Game EcosystemsBusiness Model Innovation in the Digital

Entertainment Sector: Implications for Policy

Dr Vili LehdonvirtaLSE Innovation Co-Creation Lab

vili.lehdonvirta.comTwitter: @ViliLe

Why Games?

$65 Billion industry, bigger than music or cinema

Digital game companies are pioneers in innovations that drive today’s digital economyGames 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

Source: Neogames, The Finnish Game Industry 2010-2011

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 crowdfundingRegulations designed for physical donationsGlobal digital online donations

Investment-based crowdfundingHeavy regulation of investment offersNumber of investors can be 10,000s

→ Policies aimed at frictionless donations andmicro-investment

Business Model Innovation 3: Crowdfunding

Finnish Game EcosystemThe 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!

SummaryPolicies needed for:

Seamless digital market

Virtual currencies

Digital micro-employment

Digital donations & micro-investments

Game culture!

Thanks for listening!

vili.lehdonvirta.comTwitter:@ViliLe