Business Model Development in Newspaper Publishing Industry, the Effect of e-reading – A Case Study Antti Hirvonen Supervisor – Antti Sihvonen December, 2011 Executive summary Objective of the study The primary objective of this research is to understand how the emergence of e-reading and the subsequent increase of servitization have affected the business models of the newspaper publishing industry. This is examined from a business model perspective where development patterns of different business model components have been researched. The second objective was to understand the effect of servitization with reference to the newspaper publishing industry. Therefore literature is lagging a longitudinal perspective of business model development effected by increased level of servitization. Research method This research uses case study analysis produced from a single case company and is subject to systematic combining. Research data consists of a primary dataset of 1,400 pages of material including development group’s internal meeting transcripts and secondary dataset comprised of interviews. This data was analysed by using Event Structure Analysis, which enables to analyse causal patterns of events and building on explanations. Findings The research produced thought-provoking results. The first finding is that when there is limited amount of customer information available with the rise of new technological innovations, initial product launches always rely heavily on estimations. In the following stages when market knowledge has increased, the focus moves from a technological approach to become more customer-oriented. The second main finding is with reference to servitization. Findings indicate that the contemporary newspaper is substantially more than a printed product – it is a source of information whereby its core product is consumed through services supporting the use of the product. From the basis of this analysis the theory of servitization has been embedded into different stages of business model development. Key words Business Model, Service-Dominant logic, newspaper publishing, e-reading, case study 1. Introduction .............................................................................................................................................. 1 1.1. Research area and problem ..................................................................................................... 1 1.2. Research gap ............................................................................................................................. 3 1.3. Research questions ................................................................................................................... 3 1.4. Structure of the study .............................................................................................................. 5 2. Literature review ...................................................................................................................................... 5 2.1. Business models ....................................................................................................................... 6 2.1.1. Business model concept .................................................................................................. 6 2.1.2. Business model research streams ................................................................................. 10 2.1.3. Business model canvas ................................................................................................... 12 2.1.4. E-business model............................................................................................................ 15 2.2. Service-Dominant logic ......................................................................................................... 17 2.3. Theoretical synthesis and research framework .................................................................. 27 3. Methodology ........................................................................................................................................... 32 3.1. Case Study Method ................................................................................................................ 32 3.2. Collecting the research data .................................................................................................. 34 3.3. Method of analysis ................................................................................................................. 34 3.4. Reliability and validity ............................................................................................................ 35 4. Findings ................................................................................................................................................... 37 4.1. E-reader 1.0 ............................................................................................................................. 37 4.1.1. Development process of e-reader 1.0 .......................................................................... 38 4.1.2. Interpretation of e-reader 1.0 development................................................................ 44 4.2. E-reader 1.1 ............................................................................................................................. 47 4.2.1. Development process of e-reader 1.1 .......................................................................... 47 4.2.2. Interpretation of e-reader 1.1 development................................................................ 48 4.3. E-reader 2.0 ............................................................................................................................. 51 4.3.1. Development process of e-reader 2.0 .......................................................................... 51 4.3.2. Interpretation of e-reader 2.0 development................................................................ 53 5. Discussion ............................................................................................................................................... 55 5.1. Business model development ............................................................................................... 55 5.2. Servitization at newspaper publishing industry.................................................................. 59 5.3. Interaction of servitization .................................................................................................... 61 6. Conclusion .............................................................................................................................................. 63 6.1. Theoretical implications ........................................................................................................ 64 6.2. Managerial implications ......................................................................................................... 65 6.3. Limitations and suggestions for further research .............................................................. 66 7. References ............................................................................................................................................... 68 8. Appendix ................................................................................................................................................. 80 Appenix 1: ETHNO analysis for the event log ........................................................................ 80 1. Introduction 1.1. Research area and problem Industries are not static but evolve over time (Klepper 1996; Jonavick & McDonald 1994; Gort & Kepper 1982). Therefore it is hardly news that technical advancements change industries for good and sometimes these changes can be radical and fast moving. Of late, the most changed industries are ones related to information technologies and the Internet as the past ten years have witnessed groundbreaking technological advancements. The sharp rise in cheap information technology, bandwidth, and communication possibilities have made it more convenient for companies to work in online environments as coordination and transaction costs have reduced significantly (Tapscott et al. 2000; Amit & Zott 2001). Amongst the most influenced industries lies publishing, where new technologies have brought some substantial opportunities and already affected the business models of the actors operating in the industry. Despite the fact that first e-newspapers appeared on the Internet in the 1970s, their actual emergence online took place only in the 1990s (Greer & Mensing 2006). By definition, e-newspaper can be described as a digital object with textual and/or other content, which arises as a result of integrating the familiar concept of a book or newspaper with in-use features such as search and cross-reference functions, hypertext links, bookmarks, annotations, highlights, multimedia objects and interactive tools (Vassiliou & Rowley 2008). An e-reading device on the other hand can be defined as an electronic device whose design allows it to be used for reading digital books and newspapers. The main advantages of these devices are customising abilities such as filtering news, changing font type and size; note-taking; quick downloads and updates; search functions and storage capacity. Examples of these devices are Apple’s iPad and Amazon’s Kindle (Burk 2001). Recent technological innovations have rapidly altered the e-newspaper industry and it can be expected that developments made in the very near future will grant further prospects for the industry to transform even more substantially (Fetscherin & Knolmayer 2004; Stahl et al. 1 2004). Making the situation even more interesting are new opportunities for traditional publishers to provide content services for e-reading devices. (Amit & Zott 2010). In addition to the technological advancements, another phenomenon that has been changing the way business is made is called servitization which, in its simplest form, is understood as the process of creating value by adding services to products (Vandermerwe & Rada 1988). A clear view for this topic is provided by Service-Dominant logic introduced by Vargo & Lusch (2004). It has been stated that customers do not buy goods or services, rather they buy offerings, which render services and create value for customers (Gummesson 1995). This has meant that many companies are moving away from manufacturing tangible products towards offering services (Vargo & Lusch 2004). Therefore, the business processes within an organization need to be driven towards increased level of servitization in order to be able to offer new digital services and thus stay competitive. The two trends presented above have resulted in a phase in which many publishing companies are facing a tough time operating between freely available internet content and free newspapers (Osterwalder et al. 2010). They are under pressure to comprehensively re- invent their business models and value creation logics (Graham et al. 2004). There currently are no solid guidelines as to which direction new business models should evolve as many industries are still looking for feasible e-business models for building success in the digital environment (Hoppe & Breitner 2003). The purpose of this thesis is to look at the case company Sanoma Media’s business model through examining how Service-Dominant logic and opportunity brought by e-reading has affected it. This thesis is part of the Next Media research program, funded by the Finnish Funding Agency for Technology and Innovation (TEKES) that aims to understand innovations in media experience, new business models, concepts and technology. 2 1.2. Research gap E-business models have recently received great interest from both academics and practitioners. Hedman & Kalling (2003) have identified two complimentary streams in virtual environment business model research. First stream aims to define the components of an e- business model (e.g. Timmers 1998; Afuah & Tucci 2001; Amit & Zott 2001; 2010; Osterwalder et al. 2002, 2005, 2010; Pateli & Giaglis 2004; Bouwman et al. 2008; Sosna et al. 2010). Second stream on the other hand focuses on understanding the business model dynamics and explains how businesses use the Internet to interact and how value is created for customers and other stakeholders (e.g. Applegate 2001; Weill & Vitale 2001). This thesis aims to contribute to this second stream by examining changes and development patterns within different business model components at newspaper publishing industry under the effect of e-reading. First stream of research identified has shaped solid frameworks that can be used as tools when analysing these changes. Finally, preliminary work conducted for the research topic of this thesis indicates that extant literature is lagging a longitudinal perspective of business model development affected by increased level of servitization. 1.3. Research questions The focus of the research centres around the question of how a business model evolves when a traditional product business is transformed into a digital one. This main issue is analysed through the use of two research questions. These questions are formulated so that they expand the research problem into two questions that can be answered within the scope of this research. 3 The first research question aims at understanding the development process of the business model affected by the opportunities brought by e-reading. The development is examined with framework provided by Osterwalder et al. (2002; 2004; 2005; 2010). This framework offers a good tool in analysing the development path. This logic leads to presenting the first research question: 1. How has the Business Model of newspaper publishers evolved because of e-reading? The concept of servitization has changed business models quite radically amongst different industries. In some industries it has also been associated with a change from physical product to a service product. Amongst the industries most affected is newspaper publishing. Therefore, the second research question is focuses around the concept of Service-Dominant logic (Vargo & Lusch 2004; 2006; 2008; 2011; Vargo et al. 2005; 2010; Lusch 2011; Lusch & Vargo 2006; 2011; Lusch et al. 2007; Gummesson 2008) and aims on creating a synthesis with the business model development. This will examine how and what parts of the business model have been affected by servitization. In this thesis terms Service-Dominant logic and servitization will be used interchangeably. This leads to presenting the second research question: 2. How does servitization appear in the process of business model evolution? Based on analyses provided by the first and second research questions, it is possible to draw conclusions from both, managerial and theoretical perspective, of potential development patterns on digital service offerings. These two research questions guide the research and its direction. If a logical solution to these two questions can be provided, the purpose of this research can be deemed to have been attained. 4 1.4. Structure of the study The study is structured in a following way. Next part will be literature review, which examines the definitions of business model and introduces the concept of Service-Dominant logic. After these parts a synthesis on these topics is generated and research framework for this thesis is introduced. Third part following will cover the methodology used for this research. Topics on case study analysis, systematic combining and Event Structure Analysis will be enclosed under this part. Fourth part following will go through the findings of the analysis conducted and will be followed by discussion. Final part of this thesis will cover conclusions of this research as well as present theoretical and managerial implications. 2. Literature review This section presents the main theoretical approaches used in this thesis and builds the research framework. First part will look at business model definitions and be followed by introduction to current research streams within the area and be will concluded with the introduction of e-business models. These considerations on business models will be followed by an introduction to Service-Dominant logic, which will emphasise the concept of servitization. Last part following will be synthesis, which it is aimed at combining these two main theories. Theoretical framework for this thesis will be introduced as part of the synthesis. 5 2.1. Business models 2.1.1. Business model concept To begin the theoretical approach for this thesis, the concept of Business Model will be examined first. It is often said that business models have always existed but only recently have they turn out to be of great interest for both, academics and practitioners (Pateli & Giaglis 2004; Sosna et al. 2010; Weill & Vitale 2002). The term can be considered to be relatively new despite the fact that it first appeared in an academic article back in 1957 (Bellman & Clark 1957). Still, because more extensive research of the business model concept is relatively young, its place and role within an organization is still a subject to debate (Osterwalder et al. 2005) and term has remained relatively poorly understood (Linder & Cantrell 2000). One example of these misunderstandings with the term is that it is fairly common that term business model is used when in fact only part(s) of it are actually meant (Osterwalder & Pigneur 2002). It was not until the late 1990s when the term rose to prominence. Since then a myriad of definitions have become available and the amount of literature is ever growing (Pateli & Giagls 2004). Some key definitions from previous research are highlighted in Table 1. 6