

�  Virtual currencies’ unclear regulatory/tax status (closed loop/open loop, accounting rules, breakage, ...)

�  Micro-employment not recognized in employment regulation

�  Electronic payment infrastructure does not facilitate payments back to consumers �  PayPal solves this, but at the cost of ~5% of earnings to

California

→ Explicit policy development on virtual currencies and microwork

Business Model Innovation 2: Virtual Economies

Business Model Innovation 3: Crowdfunding

Kickstarter.com

Regulatory hurdles:

�  Donations-based crowdfunding �  Regulations designed for physical donations �  Global digital online donations

�  Investment-based crowdfunding �  Heavy regulation of investment offers �  Number of investors can be 10,000s

→ Policies aimed at frictionless donations and micro-investment

Business Model Innovation 3: Crowdfunding

Finnish Game Ecosystem �  The biggest business model innovation in the Finnish

game industry is the ecosystem

�  The ecosystem is vital for talent, technology, investment and innovation

�  Consists of developers, universities, industry events & organizations, informal networks, angel investors, public R&D support, gamers, gamer events, media

�  Most important component is game culture: high acceptance of digital gaming in Finnish society & history of hobby game programming competitions

→ Policies aimed at promoting grassroots digital culture!

Summary Policies needed for:

�  Seamless digital market

�  Virtual currencies

�  Digital micro-employment

�  Digital donations & micro-investments

�  Game culture!

Thanks for listening!

vili.lehdonvirta.com Twitter: @ViliLe