Information systems innovation: Definitions, comparative contexts, and cognitive models Applied on the case of mobile service innovation in Japan and Europe, 1999-2006
Author: Patrik Kärrberg The London School of Economics and Political Science Doctoral student at Department of Management Information Systems and Innovation Group Houghton Street, London WC2A 2AE, UK Tel: +44-78 9631 7814 Fax: +44 (0)20 7955 7385 e-mail:
[email protected]
Abstract: This paper develops a comparative framework for analysing mobile service innovations in Japan and Europe between 2000 and 2006. Concepts of Information System (IS) service innovation are defined and the dynamic capabilities model together with three perspectives on context is used to discuss the fundament for the firm’s business models. We also discuss how this study lens could generate contrasting views (sociologic, economic, organisational) on IS innovation. Examples from ongoing research in the mobile music and gaming industries are used. We conclude that different markets for technology and structures of organisations and networks have supported different types of service innovations in Japan and Europe. Business models and offerings have been significantly different as a result.
This research is built on extensive industry contacts in Japan and Europe during two periods, 1999-2001 and 2002-2007, when the author spent most of his time in Japan.
Introduction This paper focus on the innovation system for mobile data services and deploys a comparative framework to analyse dynamic capabilities utilised among Japanese and European focal actors. First IS service innovation according to Swanson (1994), Teece/Pisano (1994), and Lyytinen/Rose (2002) is introduced. Teece and Pisano’s dynamic capability model is touched upon: market (national) and positions, technological paths, and organizational processes. We discuss how business models are based on assessments (which is a function of the perceived positions, paths, and processes of the firm (Teece/Pisano, 1994) and how these are affected by the three contextual views provided by our study lens. We also discuss how this study lens could generate contrasting views (sociologic, economic, organisational) on the perceived value of IS innovation in different cultural settings. This conceptual framework and discussion is then applied to the mobile service innovation for delivery of music and games in Japan and Europe between year 2000 and 2006, focusing on the related payment systems. Mobile telephony is an industry with a history of agreeing on industry-wide standards which spurred sales and induced economies of scale for equipment cost and distribution. Consumer entertainment services are chosen as indicator due to its central role in driving demand and explore new technologies. Among entertainment services, examples are taken from premium (charged) music and game download services. Even though plain messaging (SMS and email) have attracted most users and the highest volumes of sales, we focus on premium services, as these services have attracted significant resources from content providers, enablers, and carriers alike. During the period of study, 2000-2006, premium SMS and charged mobile Internet downloads provided the bulk of revenues for service providers. Carriers on the other hand have reaped most of their profits from bulk SMS and email. In this paper mobile services could be divided into two components: 1) The service delivery mechanism (starting from its origination with a content holder and terminating on the mobile phone) 2) The actual intellectual property object (the file or “content”), Due to the limited scope of this paper we focus the analysis of the service delivery mechanism on billing, or so called micro payments. The analysis of the content part will mostly be limited to music and games. A conceptual model of the full service delivery mechanism is provided (Figure 1).
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Definitions and character of IS service innovation This paper attempts to combine the systemic nature of innovation in a macro level perspective from an industry study with elements of micro scale indicators on managerial level. Why is innovation important to firms? Firstly, research implies that new products (or services) help capture and retain market share and increase profitability. Secondly, new product development is important as the environment is constantly changing, creating new opportunities and constraints. The following types of strategic advantages can be obtained through innovation according to Tidd, Bessant, Pavitt (1999): [Table 1] Swanson (1994) develops concepts to differentiate theory of IS innovation from organisational innovation theory. He recognises that innovators are frequently assumed to motivate imitative behaviour by others. Channels of communication is of central concern for the adoption process, and Swanson argue that these channels are significantly differentiated according to IS innovation type. Innovations can be typed, e.g. new products (or services), administrative innovation (improving internal control, coordination, and structure), and technical innovations (changes to technology or work processes). Lyytinen and Rose (2003) extend Swanson’s definition and define IT base innovations in terms of disruptive IT innovation as an architectural innovation originating in what they call the “information technology base”, referring to Teece, Christensen, and Swanson (1986; 1997; 1994). They distinguish between these three types of IT innovations and their interactions in what they call the “three-set model of IT innovation”. [Figure 1] Lyytinen/Rose (2003) further defines the effects of disruptive IT innovation as pervasive in that it simultaneously and necessarily spans new services, and new types of development processes. According to Lyytinen and Rose, the packet based telecommunication networks of the 1990s is a base IT innovation that spurred subsequent innovations in system development and services. Lyytinen and Rose’s further categorise service innovations in the following table: [Figure 2] In this paper mobile entertainment services innovations are mainly referred to as “technological service innovations”, as in the table above. The influential dynamic capabilities view (Teece/Pisano, 1994) connects Lyytinen/Rose’s definitions in classifying how an organisation can align with an ever changing environment. In this view, firm-specific capabilities are being renewed and embedded in its processes, market positions, and expansion paths. Dynamic capabilities are strategic and they cannot be homogenous assets. These are e.g. internal competences such as values, organisational experiences, and culture that cannot be bought on the factor market.
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Replication and transmission of knowledge can only take place when information is codified, specified and it is understood that replication takes place. The two main values of replication (Teece/Pisano, 1994) are to support geographic and product line expansion, and the spread of valuable capabilities to customers. As will be discussed later, it is crucial for technology licensing firms to decode its technical assets in order to offer it to customers. To understand process improvements is the source of incremental service innovation. Strategic change is costly in the dynamic capability view and therefore gaining opportunities for competition through diversification are costly. It can be made easier when an efficient market of technology exists.
Three contextual views on innovation In the following section three contexts for service innovation are presented with its relation to organisational dynamic capabilities and the concept of business models. 1) The economic context: Arora et al (2001 claim evidence exist that barriers for market transaction of technologies in many markets have decreased to the degree that they significantly affect the strategy space for companies through either licensing in of technology instead of developing inhouse; or license out technology instead of investing in assets for manufacturing and marketing. The demands on management could be summarised in: proactive management of intellectual property, greater attention to externally monitoring of technologies, organisational change to support technology licensing, joint ventures, and acquisition of external technology. Arora et al (2001) claim that for entrepreneurial start-ups, markets for technology make a focused business model more attractive. At industry level, markets for technology may lower barriers to entry and increase competition. Entrepreneurial start-ups may be able to focus more narrowly on developing technology rather than on its application, by relying on licensing and other arrangements to get returns on their innovative efforts. Markets for technology are also critical for the existence of many small and medium sized enterprises (SMEs) in the telecom industry. Therefore the monitoring of externally available technologies becomes a strategic activity. Markets for technology can also undermine privileged access to technology that incumbents enjoy. Larger firms have to balance the revenues of royalty against the lower price-cost margins and reduced market share that the increased competition from the licensee implies. In general, licensing is more attractive when the licensee operates in a different market. Smaller firms typically have to acquire complimentary assets should they choose to exploit their innovation by commercializing it themselves. When licensing their technology they don’t control their own fate, as licensees have to invest in complementary assets to commercialise the technology. Another issue is the longevity of complementary assets compared to the technology itself: by investing in downstream facilities, the firm needs to feed these resources with continued innovation in order to be successful. Firms divide attention and resources between two broad types of activities:
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exploitation and exploration. Acquisition of complementary assets affects the culture of the firm and induces changes to the speed and fluidity of information flows (Arora et al, 2002). 2) The organisational context: In the following Jens Christensen’s article from 2002 is used to address the comparative long-term dynamics of two different types of technology-based companies: the ‘related diversifier’ pursuing ‘synergistic economies’ and the ‘vertical integrator’ pursuing vertical economies Organisational design for managing innovation, according to Christensen, is contingent on both the overall strategy-structure profile and dynamics of the companies, and on key characteristics of their particular innovation and technology strategies. He illustrates the difficulties of many diversified companies in creating efficient internal capital markets for longer-term R&D, especially under corporate governance dominated by financial control rather than strategic planning style. The related diversifier tends to impose an organisation on management of R&D that severely constrains the strategic scope for innovation and technology strategy. Christensen also points to the challenge for incumbents that are diversified that they have problems keeping up with innovation, in spite access to financial and technology assets. The organisation’s decision to develop into related diversifiers or vertical integrators are affected by the nature of the underlying technologies and innovations in the organisation. When compared to many of its European counter parts, NTT DoCoMo in Japan had a relatively new and vertical organisation focusing only on mobile telephony already in the latter half of the 1990s, whereas most other carriers in Europe stream-lined their mobile operations at a later stage. Clayton Christensen et al (2002) discuss an industry’s vertical integration and horizontal stratification with the notion of “structured dialogue”. When structured dialogue takes place between two actors, markets are the most efficient coordination mechanism between firms (as in contrary to vertical integration of functions within the same company). Three conditions must be met for a “structured dialogue” to take place: 1) The customer that procures must be able to specify which attributes and parameters that must be provided 2) Metrics for those attributes must exist, and the technology to provide those metrics must be readily available 3) The procuring company must understand the interactions or interdependencies between the attributes of what is provided and the performance of the system in which the procurer will use it. 3) The network context: A basic assumption in the network model is that the individual organisation is dependent on resources controlled by other organisations. Because of the interdependencies of firms, the use of an asset in one firm is dependent on the use of other firms' assets (Johanson & Mattsson, 1987). Ruef (2002) argues that tie strength (weak or strong) for innovation could be analysed with the help of two underlying dimensions of social relationships:
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information and influence. Innovation in Schumpeterian tradition requires that corporate actors have access to information on various ideas and routines from which elements can be combined. The tendency of entrepreneurs and SMEs to engage in innovation relate to structural and cultural embeddedness, according to Ruef (2002). Capacity of creative action is seen to be a function of the ability of entrepreneurs to i) obtain non-redundant information from their social networks; ii) avoid pressures for conformity; and iii) sustain trust in developing novel (and potentially profitable) innovations. Ruef presents and tries (successfully in his own paper, 2002) amongst others the following hypothesises: team size (large teams of entrepreneurs are more likely to be innovative than smaller teams), strong ties versus weak ties (actors relying on strong ties as sources of ideas are less likely to be innovative than actors relying on weak ties), and the most powerful: network diversity (actors embedded in a diverse set of network ties are more likely to be innovative than actors relying on homogenous ties). In the dynamic capabilities view these network capabilities of the innovative organisation would affect current processes, as well as future paths. Ruef attempts firstly to answer how in the micro-level context – both structural and cultural – entrepreneurs contribute to the tendency to deviate from established ways of thinking and introduce new innovations. Secondly, Ruef devotes attention to how innovation is tied to the emergence of novel organisations and organisational forms. The reproduction of existing ideas is seen to be a junction of the types of social relationships those entrepreneurs are embedded within.
From cognitive awareness to business models In previous sections we have discussed the nature of IS service innovation and connected it to dynamic capabilities and a study lens of three context types. In the following we will merge these aspects of innovation into a discussion of strategy and business model formulation. The inherent value of a technology remains latent until it is commercialised, and it is crucial for technology managers to find the “architecture of the revenue” early on in the development process according to Chesbrough and Rosenbloom (2002). The business model can be said to be a situational cognitive model of value creation, being incremental and divisional rather than rational and corporate in order to support the firm’s adaptation process to changes in external environment. Building alliances are important to ignite positive feed-back during the development process and Shapiro/Varian describe three types of alliances: Special interest groups (cross-licensing of patents), alliances where members can access standards, and alliance around a central actor who collects royalties. Partners in such alliances would negotiate over control of the existing installed base, technical superiority, and intellectual property rights. The positioning and planning of products relies on the firm’s cognitive models of the external environment aided by information gathering through its external network. Service innovations could be positioned in two dimensions: novelty of technology; and
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novelty of markets (which is a variation on previous definitions of service innovation). However, assessing the maturity of a market is challenging, due to difficulties in defining the boundaries of a particular market, as our case involving mobile services will illustrate. By gathering information on the real growth rate of a market, a firm can estimate the stage in the product life cycle and the maturity of the market: High growth rates would typically be associated with high R&D costs, high marketing costs and rising investments in capacity (Tidd et al, 1999). To gather this kind of information in an emerging market calls for active usage of the firm’s human networking capabilities. [Figure 3] Consistent failure to interpret possibilities in the environment of the firm (the marketplace) and commercialise technology may force the corporation to reduce or withdraw from its technology development. In the literature, the business model could be set in contrast to strategy in at least three aspects (Chesbrough and Rosenbloom, 2002): • • •
The business model assumes that knowledge is cognitively limited, whereas strategy formation assumes access to reliable information The business model focuses on value for customers, and less on competitive threats to returns. A business model focuses on value for the business, whereas strategy focuses more on shareholder and financial value.
The logic of an established and successful business model could also constrain an organisation’s search for new alternative business models, described in the literature as establishment of a “dominant logic” (Pralahad and Bettis, 1986; Chesbrough/Rosenbloom, 2002). Habits of established routines and dominant logic confines the firm in various ways: local search relying on basic routines (Nelson/Winter, 1982), learning processes being local and path dependent (Teece, 1986; Mitchie, 1998), bounded visions among managers meaning firms may differ greatly in their perception of new opportunities (Fransman, 1990), or innovators loosing out to imitators due to lack of complementary assets (Teece, 1986). Established business models become embedded in the organisation, which is described as the `success breeds failure syndrome’ (Starbuck, Greve and Hedberg, 1978), that disadvantages established industry leaders when challenged by startups with new and transformative technology (Christensen/Rosenbloom, 1995). It could also affect the firm’s absorptive capacity negatively (Cohen/Levinthal, 1990). To overcome limited information and bounded visions in new technology development some scholars propose firms to invest in: integrative capabilities (Henderson, 1994), complimentary assets (Tripsas, 1997), and manage disruptive technologies outside the main business (Christensen, 1997). Integrative capabilities are competences spanning organisations, which takes time to establish, as they are the product of many individual management decisions over time. ‘Related diversifiers’ as described by Ruef in the previous section would typically aim at this. Complimentary assets could be external integrative capacity, and the maintenance of geographically dispersed research centres.
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Managing of transformative (and disruptive) technologies keeps the organisation involved in alternative value networks. Limitations in a firm’s ability to autonomously evaluate business information could lead to ‘strategic convergence’ (Hamel, 2000), i.e. firms imitate each other. Successful business models get imitated by firms that do not understand that the strategic process involves designing a custom strategy or business model for the specifics of each situation that involves dynamic capabilities. Firms involved in strategic convergence typically underestimate the difficulty of replication and imitation of dynamic capabilities.
Mobile service innovation in music and games In a previous paper (Kärrberg/Liebenau, 2006) it is discussed how similar and converging technologies were used in Japan and Western Europe for mobile service delivery between 2000 and 2005. A general convergence in the global market of PC Internet and mobile phone Internet file formats is a major reason for this. Hence, the technical infrastructure itself doesn’t explain major differences in service provision of new and innovative service offerings. Due to strategic convergence, the business models and service innovation landscape for mobile services was interconnected and pretty much similar in Western Europe (generalised as ‘Europe’ in this paper) differentiated mainly by technological and market maturity in the various countries. By applying the contextual framework from the previous section, we attempt to analyse social dynamic effects on business models used in Japan and Europe through three perspectives: Markets of technology, organisation of in-house R&D (and payment models), and the nature of industry network ties. Differences in the institutional settings of regulation, and other historic aspects of the telecommunications sector in Japan and European countries should not be underestimated. However, the limited scope of this paper keeps us from discussing institutional factors in detail. Indicators of the influence of each contextual perspective are singled out after an introduction to the game and music markets: Markets of technology: Licenses and rights for music and games Organisational forms of in-house R&D and payment models: Related diversification and vertical integration among focal actors (carriers, music publishers, game publishers). Network aspects: Value chain integration and industry overlap (telecom, music, games) Our focus lies on Japan with a comparative discussion of Europe. The first mobile Internet services in 1999 focused on information services both in Japan and the EU, as carriers believed business users would drive revenues. High coordination costs in Europe kept content providers from expanding cross-boarder sales, as incumbents all had different billing systems, portal policies and regulations. So initially the larger size of the EU market didn’t have any positive effects for mobile services sales compared to Japan (Kärrberg/Liebenau, 2006). The music content sales got off to a head-start in both Europe and Japan. Traditional music sales were saturated or decreasing in both Japan and Europe around 2000. In the
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beginning, ringing melodies were manually input by users before the development of the mobile Internet enabled distribution of ready-made melody files. New technologies made it possible to distribute parts of original songs and, ultimately, full-track music. The process was not technologically determined, but rather socially and business-wise constructed. Initially ring signal services in Japan were dominated by karaoke providers were successful, while recording companies and content creators dominated the subsequent real-tone and fulltrack music download services (Takeishi/Yoo, 2006). In Japan markets of technology for music didn’t take off for monophonic and polyphonic ringtones (1999-2003) as karaoke providers re-created original songs and marketed them mainly by themselves. But gradually, popular service providers bought the rights to songs from music companies and marketed them on their own portals. Between 1999 and 2006 consumer and entertainment contents have totally dominated over business applications in terms of sales volume in both Japan and Europe. As Funk (2004) points out, the mobile Internet acted as a disruptive technology for existing and advanced Internet applications (business usage), whereas (simple) entertainment content (consumers) were much easier to enable and sell.
In 2003 Europe and Asia (foremost Japan) were together leading the way for ringtones. The Economist (2004) reports that ringtone sales were $3.5 billion worldwide in 2003, up by 40% from 2002. According to the Digital Contents Association Japan the ringtone sales in Japan were USD 900m in 2003, some 25% of the global market. Europe and Asia were the leading markets, with only USD 50m to USD 80m generated in the US. Sales of ringtones had already overtaken CD singles and outstripped legal internet download services, such as Apple's iTunes, which generated less than USD 100m in 2003 worldwide. The mobile gaming industry in Europe was bogged down by lacking handset and billing capabilities until 2003-2004. However, in Japan the demand for mobile entertainment services attracted traditional game software companies early on from 2001 when the first java phones were released. Even before the introduction of java, a few game providers (like Dwango’s ‘Tsuribaka’ game) attracted 100s of thousands of users paying USD 3 or more per month. A general downturn for game centres Japan at the end of the 1990s started simultaneously with the introduction of mobile Internet services. Especially SEGA, market leader in game centres, were already looking for new sources of revenues. Investments to develop a new java application are rather high (USD25k-50k for an initial prototype working on 3-5 handset families, own source), so the early connection and collaboration between networks of Japanese game publishers and the telecom carriers was crucial. The fact that handset specifications were coordinated by the carriers in Japan, further decreased coordination costs for the game publishers when offering end users their products.
[Figure 4] In Japan companies like Namco, SEGA, and Konami offer most of their popular game services in the entertainment category on NTT DoCoMo’s i-mode portal. These companies have a long experience of developing games for home consoles and computers. Like character licensing, game software is a huge industry in Japan, concentrated to
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Tokyo. The figure below illustrates the major game software companies in Japan and their business areas. [Figure 5] But also new entrants (such as Dwango and G-mode) got on the carrier portals in 2001 with their games, often staffed by ex-employees of larger game publishers. All of the gaming companies entered the mobile Internet gradually from 1999 and with force in January 2001 when java handsets were released. They all saw it as crucial in order to regain sales from a declining game centre market. The wireless games market in Japan was estimated to USD 230m in 2005. Wireless world forum reports (2006): “Japanese play more mobile games than their counterparts in the US and Europe. In 2006 over 70% of i-mode users are expected to have played a mobile game more than once a week, with 38.4% playing almost every day. By comparison, only 16% of UK mobile phone owners say they play mobile games regularly”. Therefore anecdotal evidence points to a higher usage and expected higher innovative activity within the mobile gaming industry in Japan. Further, a gaming cluster exists in Tokyo according to Tokyo University researchers (Baba, 2001), adding to the innovative capability of companies located there.
Mobile payments for games and music Currently, a large majority of mobile payments in Japan and the UK for mobile data services are triggered via end user action and terminated in the billing systems of the carriers. The carrier billing systems either accept SMS or some form of browser mediated billing (strings of unique URLs). A growing number of payments are triggered via a PC, but very few payments are mediated via alternative methods, such as credit card billing, bank transfer, or other e-payments (Paypal etc). Below is a categorisation of a general value network, enabling various business models, for delivering entertainment mobile content (video, audio, graphics, applications): [Figure 6] A company can take more than one role in above chart. In most cases two types of billing systems connect a) carrier with billing mediator and b) service delivery provider with billing mediator. There are three exchange flows of interest to our analysis of these firms: digital content delivery, monetary transactions, and business interaction between staff to enable the previous two. Contents in indirect billing systems are generally not charged to the end-user, but paid by advertisers or other information providers. Offers combining indirect and direct payment systems are common. An example would be a mobile site where advertisers (who don’t charge the end-user) and content providers (who charge for content downloads via micro billing) display their offerings side by side. Another more intricate example is a mobile portal, provided by a carrier that includes search engine functionality, where users search for content (e.g. “Tetris”). Behind the scene content providers bid for popular key words (such as game, girl, gambling etc) in weekly auctions (arranged by the search engine
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provider) in order to be on top of the resulting list that the end-user sees upon his key word search. In Japan, pricing of mobile games used to be offered only as monthly subscription for a single game or a game pack initially, but later on also as one-off charge. In Europe the opposite development with initially only pay per download existed, due to limitations in the billing software used by carriers and service providers. From 2005 and on, search engines (mainly provided by Overture and Motionbridge) became commonly used by carriers in Europe. Content providers bid for key words (in on-line auctions) used by these search engines, generating revenue streams for operators both from service providers and end-users. Technical glitches and high bids from inexperienced service providers often meant that over-all profitability for service providers have been challenged. It can be argued that this has further accelerated industry-wide merger and acquisition trends among service providers in Europe.
Discussion and conclusions Micro payments in mobile services have remained more or less proprietary, unique to each carrier, up until recently. Products in which there is little or no value to the first users due to the existence of strong direct (e.g., telephone) or indirect (complementary products such as mobile commerce) network effects face a significant start-up problem (Economides, 1996). According to Funk (2006) the Japanese and to a lesser extent Korean service providers early on solved the start-up problem of direct network effects with entertainment content that was supported by a micro-payment system (service providers collect and pass on content fees to content providers) and custom phones that displayed this content in a consistent manner.
Markets of technology for music and games: Sony Music in Japan initially lost out to fast-moving karaoke companies in the ringtone business, but revived its influence and sales when full music downloads became available. Europe had a similar situation with large record companies missing out on the first wave of monophonic and polyphonic ringtones, due to lack of copyright protection and ambiguous IPR legislation. As most music files now are sold in MP3 or other standard file formats, the only remaining trick to protect from piracy and copyright infringement are digital rights management (DRM), in which third party providers assist record companies. For games, early on a significant license trade developed in Europe, as simple PC games from the 80s (Atari, Amiga) initially were popular. In 2006, even 3D games (such as Vijay Sing 3D Golf by Gameloft) were released for more advanced handsets, costing up to USD 7 to download. In Japan, the established game producers have chosen to produce mobile versions by themselves.
Organisational forms of R&D and payment models: Sega created a related diversification strategy when splitting their game developing organisation into smaller independent units, each with a certain market focus, some of them targeting the mobile segment. None of these early moves were seen in Europe around 2000, where not even GPRS or micro billing were widely spread. NTT DoCoMo created a special department (the Gateway department) dealing with the approval of new 11
services for its i-mode portal already in 1998. Corresponding moves in Europe didn’t happen until Vodafone Live was launched in October 2002. Prior to that experiments with circuit switched WAP (Wireless Application Protocol) services had failed mainly due to lacking value chain integration and clear business models in Europe. European users could finally turn to their carriers for a mobile Internet shop from 2002, what imode had offered the Japanese since March 1999. In Europe carriers early lost the initiative on delivering wallpaper and ringtone business to premium SMS providers, but these still had to pay high revenue share fees to the carriers. According to Takeishi/Yoo (2006), an integrated analysis is needed of the business ecosystem of the mobile music in Japan (and Korea) to understand the interplay of copyright institutions and business models of dominant actors. Due to weaker copyright institutions in Korea, carriers could dominate the music industry (through buying major record labels e.g.), which wasn’t the case in Japan and Europe. The business model of Japanese carriers early on focused on packet charges for data combined with premium content fees. Content providers could keep up to 91% of premium content fees, but the bulk of revenues was generated by packet fees. Most packet fees originated from email traffic and pier to pier messaging. Perhaps as much as 90% of total revenues from i-mode were content fees and only 10% stemming from premium content fees in 2001 in Japan (Kärrberg/Marnung, 2001), which made carriers the absolute winners from the success of mobile services.
Network aspects: Kärrberg/Liebenau (2006) summarise the main differences between the corporate networks around mobile Internet in Japan and Europe: “When comparing the EU and Japan the first major difference is in the usage of GSM versus PDC as the network standard. At a first look, it would seem as the EU had a head-start as GSM is a global standard and PDC is not. There are many similarities when looking back in time: Both markets were pioneering the mobile Internet, and WAP even had a head start over i-mode (and WAP was adopted by KDDI, the second carrier) as a mark-up language. Handsets had black and white screens and no ring tones or java games were available in Japan or the EU during launch in 1999. Messaging, the “killer application”, took off already back in the mid-90s as the first data application in both markets, and still in 2005 provide most of the non-voice revenues”. It is also clear that the focal role of carriers in Japan enabled an early incentive for investments in marketing and product improvements in order to grow the market through feed-back processes with the users. This feed-back process was early on recognised by NTT DoCoMo as crucial in order to grow the market. Similar investments in long-term product development was lacking in most European markets until GPRS and Vodafone Live became available in 2002. Feed-back processes in Japan early on produced a few profitable content providers, that inspired other content providers, more users signed up, and carriers (NTT DoCoMo mainly) expanded its content departments. An existing world-class cluster of entertainment service companies in Tokyo (gaming, animations, karaoke) also contributed to a rapid mobilisation of production resources into the new
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mobile Internet distribution channel (Kärrberg & Marnung, 2001). There are also clear structural differences: The market fragmentation and power struggle that took place in Europe between handset makers and carriers didn’t take place in Japan. The “always-on” packet networks (GPRS) in Japan were not available until 2002 in most EU markets. Another major difference was the clear value proposition that Japanese carriers offered compared to EU carriers.
Discussion Lacking cultivation of ties between carriers and the new content providers in Europe meant a severe lack of trust between the parties on grudges against low revenue shares on one hand (content providers) and complaints regarding lack of quality control on the other (carriers). NTT DoCoMo’s Gateway Department originally spent a majority of the time convincing the banks to offer mobile banking sites, but realised quickly that ringtone signals were more important, when the first i-mode handsets had gone on sale. As a contrast, the low replacement rate of handsets and lacking customer relationship management from carriers towards service providers in Scandinavia (the leading GSM market at the time) exemplify how network effects were kept back from work in 1999 to 2002 at the time when Vodafone Live was launched in the EU (Kärrberg & Sigurdson, 2002). Islands of directed ties (Ruef, 2002) could also explain the higher success rate for new services in Japan in the initial stages of the mobile Internet, when the game and music industries connected to the mobile carriers. European services were mostly offered through specialised mobile content houses, who seem to have suffered from collective business models (strategic convergence) that weren’t aligned with the focal players, the carriers, and too much of isolated islands, with a focus on both in-house conceptual and technical design. Bounded visions could be seen to have developed among European carriers and services providers, with focus on GSM technology, and eyes on the carrierhandset power struggle. WAP forum, dominated by technology enablers (browser and handset makers) defined mark-up language and delivery methods without great interaction with carriers. Many service providers developed their own business models to deliver their content. One could argue that such insular positions would free actors from pressures of conformity, but such argumentation fail to acknowledge the importance of information flows as inputs to innovation (Ruef, 2002). Most content providers who didn’t fail immediately became technology enablers instead, trying to sell their solutions to carriers. Carriers using third party technology in their delivery systems took the first step towards markets of technology on the mobile Internet in Europe. One of the most crucial innovation areas in Europe were micro billing systems, which in Japan was controlled by the carriers. The difference in billing systems is perhaps the single largest reason for the different business models applied in Europe and Japan. In Japan it’s not possible to charge for contents off-carrier portal (for physical products it is possible though!). In Europe most mobile content houses provided games initially, but even in 2006 most games in Europe are provided by mobile content providers either on license from major
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game companies or stemming from their own game development. The gaming industry is dominated by the Japanese and Western game publishers like Electronic Arts, but only in Japan (and Korea) has mobile gaming attracted the game publishers to invest significantly in end-to-end interaction with the consumers. We note the fundamental difficulty for organisations to formulate strategy in an industry in change, and argue backed by anecdotal evidence from our field research, that actions based on well communicated cognitive views of how complex technologies interact, have provided competitive advantage and profits to innovative actors in Europe and Japan (represented by providers of micro billing systems and carriers in Europe; content providers and carriers in Japan). An overview and summary of the changing business strategies and a pointer to where resources for innovation in Japan and Europe have been directed among these actors are given in the following: [Table 3]
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Figures and tables: Type of innovation
Strategic advantage
Novelty Competence-shifting
Offering something which no one else can Rewriting the rules of the competitive game Difficulty of learning about technology keeps entry barriers high Basic model product or process can be stretched over an extended life, reducing overall cost Continuous movement of the cost/performance frontier
Complexity Robust design
Continuous incremental innovation
Table 1: Strategic advantages of innovation (Tidd, Bessant, Pavitt, 1999)
Content ownership
Service Delivery
Content aggregation
Billing
Portal Management
Content Approval, NW access
3 Party Man. system
Search Engine
Site Builder
Billing mediation
Media Player
Download Manager
Digital Rights Management
On-the-fly Transcoding
Device Discovery
Metadata capture
Content Man System
Compression encoding
Ingestion
Technology Choices Japan EU
= widely used Where...
= rarely used = hardly used at all
Figure 1: Kärrberg/Liebenau (2006)
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Systems Development Innovations
Service Innovations
IT Base Innovations
Figure 2: The three-set model of IT innovation (Lyytinen/Rose, 2003)
IT service innovation sets
Description
Examples
Services (S)
Administrative process innovation (S1) Technological process innovation (S2) Technological service innovation (S3) Technological integration innovation (S4)
Accounting systems, EIS MRP, computer integrated manufacturing Remote customer order entry and follow-on customer service systems Interorganisational information systems, EDI
Table 2: Service innovation sets (Lyytinen/Rose, 2003)
High
Novelty of technology
Low
Technological:
Complex:
new solutions to existing problems
technology and markets co-evolve
Differentiated:
Architectural:
compete on quality and features
novel combinations of existing technologies
Novelty of markets
High
Figure 3: Service innovations seen in the context of technological and market maturity (Tidd, Bessant, Pavitt, 1999)
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70 60 50 B illion Y en
40
Mobile Contents
30
Game Centers Music Contents
20 10
M M C A : W h ite P ap er 20 0 0
0 1998
1999
2000
Figure 4: Japan entertainment trends 1998-2000: Mobile contents up, game centres down (MMCA, 2000)
Namco
Arcade
Capcon
Taito
SW Amusement Park
PC SW
Sega Biggest Arcade holder Dream Cast SW
Home Consoles
Sony PS SW
Nintendo Nintendo 64 Gameboy SW
Atlus SW HW
Games SW
Dwango Network SW Mobile
Bandai Wonder swan SW
Konami SW
Square SW
Enix SW
Figure 5: Overview of the Japanese software gaming industry (Kärrberg/Marnung, 2001)
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3) Revenue share
Content provider
Service delivery provider
Content aggregator
1) Content delivery
Billing mediator
Carrier
2) Payment confirmation Consumer with handset
Fig 6: Payment value network
Japan 2000
EU 2000
Japan 2006
EU 2006
Carrier
Content Provider
Portal management, value chain coordination, billing systems Content aggregation, service delivery technologies Portal mgm, coordinate handset releases
Carrier relations, service creation
Service delivery platform provider biz Systems innovation for CP
Content creation
Carrier business relation, cost cutting and volume solutions Portal SMS solutions management, for off-portal and advanced brand aggregation, video services and store billing fronts for models carrier portals
Systems innovation carrier
Retail Brands
Distributing raw content to content provider
Distribute to for carrier, own portals
carrier Cost cutting for Use CP portal for revenues, offportal for customer interaction Technology infra Using off-portal for carriers, CP, storefronts for advertising and and brands. user interaction (TV voting etc)
Table 3: Service innovation in Japan and Europe, 2000-2006
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