1. Introduction
In the last few decades, new market conditions and technological advances have not only contributed to an increasing number of ventures being international from their inception, or being “born global” [1], but also to a dynamic environment that challenges traditional views on ventures’ business models. As the Internet and related technologies have changed the way business is done, interest in business models has grown among managers and scholars. There has been a proliferation of e-business models that are based on different logics from traditional businesses [2]. But for ventures launching business models linked to a more open innovation context of the Internet, the nature of business model logics is still in its infancy. This has caused an uncertainty in the business model design and management. Research in the service sciences also indicates the need to develop sustainable business models [3].
For these reasons, understanding and designing business models has become highly important in the new and rapidly evolving mobile services sector. Today’s mobile service environment has been compared to the early stages of the wired Web [4] in terms of its fragmented network, applications, and device platforms [5]. Moreover, ventures in the mobile service sector are working increasingly in value networks, where mobile services are developed and provided by networks of cooperating ventures.
This move towards value networks also implies a transition from closed to open innovation, meaning that innovations can move easily between the venture and its environment. Research indicates that new business models are of central importance in open innovation [6]. In the mobile service sector, the logic behind open innovation is that anyone can develop a service anytime and reach anywhere; the service is born global.
The objective of this paper is to enhance the knowledge of business models in the mobile service sector by exploring its key mechanisms and underlying components. This will be achieved by answering the following exploratory questions: What are the key mechanisms and underlying business model components? How do these interact in a business model design?
Drawing from the business model literature and from empirical case studies on 69 business models in the mobile service sector, the paper illustrates the findings of a longitudinal case study of a business model linked to development of an iPhone application. We develop a model for business model design for mobile services in an open innovation context. The proposed model extends earlier frameworks by identifying and incorporating the key mechanisms; contingency aspects and core resources in a dynamic sector. Conclusions based on the model and empirical data are provided, as are suggestions for future research. This study contributes to the research on business models and service science by exploring business model design at work within the nascent research field of mobile services.
2. Literature Review
In the last few decades, business model design has attracted the attention of both scholars and practitioners. However, trends of open innovations in services, such as shifting from product to service and customer empowerment in innovation [7] have been neglected in conceptual research on business model definitions, nature and structure [8]. Generally speaking, business models define the logic of the firm and reflect its business strategy. Business model research has lately changed in focus and approach, to emphasize components rather than specific models or typologies [9], as this provides a better understanding of how and where value is created and captured. In their synthesis of business model literature, which included established publications from 1998 to 2002, Shafer et al. [10] uncovered 12 business model definitions comprising 42 business model components. Four categories of components were identified: strategic choices, creating value, capturing value, and value network. The authors define a business model as “a representation of a venture’s underlying core logic and strategic choices for creating and capturing value within a value network” (p. 202). There is, however, a lack of empirical support for conceptually developed business models.
Several studies have synthesized previous work in the area of business model components. Based on such a synthesis, Morris et al. [11] propose a business model framework that includes factors related to the offering, market factors, internal strategy factors, competitive strategy factors, economic factors, and personal/investor factors. According to Morris et al., their framework is not sectorspecific and could thus be used to design, describe, categorize, critique, and analyze a business model for any venture. Nevertheless, there is a need to acknowledge the sector-specific and venture-specific characteristics of business models.
A review of the business model literature by Osterwalder et al. [9], results in a proposed framework with nine “business model building blocks”: value proposition, target customer, distribution channel, relationship, value configuration, core competency, partner network, cost structure, and revenue model. Their framework incorporates the venture’s internal parts of the business model. The internal parts as proposed by Osterwalder et al. [9] however need to fit an open innovation context where internal and external parts interact without boundaries.
Chesbrough and Rosenbloom [12], propose six functions of a business model (Table 1), each of which could create and capture value in innovative ventures.
As noted, interest in the business model concept has increased within the mobile service sector [13]. This study departs from the Chesbrough and Rosenbloom [12] framework, since it is comprehensive, generic, and forms part of the open innovation paradigm.
3. Methodology
The present study is based on a qualitative methodology for studying the relatively unexplored area of business models in the mobile service sector [14]. The case study design adopts a grounded approach [15] and focuses on the level of mobile service business models rather than on the venture level. This implies that ventures may have different business models for different services provided to customers.
Judgment sampling was used when selecting the case based on the main criterion of entrepreneurs with experience of multiple business models in the mobile service sector. Eleven entrepreneurs were selected as a sample in accordance as suggested by Eisenhart (1989) [16]. Each entrepreneur selected business models with which he or she had experience, resulting in discussions of 4 - 9 business models with each entrepreneur, and a total of 69 business models.
Data was collected through semi-structured interviews with the 11 entrepreneurs exploring key mechanisms in business model design at work and the underlying business model components in the 69 business models. Each interview lasted an average of 90 minutes. The interview guide allowed the researchers to follow up on issues raised during the course of the interviews where those issues of business models were explored with the entrepreneurs. When coding the 69 business models, a multidisciplinary group of researchers first coded individually and then discussed the individual coding in the research group. The group coded each entrepreneur’s business models and had frequent meetings comparing the individual researcher’s coding. In this process, we observed a very high consistency which may support the internal validity of the research [17]. In a following sequence, we grouped the coding into categories. As a result we identified two main types of business models: demanding and simple.
Simple business models have low internal and external complexity in technology, products and organizational structure. Demanding business models, in contrast, are characterized by high internal and external complexity. We focus on the simple business models as our analyses outline mobile applications exploited through mobile service platforms such as iPhone and Android, all of which have simple business models and the mobile platforms have opened up the mobile service market, market structure provides new logics for business endeavours. In order to explore mobile platform application business models, we present evidence from the representative case of a simple business model. The selected case also represents a business model design in the early phases of the smartphone era. The focus on one illustrative case enabled provision of selected primary data, as well as contextual material necessary to understand the business model design at work in the mobile application context. The selected business model case was closely and longitudinally studied for a year from the establishment of the venture.
The study of the illustrative case included six interviews conducted by the team of researchers resulting in an additional 15 hours of transcribed interviews. In this second sequence of in-depth case analysis, the group of researchers independently coded and matched the coding within the group. Central key mechanisms, aspects and themes were identified based on an interpretive process of continuous iteration between the theoretical concepts and empirical patterns [18]. Chesbrough’s functions of a business model (see Table 1) constituted the conceptual basis for data analysis. We view in this study the value chain as encompassing internal functions, while the value network is regarded as external to the venture. The function “competitive strategy” was not analyzed due to that the discussions were focused on specific applications and the interviewees did not raise the issue of competitive strategy.
Through the iterative analysis of theoretical concepts and empirical patterns, we used investigator triangulation, which addresses the study’s construct validity [14]. We also employed data triangulations by using multiple sources of data such as repeated screenshots of the list of the top 100 downloads in the iTunes App Store and written feedback from the application’s customers, as complements to the interviews. Such feedback had been written by people who had purchased/downloaded applications from the iTunes App Store and was then explored through a content analysis. The written feedback received during the first few days after the launch of the studied application, was provided to the researchers. After excluding texts written in languages other than English, 58 pieces of feedback from customers in 11 countries remained. The texts were analyzed with Leximancer software, which simultaneously conducts thematic and relational analysis [19].
4. The Mobile Application Business Model
The illustrative case of the mobile application business model is presented as a narrative in the following section.
4.1. An Application on the List of the Top 100 Downloads—The App Store Case
In this section, we identify and explore the functions of a business model for a mobile application, which centres on the business model design attached to an innovation process of an iPhone application. The idea of a mobile application originated in a brainstorming session in which the entrepreneur and a developer at the IT venture decided to develop an iPhone application. The mobile service application innovation was outside the scope of the ITventure’s ordinary consulting activity. The iPhone platform chosen because of the phone itself combined with Apple’s external distribution channel, the iTunes App Store. This was a new market and technology window of opportunity. The entrepreneur believed that the iPhone and App Store offered a unique package of distribution channels and billing in a single system. The entrepreneur and the developer became particularly interested in the 3-axis accelerometer. Their specific competences, limited time and financial resources determined their plan to develop a high complex application.
From idea to release of the application as freeware on the App Store in fall 2008, the process required two weeks. Initially, the ambition was to achieve 5,000 downloads. Three days after launch, however, 100,000 customers had downloaded the application, and it reached top ranking after approximately 200,000 downloads. Given the massive customer response, a new version of the application, for which they charged $1, was released two weeks later. The venture team was unsure of the pricing in the structured revenue model at the App Store and whether they could charge existing customers for the second version.
Table 1. Functions of a business model.
At this point, downloads dropped dramatically, perhaps because of the pricing structure. An additional factor was that customers of the second version erroneously received the first version due to a problem with the App Store, and they were unwilling to pay for an application that had been free. Moreover, when the first customers tried to download the second version, they were informed that they already had the latest release. Customer feedback included some complaints, and the application dropped in ranking on the App Store’s list. However, a second App Store bug balanced the first somewhat, since the number of downloads as a free application followed the application as it entered the list for paid applications. Therefore, the application re-entered the top list, though only briefly.
After two weeks, the application had dropped from the top but still received approximately 200 downloads daily, peaking on weekends. At that time, it was uncertain whether a third version would be launched since this would require competences not available internally in the existing IT-venture. Nevertheless, the entrepreneur and the developer formalized their new business based on the mobile application into a new venture in order to manage all the transactions linked to the application.
Figure 1, based on data collected through repeated screen shots of the list of the top 100 downloads in the iTunes App Store, shows the application’s place. The first observation (day 1 in the figure) was made 1.5 weeks after the application was launched, just before the venture started to charge for the mobile service application.