Chapter 6: New Business Models (OUCH! That Hurts)

Before I get into the newest excerpt of the book (partially because it minimizes how much I have to write. My hands still hurt pretty badly), I want to thank everyone who have written encouraging blog posts and commented on my blog and in twitter to wish me love and support. I do feel the love - I'm not being facetious in the slightest. I recognize what I have with many of you because I almost lost it. Trite? Hackneyed? Only because its actually the unadorned truth. The outpouring has been enormous from those I know for a long time, to some I've spoken to infrequently but correspond with online to others who I've never spoken with but have a bond with because of whatever way I happen to engage them - via Facebook or Twitter or whatever. But the compassion of people shows the better part of human nature, now doesn't it? It sure has here.

All I can say is thank you, thank you, thank you because I for once am rendered speechless in terms of how to express my gratitude that you've cared enough to let me know it and that I'm around to hear that.

Okay, now on to the excerpt.

As always, the Wordle starts it all out.

Here 'tis for Chapter 6 of the 4th edition of CRM at the Speed of Light

Now, ladies and gents, friends and even more friends, the excerpt from Chapter 6. Please understand prior to the Sony example, was a more positive detailed example on the mod community in the PC/Video gaming industry and even some discussion of September's upcoming blockbuster game Spore.

THE EXCERPT

(2)Sony Does It Wrong - Again

This one will be short and sour.

Sony produces excellent hardware. They have an engineering culture that is defined by a view of the customer that says "if we build it, they will come." This means, we'll figure out what we want to produce, produce it, and the customer will buy it. Pretty much like Oracle was until the last couple of years.

Sony then builds a product like the Sony Bravia TV or the PSP or a Blu-Ray player and while people attracted to the hardware will buy it, they never seem to sell at the expected level. For example, here are quotes from industry rags on each of the three electronics items.

Why is this? Because the customer not only has little to say about the development of the product in an era where product development has entered the customer's domain, but Sony actively has discouraged customer participation and stays invisible or opaque if you prefer to their customers when other companies are struggling with how to be more transparent.

Sony considers its intellectual property entirely sacred and makes every effort prevent any encroachments on it, unlike the open source approach taken by the John Carmacks or the Segas of the gaming world.

A case in point was their handling of the first crack in the PSP firmware. In the earliest days of the Sony PSP, the handheld gaming unit that Sony has been producing since 2005, was hacked. There was a game called Wipeout Pure, which, if you reverse engineered it, would provide an Internet browser, in violation of Sony's agreements. Sony's response? They created an Internet browser for the PSP owners and then closed off the hole by updating the firmware so the product couldn't be hacked. Unlike much of the gaming community which releases the source code and even best practices guides on how to modify the games, Sony thinks that this is a dangerous thing and remains a closed somewhat arrogant environment. Their lack of customer involvement is also why in 2005, they lost the #1 position in consumer electronics to Samsung who very much involves their customers and external expert networks in their planning, development and problem solving.

Much of the game industry, even including its multi-billion dollar giants like Electronic Arts, support the open source approach that has driven much of its success. Their approach supports the contemporary customer's outlook without trying to subvert it. It accepts the peer trust that exists and at the same time is able to institutionalize practices that will both cede control of the environment to their customers and still profit from it because they then give the customers the ability to participate in the creation of a highly personalized experience that also drives sales.

This is borne out by the 2006 IDG Consumer Research Report on the game industry which found that only17% of gamers actually find official publisher game sites useful while 70% of gamers get game specific info from forums, game fan sites, and third party news websites which are often sponsored or supported by the gaming companies!

But, most important, what kind of business model can be extrapolated from this example?

(2)Characteristics of the New Business Model

Traditional business models are rapidly losing their oomph. The kind of business organization that sees itself as a producer/distributor of products or a service provider and then sees its returns based strictly on products or services sold, is becoming the coelacanth of the 21^st century - a weird looking specimen in a fossilized state.

While the game industry has been a great lab for this new model, it is gaining credence throughout multiple sectors, far beyond just games. There are some distinct characteristics that define this model. The model is intermeshed with contemporary social CRM and customer engagement strategies. You can't have one without the other, though you can build toward either or both incrementally (See Chapter

1. The lines between producer and consumer are blurred. The effort is cooperative and the interest in making the products "consumable" is mutual. For example, at the 2002 annual Game Developers Conference in San Jose, game company Valve Software founder Gabe Newell unveiled Steam, a distribution network that would offer instant updates to recent Valve games and new titles from Valve and other companies. Among the new titles was "Day of Defeat," a multiplayer add-on to Valve's best-selling first-person shooter (FPS), "Half-Life. This wasn't a Valve original product "Day of Defeat" is a mod and the company supported it through distributing the updates as if it were a company product. The company and the customer were operating in conjunction with each other. This is a collaborative value chain in (my) enterprise jargon. (see Chapter 12)
2. The company moves from being the producer or distributor of goods or the provider of services to the aggregator of products, services, tools and experiences to allow the customer to meet the needs of their personal agenda, or in bizbuzz, their personal value chain. This implies that what the company packages is actually a solution set though not in the classic sense. For example, with the release of Half Life 2 (see #1 and #6), not only did they release the game itself, but the source code, the tools to author the modifications and a page where you could download the best practices that were culled from the hundreds of mods that the game had engendered. So you had all you needed to tailor your own experience if you were so inclined.
3. The users and producers are engaged in the co-creation of value. The game companies sell millions of copies of the game and the gamers are able to make the game into something that has value to them.
4. The users have the tools to configure and/or customize their personal experience with the product. This is part of the core difference with the older business model. The traditional model treats products and services as items for purchase. The new one incorporates configuration tools as something available for the customer's use.
5. The users and the producers encourage each other and mutually define the future directions of the specific products. The game industry sponsors conferences for modders, invites the modders and their other key gamers into strategy sessions as something done typically. The users and producers take advantage of the most advanced methods of communication within the global matrix (e.g. user communities within the worldwide web)
6. Even though the users are working on the product changes for their own experience, the changes to the product have universal and commercial value and drive the sales of the product. Valve Software's Half Life 2 is one of the most modified games in history. One mod, Counterstrike, was so popular that Valve acquired it and by 2006, it had sold over 18 million copies, was being played on 36,000 servers as a multiplayer game 24 hours a day and 7 days a week, and had over 4.5 billion minutes a month being played. A mod.
7. The producer is not just the publisher/manufacturer but operates as an aggregator for the user's creative interactivity. The company provides the products, services, tools and experiences that allow the customer to personalize their interactions with the company in the way they want them.
8. The user is not just a purchaser but also an advocate of the experience around the product and by extension, the company. The existence of multiple communities and sites that are associated with the modders who are constantly chattering is a perfect example of this. Firaxis, the publisher of Sid Meier's Civilization IV, has hundreds of mods - some on sites that are for the mods themselves e.g. http://www.civfanatics.com, some that are the subjects of threaded discussions on the main Civilization IV website.
9. There is a collaborative customer experience that provides transparency for the customer into the inner workings of the companies themselves. The game companies are happy to consult with their gamers on strategies and interests for future products.
10. The companies encourage the customization and personalization of the experience of the customer. The companies sponsor and pay for key modders to fly to their corporate headquarters. Several of the, such as Blizzard, creator of the wildly popular World of Warcraft (WOW) hold conferences for fans and modders that have more than 6000 attendees. The company goes all out for key players - wining and dining them and providing them with a memorable experience.
11. The companies and the customers jointly create and provide the tools to make this collaboration successful. The customers often create the tools. For example, the Rome: Total Realism team developed their own skinning tools to make the uniforms of the varying factions in the game accurate.
12. In fact, the customization effort itself, not just the result, is part of the experience, thus enhancing the producer/consumer collaboration all the more. Most of the more complex mods are team efforts and the collaboration itself is as important as the results of the effort.
13. The overall effort involves a corporate culture that is defined by the voice of the customer first. The difference between John Carmack, Valve Software v. Sony. I rest my case.
14. The model uses and provides the most advanced technological tools that exist vis a vis the use of the Internet for these globally matriced communities that are interactive and real time. Many of the mod teams have never met their fellow developers. They are successful because all tools, code, and communications media are available via the web in either real time or as threaded discussions accessible on demand despite the teams being spread across multiple nations.
15. The company and the customer each get value in ways that are appropriate and satisfying to them. As we discussed in Chapter 4, there is a different set of values but both the company and the customer are participating jointly in creating something mutually beneficial. Revenue or profit to the company; some form of emotional satisfaction the customer.
16. The company's revenues increase accordingly, as does their profitability, given that their customers are doing something freely - and for free. That still remains the most astonishing facet of this business model. The customer has no problem doing this for free because they see it as a benefit to them.

(3) CRM 2.0 Business Model - In Sum

CRM 2.0's business model is based around one central premise. The company moves from being a producer of products and a provider of services to an aggregator of products, services, tools and experiences that give the customer the means to meet their own agendas.

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Comments

[Darayush]

Paul, this is good stuff. Have been reading your excerpts and wanted to put in my 2c on this.
Just saw this update about an Indie Game developer seeing some good success on the XBOX virtual store, its fits in very well with the model shift you're describing in this chapter. http://www.alleyinsider.com/2008/8/indie-game-developer-finds-success-on-xbox-360-est-825k-sales-in-first-week

The 16 points to illustrate the new shift .. are a little too wordy for me and in re-reading it a couple of times it felt like they would be better off in 3-4 categories that you've already identified in there like;
- vendor customer collaboration in a completely new way.
- companies encouraging the customization and personalization of the experience
- co-creation of value for both parties

Keep it coming.

[christopher carfi]

glenn, "omit needless words" is originally from strunk & white. http://www.bartleby.com/141/strunk5.html , section 13.

that said, s. king's "on writing" is a fine book.

[Glenn]

Paul,

1.I'm a proponent of BLUF: "Bottom Line Up Front" practiced by the US military. In order to retain the reader's attention, I recommend you move (3 CRM 2.0 Business Model In Sum, to the top of the chapter. You could start the first sentence of your chapter in this way: "Sony doesn't get CRM 2.0. Here's why. Then continue with what you have.
2. Stephen King's advice, "Eliminate needless words," comes to mind when I read these excerpts. I find my attention wandering. Do you really need to list 16 characteristics to make your point? Could these be placed in a side-bar? Or consider your first sentence, "This one will be short and sour." I can't decide if that sentence is needed to maintain your writing style or not. Your "voice" is irreverent and that held my attention in the 3ed. Your sentence on p. 481 "...BPR, still practiced today by those companies engaged in the process of discovering fire...." made me laugh out loud. So if the "short and sour" sentence is necessary to maintain your voice, keep it. But if not, I'd discard it.

Just my two cents...

Glenn