developing cloud business models

8/2/2019 Developing Cloud Business Models

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42 IEEE SOFTWARE |PUBLISHED BY THE IEEE COMPUTER SOCIETY 0740-7459 /11 /$26 .00 2011 I EEE

EVER SINCE THE sotware industrydiverged rom the computer manuac-

turing industry, sotware rms busi-

ness models have been in fux. Over

the last decade, the primary sotware

industry has tended to be seen as a

combination o a US$200-billion sot-

ware product industry (with products

comprising either enterprise solutions

or packaged mass-market sotware)

and a $500-billion proessional-

services industry (producing bespoke

sotware systems matching exact cus-

tomer needs).1 In contrast, the vertical

sotware industries role has been di-

cult to grasp, existing between the pri-

mary sotware industry and industries

purchasing specialized sotware sys-

tems or their core businesses.2

One reason or this lack o clarity is

the obsolescence o industry classica-

tion systems. These tend to conceal the

sotware development activity o media

and communication companies such

as Apple, Google, Nokia, and AT&T,

classiying them among nonsotware

industries. Another reason is the vague

border between traditional sotware

companies, which deliver sotware as

packages but also through the Internet,

and sotware-based rms, which use

the Internet in new ways, including as a

means to create and capture value rom

delivering content and services. These

services include what have become

known as cloudapplications.

Cloud computing reers to the pro-

vision o computing capacity and appli-

cations as a service across the Internet.

There are three service layers (matching

the cloud architecture layers):3,4

Inrastructure as a service (IaaS)

provides computation and storage

capacity.

Platorm as a service (PaaS) pro-

vides sotware development tools

and an application execution

environment.

Sotware as a service (SaaS) pro-

vides applications on top o PaaS,

IaaS, or a private data center.

Here, we ocus on the evolution o a

small sotware rms product and busi-

ness model, rom an SaaS toward a

PaaS strategy.5 In particular, this case

study considers how, over time, this

rm developed a successul cloud busi-

ness model to compete in computer

gaming.

Business ModelsThe term business model tends to be

loosely dened. Essentially, a business

model is a story that explains how a

rm works.6 However, rms oten de-

pend on other actors in the market. So,

to understand how a rm works, we

must know the other important actors

in its network. For this reason, we ap-

ply Alexander Osterwalder and his col-

leagues recent denition o a business

model, which takes the entire rms

network into consideration:

[A business model is] a description

o the value a company oers to one

Developing CloudBusiness Models:A Case Study

on Cloud Gaming

Arto Ojala and Pasi Tyrvinen, University of Jyvskyl

//Cloud computing lets small frms compete in markets

traditionally dominated by multinational corporations.

Over a 10-year period, one such frm developed a

successul cloud gaming business model. //

FOCUS: SOFTWARE BUSINESS


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JULY/AUGUST 2011 |IEEE SOFTWARE 43

or several segments o customers and

o the architecture o the frm and

its network o partners or creating,

marketing, and delivering this value

and relationship capital, to generate

proftable and sustainable revenue

streams.7

Business models are oten depicted

as static descriptions o a rms activi-

ties in the market. However, marketsarent static, and rms must respond to

market changes. In addition, a change

in a sotware rms products can

change its business model. So, a busi-

ness model that succeeds today might

not be successul tomorrow, and rms

must adjust their sotware oerings

and business models to adapt to chang-

ing market conditions.

From PackagedSoftware to SaaSFor sotware rms, the transition to an

SaaS business model means much more

than just delivering standard sotware

products through the Internet (see

Table 1). The adoption o SaaS has been

regarded as a major driver o structural

changes in the sotware industry.8

SaaS promises sotware rms more

customers because applications become

available via the Internet and are no

longer limited by the need to package

and deliver CDs or DVDs. Moreover,

the service is executed in a single virtual

environment that removes the need to

develop, test, and maintain sotware

variants or multiple OSs, databases,

and middleware systems. Estimating

uture demand or capacity is no

longer a problem because the sotware

executes on top o third-party PaaS or

IaaS with virtually unlimited capacity

in terms o on-demand processing

power and storage.

The core value of SaaS lies in pro-viding online access to a software

product that the provider manages

and maintains. For customers, SaaS

promises more services for fewer up-

front costs because they only pay per

use. Moreover, out of the long tail

of services provided via SaaS,9 they

can choose the one that best matches

their needs, rather than using sotware

theyve installed on a PC. This means

ewer problems with purchasing, up-

dating, and maintaining computer

hardware, or with hard disks, OSs,

and applications. The applications are

stored on the Internet, upgrades are

available automatically, and Internet

data storage expands in accordance

with demand, never becoming ull.

For sotware rms, the promise o

low costs or users is, in one sense, bad

news. On the other hand, they can o-

er low-cost services to small businesses

and individual users that could never

have aorded heavy enterprise systems

in which adoption might well require

expensive tailoring and integration.

Moreover, large enterprises can also

adopt SaaS services on the basis o ser-

vice fexibility. They nd advantages in

the ease o starting to use a service or

in cases in which prior problems with

poor cost/benet ratios have prevented

the use o sotware.

SaaS doesnt promise killer ap-

plications or high-end users; rather,

the benets accrue to large numberso users in new market segments with

the provision o services previously

available to only a ew enterprises.

The charges or SaaS services are also

based on use. Instead o a large lump

sum when a license is sold or a sotware

project is delivered, SaaS oers service

providers a airly steady stream o in-

come once customers have started using

the service. However, owing to the low

revenue per customer, service providers

will need many customers, which they

can gain through aggressive marketing

or by using high-volume channels, such

as network operators.

The Case StudyWe chose the gaming industry or our

case study because games include ea-

tures rom both the sotware and me-

dia industries. The gaming market in-

cludes extremes, ranging rom high-end

games (requiring specialized consoles)

to simple games (delivered ree through

the Internet). Both might seem like

TABLE

1 Table 1. Software-as-a-service characteristics, concerns,

and business characteristics.10,11

Characteristics Concerns Business characteristics

Service based

Scalable and elastic

Shared (multitenancy, one-to-many)

Usage metering

Internet technology

Service-level-agreement guarantees

Security, including data ownership

Integration with on-premise systems; limited customization

Transparency o processes and supply chains

Immature technology and standards

Unproven fnancial and licensing models

Easy to deploy, easy to deliver

Online purchase, online support

Low price, high volume

Low competitive advantage

Common business processes

Loose, standard integration

Transerrable risk

Modest internal IT capacity

Immediate need

Low budgetary expense


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44 IEEE SOFTWARE |W WW. COMPUTER.O RG/SOFTWA RE


challenging markets or SaaS oerings,

which can suer rom network latency

and rely on end-user payments.

We examined how the sotware o-

ering and business model o Game

Cluster (G-cluster)a sotware rmthat uses cloud architecture in the gam-

ing marketdeveloped since 2000.

More specically, we explored the rea-

sons behind the changes to its sotware

and the business model and the benets

these changes precipitated. We con-

ducted two rounds o interviews: one

in 2005 and one in 2010. In total, we

conducted seven open-ended interviews

with ve inormants, each lasting 45 to

90 minutes. The inormants included

the managing director, the vice presi-

dent, the chairman o the board o di-

rectors, the vice president o sotware

engineering, and a sotware engineer.

In addition, we ollowed the rms

press releases and website to gather ad-

ditional inormation.

System Architecture

G-cluster, established in 2000, has 25

employees. It provides interactive gam-

ing platorms and games on demand,

summed up as gaming-as-a-service.

The rms system architecture executes

computer games on servers operating

the rms game system platorm. It de-

livers games to client devices (players

TV set-top boxes or PCs) as a com-

pressed stream through the Internet,

provided by a broadband network op-erator. This model rees consumers

rom worrying about processor power,

the OS, graphics cards, or other techni-

cal specications o a PC or console.

Network operators are in a good

position to provide customers with the

quality o service in the IP connection

needed or latency management. They

also have large customer bases to target

and computing centers that can operate

gaming inrastructure services.

The 2005 Software and Business Model

During G-clusters start-up phase rom

2000 to 2003, it ocused mainly on

product development and network-

ing with potential partners. In 2003, it

started concentrating on marketing and

sales.

Figure 1 demonstrates the 2005 busi-

ness model. In this model, G-cluster li-

censed source code rom other rms,

such as game publishers and game de-

velopers. When G-cluster licenses a

game, it modies the source code to en-

able the servers gaming platorm to ex-

ecute the code. It also makes any neces-

sary changes or a given user interace.

For instance, i a game was originally

developed or a console and G-cluster

aims to target it at PCs or Internet Pro-tocol Television (IPTV) devices, it must

convert the command button drivers

or a remote control or control paddle.

In 2005, G-cluster tried to penetrate

the IPTV market. However, this mar-

ket was still undeveloped, and G-clus-

ter couldnt reach enough potential

customers. So, the rm started oering

games on demand to PC users.

In 2005, G-cluster used network

operators and portals as sales chan-

nels to consumers. However, it was di-

cult or such a small rm to contract

with network operators. So, G-cluster

used value-adding mediators (video-on-

demand service providers, set-top box

manuacturers, and middleware sot-

ware providers) as channels to market

its product to network operators. In ad-

dition, video-on-demand service provid-

ers contributed an invoicing system or

G-clusters games-on-demand service.

The mediating rms helped G-cluster

contract with the network operators

who were its main customers. G-cluster

Gamelicensors

Binary code

Sourcecode

Addedvalue

Games ondemand

Revenue

Addedvalue

Games ondemand

Addedvalue

Addedvalue

Addedvalue

Addedvalue

Networkoperators

G-cluster End usersPortals

Set-top boxmanufacturers

Middlewaresoftwareproviders

Video-on-demand

service providers

FIGURE 1.The 2005 business model. G-cluster licensed source code from game licensors. The games were executed on a gaming platform

operated by a network operator and delivered to end users PCs through portals.


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provided the gaming platorm and game

applications or the operators, who ran

the games on their servers.

In this business model, portals actedas retailers or G-cluster and the net-

work operators, thus making the games

available to consumers. Portals pro-

vided game menus or consumers. They

also took care o marketing and invoic-

ing through the invoicing system inte-

grated into their own services.

In 2005, the customers o G-clusters

games-on-demand service were mainly

PC users, and the service was accessible

to 15,000 households. The revenue was

shared among the portals, network op-

erators, G-cluster, and game licensors.

Changes in the Software

and Business Model

Figure 2 represents G-clusters 2010

business model, which is simpler and

has ewer actors. It no longer includes

video-on-demand service providers,

set-top box manuacturers, middle-

ware providers, or portals. This dier-

ence has two main causes: a change in

the target market and a change in the

sotware provided.

In 2010, the target customers were

IPTV users. The PC gaming market

had become extremely competitive,

and nding a segment on which to o-cus was hard. For PC players, games

have increasingly become ree. In addi-

tion, well-known games are extremely

expensive to license or games-on-

demand services. All this meant that

the PC market became too dicult to

penetrate and develop into a successul

business. So, G-cluster ocused back on

the IPTV market. Nevertheless, oper-

ating in the PC market had let the rm

test the product, obtain eedback, and

gain experience. These opportunities

enabled G-cluster to develop the prod-

uct urther or the IPTV market.

The target group or G-clusters

games-on-demand service also crystal-

lized. In practice, the service seems best

suited to mid-class users. Occasional

users are unwilling to pay or the ser-

vice because ree games are available

(although theyre much simpler than

G-clusters games). Heavy users tend

to buy games in stores and play very

complex games. They are also willing

to invest in consoles and other equip-

ment. G-clusters service thus appeals

to the middle category o users that a-

vors easy to use games, such as Nin-

tendo Wii games. This middle categoryorms a very large group, as the success

o Nintendos Wii has shown.

Regarding the sotware, G-cluster

now oers a whole product or net-

work operators.12 In 2005, G-cluster

provided only the server platorm and

gaming content. In 2010, it oered a

ready-made product portolio includ-

ing components previously provided

by value-adding mediators or net-

work portals. The rm now includes

an invoicing system and a user inter-

ace (menu) that lets users select the

games rom its virtual games store.

The comprehensiveness o its oerings

has enabled better access to network

operators with no need or sotware

components rom a large number o

intermediaries.

In addition, G-cluster got to know

the operators better between 2005

and 2010 and can more readily make

direct contact with them. The change

in target customers to IPTV users and

the individualized menu have let it

Gamelicensors

Binary code

Binary code

Qualityassurance

Sourcecode

SDK

Addedvalue

Games ondemand

Revenue

Addedvalue

Networkoperators

G-cluster End users

Servermanufacturer

FIGURE 2.The 2010 business model. G-cluster removed unnecessary third parties from the business model because of changes to the

entire product and changes in the target market.


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46 IEEE SOFTWARE |W WW. COMPUTER.O RG/SOFTWA RE


remove portals rom the value chain.

Altogether, these changes have madeG-cluster less dependent on third

parties.

The only third party between G-

cluster and the network operators is a

large, well-known server manuacturer.

G-cluster is still relatively small; thus,

cooperation with the large rm helps it

negotiate with new network operators.

However, G-cluster conducts no actual

business with the server manuacturer;

instead, the cooperation benets both

rms. G-cluster gets marketing and

sale resources rom the rm, which

already knows the network operators

and conducts business with them. Byincluding G-clusters technology on its

servers, the manuacturer gets added

value, which it can advertise when sell-

ing servers to network operators.

In the current business model, G-

cluster also oers a sotware develop-

ment kit (SDK) or game licensors. By

using the SDK, licensors can modiy

and integrate a game directly or G-

clusters gaming platorm and send it

to network operators. Nevertheless,

G-cluster undertakes quality assurance

or all games beore network opera-

tors can oer them to customers. The

long-term plan is to outsource all the

integration work to game developers.

In this way, developers can take the re-

quirements o G-clusters gaming plat-

orm into consideration right rom the

start. The SDK decreases integration

costs and lets G-cluster launch new,

more expensive games.

As Figure 2 shows, the revenue is

now divided among three actors in-

stead o our. This, together with other

business model changes, has doubled

the average revenue per user. In addi-tion, G-clusters service is now acces-

sible to 3,000,000 households.

Lessons LearnedA business model must provide value

to the actors in the supply chain. G-

clusters business model has provided

added value to actors in the game ser-

vices supply chain and to customers.

Over ve years, both internal changes

(product development) and external

changes (competition in the PC games

market) have impacted G-clusters busi-

ness model. The lessons learned rom

the G-cluster experience are applicableto a broader populationthat is, sot-

ware rms whose business model in-

cludes providing cloud services through

the Internet.

Aim at a Whole Product

By adding the invoicing and user in-

terace sotware, G-cluster created a

product that contains all the modules

needed and satises the operators

needs.12 With this business model, G-

cluster has become less dependent on

third parties and has improved prot-

ability by reducing the number o the

partners who share end-user revenue.

This implies that rms should simpliy

the value chain as soon as possible.

Certain third parties were impor-

tant in G-clusters start-up phase be-

cause they provided knowledge and

sotware modules that the rm didnt

have. These parties also acted as mar-

keting channels at a time when G-

cluster lacked legitimacy in the mar-

ket. However, when the rm achieved

an entire product and a easible mar-

ket position, costly partners becameunnecessary.

Shift to a Platform Layer

G-clusters development o the SDK

made it more protable to include new

games or its service. The new busi-

ness model decreased G-clusters modi-

cation o games and increased the

range o available games. Although

this decreased the income per game,

it boosted the total volume. So, a shit

in emphasis in the architectural layers,rom the games layer to the platorm

layer, let G-cluster ocus on developing

the core product. Generally, rms must

develop alternative business models

to keep their products competitive or

customers and maintain protability

or revenue-sharing partners.

Balance the Platform Strategy

and Operators Roles

Network operators can guarantee the

quality o gaming-as-a-service. Theyalso possess the customer contacts and

have the inrastructure or operating

cloud services. A small rm such as G-

cluster couldnt achieve the market vol-

ume that would let it operate the plat-

orm and games on its own, bypassing

the operators. So, providing ull PaaS

sotware or network operators and as-

sociated tools or game licensors has let

G-cluster establish a easible platorm

strategy in its business model.5

Use Indirect Network Effects

The server manuacturer acted as an

important new third party in the busi-

ness model, even though there were no

major business transactions or con-

tracts between it and G-cluster. The

partner now acts as a reliable mar-

keting channel, increasing G-clusters

market credibility and helping to nd

good contacts on the customer side,

which will prove useul when G-cluster

negotiates with large network opera-

tors. This indicates that small sotware

Executing the games

on a cloud server makes illegal

copying practically impossible.


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rms should exploit the positive indi-

rect network eects o its partners.

Exploit SaaS Advantages

Game licensors appreciate the SaaS

model or various reasons. Executing the

games on a cloud server makes illegal

copying practically impossible. Its also

easy to benet rom the long tail when

oering SaaS. In a virtual store, shel

space costs nothing, and the licensor

can oer a large number o games or

longer than traditional games oered in

storesgiven that a games lie cycle isrelatively short and shel space is costly.

Adapt to Infrastructure

Technology Changes

The IP protocol has been seen as a uni-

ying platorm or uture applications.

However, a plethora o network vari-

ants, inrastructure components, in-

teraces, and standards wars are still

impacting the market reach o any sot-

ware-based system. As we described,

G-cluster changed its business modelrom IPTV users to PC usersand then

back to IPTV users. These changes

were based on technical developments

and competition in the market. How-

ever, these business model changes

havent impacted G-clusters prod-

uct strategy because the same gaming

platorm can deliver games or PC and

IPTV. The only technical change was

coding the command buttons o the PC

games or IPTV users.

F or a small sotware rm suchas G-cluster, successul opera-tion in an SaaS market meansincluding easible positioning in the

business model. This means accurate

positioning in many dimensions. For

G-cluster, the positioning involved pro-

viding ull gaming platorm sotware

and being located between content

rights holders and network operators.

It also meant serving mid-class gam-

ers with a long tail o games that were

previously issued or game consoles

and that are now used or games on de-

mand through IPTV devices.

Generally speaking, a business

model change might come rom outside

the rm (a change in the market situ-

ation) or inside the rm (developmento a new or existing product). When a

sotware vendor starts a rm, develops

a new product, or expands a product

line, it must evaluate how these changes

impact the business model. In addition,

in assessing a business model, the ven-

dor should evaluate a new products

or services added value to other ac-

tors and customers. As G-clusters case

demonstrates, striving or platorm

leadership in the market will inhibit the

entry o new competitors. Firms can

also reduce the threat o competition by

developing a business model that bene-

ts allpartners, thus making it dicult

or newcomers to achieve a oothold in

the value chain.

References1. D.J. Hoch et al., Secrets o Sotware Success:

Management Insights rom 100 SotwareFirms around the World, Harvard BusinessSchool, 2000.

2. P. Tyrvinen, Vertical Sotware Industries,Vertical Sotware Industry Evolution:Analysis o Telecom Operator Sotware, P.

Tyrvinen and O. Mazhelis, eds., Springer,

2009, pp. 1115.

3. M. Armbrust et al., A View o Cloud Com-puting, Comm. ACM, vol. 53, no. 4, 2010,pp. 5058.

4. L. Youse, M. Butrico, and D. Da Silva,Toward a Unied Ontology o CloudComputing, Proc. 2008 Grid ComputingEnvironments Workshop (GCE 08), IEEECS Press, 2008, pp. 110; doi:10.1109/

GCE.2008.4738443.5. A . Gawer and M. Cusumano, Platorm Lead-ership, Harvard Business Press, 2002.

6. J. Magretta, Why Business Models Matter,Harvard Business Rev., vol. 80, no. 5, 2002,pp. 8692.

7. A . Osterwalder, Y. Pigneur, and C. Tucci,Clariying Business Models: Origins, Present,and Future o the Concept, Comm. Assoc.or Inormation Systems, May 2005, pp.140.

8. V. Choudhary, Sotware as a Service: Impli-cations or Investment in Sotware Develop-ment, Proc. 40th Hawaii Intl Con. SystemSciences, IEEE CS Press, 2007, article 209a.

9. C. Anderson, The Long Tail: Why the Futureo Business Is Selling Less o More, Hyperion,

2006.10. D. Greschler and T. Mangan. Networking

Lessons in Delivering Sotware as a Service,Part I, Intl J. Network Management, vol.12, no. 5, 2002, pp. 317321.

11. J . York, SaaS Model Economics 101: Com-petitive Advantage in Sotware as a Service,blog, 30 Nov. 2008, http://chaotic-fow.com/saas-model-economics-101-competitive-advantage-in-sotware-a-a-service.

12. G.A. Moore, Inside the Tornado, HarperBusiness, 1995.

ARTO OJALA is a senior researcher in the Cloud Sotware Program

in the University o Jyvskyls Department o Computer Science andInormation Systems. His research interests include sotware business,

international entrepreneurship, and internationalization o sotware

frms. Ojala has a PhD in economics rom the University o Jyvskyl.

Hes a member o the International Entrepreneurship Scholars and the

Academy o Inte rnational Business (A IB). Contact him at arto.k.ojala@

jyu.f.

PASI TYRVINEN is a proessor o inormation systems at the Uni-

versity o Jyvsk yl. His research interests include enterprise content

management and sotware business; he initiated the International

Conerence on Sotware Business in 2010. Tyrvinen has a PhD in

computer science rom the Helsinki University o Technology. Hes a

member o IEEE, the ACM, and the Academy o Management. Contact

him at [email protected]

ORS

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