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When the investors choose -
Analysis of business models within
the Swedish video game industry
Bachelor’s Thesis 15 hp
Department of Business Studies
Uppsala University
Fall Semester of 202
Date of Submission: 2021-08-05
Kasper Knudsen
Vilhelm Söderströ
Supervisor: Peter Ek
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mAbstract Many Swedish video game companies have in recent years been very successful in terms of share price development. Why is it like that? With the purpose to gain an increased understanding of the investor's choice, we here examine which business models are used in the Swedish video game industry. More specifically, we try to identify what similarities do the business models in the successful companies share and what similarities do the non-performing companies share. The analytical framework used is based on Business Model Canvas adapted to the video game industry. We use a qualitative approach with case studies of 10 listed Swedish video gaming companies, five successful and five non-performing, in terms of share price development. The data collected is from secondary sources, mainly the companies' annual reports, fitting the investors narrative with the assumption that secondary data is generally what influences the stock price. In general, the results suggest that similarities between business models among the successful companies largely coincide with similarities between the non-performing companies, which makes the information less valuable for understanding investors' choices. Nevertheless, one unique similarity among successful companies applies to that they in general have broad gaming portfolios that target several unrelated customer segments, i.e. a diversified market. The non-performing companies instead mainly target a niche market. Another unique similarity among successful companies’ business models concerns their use of acquisition strategies. In the non-performing companies' business models, acquisition strategies are largely lacking. Keywords: Business models, Business Model Canvas, share price, video game industry, secondary data, acquisition.
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Table of contents
Abstract 1
1. Introduction 3
1.1 Background 3
1.2 Problem discussion and purpose of the study 3
1.3 Disposition 4
2. Theory 5
2.1 The concept of business models 5
2.2 Business Model Canvas: A structured way of describing a business model 5
2.2.1 Value propositions 6
2.2.2 Customers segments, channels and customer relationships 7
2.2.3 Key activities, key resources and key partnerships 9
2.2.4 Cost structure and revenue streams 11
2.3 Summary of a framework to analyze business models in video game industry 12
3. Methodology 13
3.1 Choice of Method 13
3.2 Case selection 14
3.3 Data collection 15
3.4 Analysis of the data 18
3.5 Generalisability 18
4. Result and analysis 19
4.1 Company presentations 19
4.1.1 The successful companies 19
4.1.2 The non-performing companies 20
4.2 Analysis of business models in 10 video game companies 22
4.2.1 Value proposition 22
4.2.2. Customer segments, channels and customer relationships 24
4.2.3 Key activities, key resources and key partnerships 26
4.2.4 Cost structure and revenue streams 30
4.2.5 A business model canvas for the successful companies 32
5. Conclusions 33
References 353 1. Introduction 1.1 Background The birth of the first video games can be traced back to the 1940s, when researchers developed simple games and simulations as part of computer research. However, it was not until the 1970s that the industry became commercially viable with the introduction of arcade games. In the 1980s, the development of video games and consoles progressed along with the development of the personal computer. Since then, the video game industry has evolved in symbiosis with the exceptional increase in performance in the computer industry. New technology such as the smartphone has opened up new places where video games can be played, which further increased the market value (Donovan, 2010). Since then, the industry has only continued to flourish and from the year of 2014 to 2019 the money spent by gamers around the world grew from somewhere around $84 billion to nearly $150 billion per year (Newzoo, 2020). In 2020, the Covid-19 pandemic accelerated the growing trend for the video game industry due to lock downs and restrictions, which turned many people to the entertainment that video games could provide. Along with the growth of this market, also the number of listed companies within the industry around the world has grown. (Newzoo, 2020). Many Swedish video game companies have been very successful in terms of share price development. For example, the Swedish game development company Stillfront's share has given a 230% return over the past 3 years (Börsdata, 2021). The strong price development Stillfront has shown is not unusual in the Swedish video game industry either. A number of other companies in this industry have seen a similar development. This can be compared with the average development on the Stockholm Stock Exchange, which was 12.5% per year between 1990-2019 (Bolmeson, 2019). There is thus a significant difference in return between a share like Stillfronts, a so-called multibagger, and the average return for a listed company. The term multi-bagger was first introduced in 1988 by investor Peter Lynch in his book, One Up on Wall Street, and was defined there as a stock that provides at least 100 percent in return (Lynch, 1988). Since then, the term has developed further and now the term two-bagger is used for shares that have increased their price by 200 percent or ten-bagger for shares that have increased their price by 1000 percent. (The Motley Fool, 2019.) Of course, not all companies in the Swedish video game industry have a return on par with Stillfronts. There are a number of examples of companies where the return has instead been sharply negative for a number of years. 1.2 Problem discussion and purpose of the study Covid-19 has not only led to a growing growth of video game players, but it has also led to increased interest and activity in the stock markets. The number of non-institutional traders has increased drastically to levels similar to the 21st century IT bubble. Explanations of this behavior are partly the same as for the growing interest in video games, i.e. people who stay at home have more free time, but also more money to invest because it has been more difficult to spend money on consumption (Forbes, 2020). The declines in the stock market have also been of interest to private investors with high liquidity (Chiah et al., 2020). At the same time, multibagger phenomena are interesting from a trader's perspective because a universal desire among all investors is to maximize their invested
4 capital. Stocks for video games therefore become interesting for private investors due to their potential as multibaggers (Sener & Gulseven, 2021). A study by researchers at MIT in which 10,000 companies from various industries listed on the US stock exchanges were analyzed, shows how certain business models are preferred by investors. According to the study, there are certain factors that unite the business models in companies that are of greater interest to investors. The study also states that business models are important for investors' interest in general (Weill et al., 2011). In addition, there exists little academic research on video game companies, especially in context with business models. This is probably due to the fact that video gaming is relatively new, and until recently there has not existed a wide range of companies in the industry. Instead the market has been dominated by a few big players. With an increasing interest in video gaming and a growing demand in the industry, the number of market participants has grown and therefore the research for these companies needs to grow as well. And although academic research on video games has grown, marketing scholars still devote far less attention to this field than to other entertainment industries, such as movies, television, or music (Marchanda & Hennig-Thurau, 2013). The industry today is completely different compared to just 10 years ago when computer and console games were the main gaming platforms. Today, the largest platform is instead the smartphone, which has completely changed the market. With this type of ever-changing market, a company's business model must be evaluated and changed in order for a company to remain competitive. (Teece, 2010; Wirtzet et al., 2015). The few older academic studies that have analyzed this industry risk becoming obsolete and it is therefore an interesting area for studies. Based on previous research, we can thus state that a company's business model is of general interest for an investor (Weill et al., 2011). We can also state that video game stocks are of interest to investors because of their potential to become a multi-bagger, generating a high return on invested capital (Sener & Gulseven, 2021). Against this background, we have chosen to examine which business models are used in the Swedish video game industry. The purpose of the study is to gain an increased understanding of the investor's choice by comparing the business models for the most and least successful companies in the Swedish video game industry. More specifically, we try to identify what similarities do the business models in the successful companies share and what similarities do the non-performing companies share. Success in this context refers to companies that are successful in terms of extraordinary share price development, so-called multibaggers, while non-performing means the opposite. 1.3 Disposition Section 2 Theory, provides a theoretical framework for how business models can be described in a systematic way through Osterwalder's so-called Business Model Canvas. Based on Osterwalder's canvas, a theoretically based analysis model is constructed and adapted to the video game industry. In section 3 Methodology, the choice of method is presented and justified, as well as how the material was collected and what delimitations were made. In section 4 Result and analysis, the empirical material and the selected companies' business models are presented in a way that follows the theoretical framework. A cross-case analysis is used to examine similarities and differences between companies' business models. Finally, section 5 contains conclusions.
5 2. Theory In this section, we will present some theoretical starting points and key concepts to develop an analytical framework to use when we examine which business models are used in the Swedish video game industry. We begin by briefly touching on the concept of business models more generally. Then we take a closer look at a theoretical framework on business models, The Business Model Canvas, which offers a structured way of describing a company's business model, which fits the purpose of our study. Based on some studies on the video game industry, we will also discuss how the analytical framework can be adapted to the video game industry. 2.1 The concept of business models The concept of business models has existed for quite some time, rewinding to 1957 when it was first mentioned in the academic environment (Bellman, Clark, et al., 1957). Today the field has grown large and there are many authors in the field of business models. Magretta describes the business model as stories that explain how companies work, and her focus is on how organizations make their revenue by delivering value to a customer at an appropriate cost (Magretta, 2002). Despite the wide usage in academic literature there is no clear consensus in an universal definition of business models. Most authors however, agree that the purpose of a well developed business model is to gain competitive advantage. (Casadesus-Masanell & Ricart, 2011; Foss & Saebi, 2018). The primary definition of this study will be based on the theories of Osterwalder. His original thoughts about business models have been well preserved in time and are therefore still widely relevant today, with many modern articles containing his research. According to him a business model is a conceptual tool that contains a set of elements and their relationships which emphasizes an expression of a company’s logic to earning money. It is a description of the value a company offers to one or several segments of customers and the architecture of the firm and its network of partners for creating, marketing and delivering this value and relationship capital, in order to generate profitable and sustainable revenue streams (Osterwalder. et al, 2005). 2.2 Business Model Canvas: A structured way of describing a business model According to Osterwalder, every entrepreneur has an intuitive understanding of how their business is run and how their value is created, in other words an intuitive understanding of how their business model works. But, in many cases they are unable to communicate it in a simple way to others, and therefore Osterwalder in 2005 created the Business Model Canvas (hereinafter referred to as BMC). He was concerned with the question of how entrepreneurs could deal with business issues and changes, if these are not fully understood by all the concerned parties. The created canvas is a chart composed out of nine building blocks, under the categories of a product's value proposition, customers (segments, channels and relationships) , infrastructure (key activities, resources and partnerships) and finances (cost and revenue streams). The purpose of the canvas is being a tool for a firm to easily and in a structured manner describe a business model either in the purpose of developing a new business model or to evaluate an existing one (Osterwalder. et al, 2005). It is according to Osterwalder a hands-on tool that fosters understanding, discussion, creativity, and analysis (Osterwalder, 2010). It is important to recognize that a business model framework is more
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than the sum of its components, the model captures the value of how the business system will be
focused. This is consistent with suggestions that the business model is a system with complex
interdependencies (Fielt, 2013).
Figure 1. Template for the Business Model Canvas (Osterwalder, 2010).
Common criticism against the BMC is related to the fact that it is sometimes too broad or weak in its
ability to explain certain business models. To deal with this to some extent, BMC will be delimited
and adapted to better fit the targeted businesses, which according to Ching and Fauvel is a way of
dealing with this problem (Ching & Fauvel, 2013). The following theory section presents the nine
building blocks that are part of BMC with reasoning about certain simplifications and adaptations of
the framework to the video game industry.
2.2.1 Value propositions
The first building block in BMC is Value proposition. Customer value proposition was first introduced
in the 1980’s in Ray Kordupleski’s book Mastering Customer Value Management. The general
definition of the term is a statement that describes why a customer should buy a product or use a
service. It is one of the main theories behind the survival of a company since if the company doesn’t
offer any value proposition it will not receive any customers (Parasuraman, 1997). Osterwalder
describes the concept as what distinguishes a company from its competitors in terms of product
offered to customers to satisfy their needs. Osterwalder's value propositions are based on the
original product and service perspective. Of Osterwalder's many value propositions, we consider the
following to be of special relevance to the video game industry:
• Customization: Tailored products or services to specific needs. Lately the concept of
customer co-creation has gained importance.
• Accessibility: Making products available to customers who previously lacked them.7
With regard to the concept of customization, co-creation has as mentioned above become more
important. In video gaming the value is often created by the players experiencing the game. It is a
dynamic industry with multiple participants (Grönroos, 2011). When a player e.g. can modify and
customize content on the foundation of their development in a game, it creates unique value for
each individual. (Another aspect of co-creation connected to beta-testing and mods is developed
below in connection with customer relations.)
Concerning the concept of accessibility, it can be mentioned that there are large differences in the
availability between video games, mainly the difference between the platforms, such as PC/Console
vs Mobile. Mobile games generally have less hardware requirements and the games are often free
and small in size, making the downloads fast and easy (Stacktips, 2012), therefore having a higher
degree of accessibility.
2.2.2 Customers segments, channels and customer relationships
Profitable customers is the foundation which all companies existens rely on. Three of the nine
building blocks in BMC are related to customers: customer segments, channels and customer
relationships (Osterwalder, 2010).
Customer segments: To satisfy customer needs, it is important to understand the customers and
group them into distinct segments with common needs, common behaviors, or other attributes.
When creating the business model the company needs to decide which customer group to serve and
which to ignore in order to meet the needs of selected groups of customers. Customer groups
represent separate segments if for example their needs require and justify a distinct offer and they
are reached through different distribution channels. Some common market segments are the
following: (Osterwalder, 2010).
• Mass market: A very broad customer segment almost to a point where no customer
segmentation is being used.
• Niche market: A narrow customer segmentation targeting specialized needs and
characteristics of its customers.
• Diversified market: A company serves multiple unrelated customer segments with different
needs and problems.
Relevant customer segmentation in the video game industry are different types of players categories.
Depending on different types of relationships, customer needs etc. the customers can be divided into
casual, core and hardcore players. The casual players category make up the majority of players and
consists of people who spend limited time and money on games, and prefer the simple and easily
accessible games. Core gamers spend a little more time and money whereas hardcore players spend
a lot more time and money for the most part. Hardcore players are also well informed of the current
game and often participate in communities, and according to their specialized needs and
characteristics. (Video Game Market Size, Share & Trends Analysis Report. 2020). Casual players can
often be categorized under the mass market segment while hard core players often belong to the
niche market segment. If a company targets different types of players with different games, their
customer segments can be categorized as diversified.
Also, in the video game industry different platforms like PC, Console and Mobile satisfy different
needs and offer different values to different customers. The customers are reached through different
distribution channels thereby creating different market segments according to Osterwalder. The8
console device is a gaming platform and the users mostly consist of core/hardcore players. The PC on
the other hand is a multi-tool capable of variable tasks. It means that many in the customer group
occasionally play video games, while others are hardcore players. (Newzoo, 2020.) The mobile is the
newest addition to the video game platforms. It arose primarily with the advent of smartphones, and
as the technology evolved and became more widespread, the smartphones became cheaper and
availability increased (Oberlo, 2010). This availability and the fact that the games offered often are
cheap or free makes the platform's barrier to entry very low and thereby an ideal place to start
gaming for casual players (Newzoo, 2020).
The building block Channels in BMC describes the way a company reaches and delivers a value
proposition to its customer segments by (i) making customer aware of a company's products and
services, (ii) helping customers evaluate a company's value proposition, (iii) making a service or
product available for purchase to customers, (iv) deliver the value proposition to the customers, and
(v) after purchase, providing customer support for the product or service. A channel can either cover
some of the phases or all of them. A channel can also be divided into different channel types. Figure
2 describes and illustrates this. It is crucial for a company to find and adapt a channel/channels which
suits the way their customer segment(s) wants to be reached by (Osterwalder, 2010).
Figure 2: Illustration of channel types and its different phases (Osterwalder, 2010)
Characteristic of the video game industry is that its main distribution channels are characterized by a
high degree of monopolization. For PC the common distribution channels are Steam, Battle.net, Epic
Games Store etc. Console has Microsoft Store, Playstation Store and Nintendo eShop. Mobile has
Amazon Appstore, Apple App Store, Google Play etc. (Hackernoon, 2019). These can be categorized
as partner indirect web sales according to Osterwalder's terminology, while own direct web sales
exist but are uncommon. These distribution channels basically cover all channel phases described in
figure 2.
Customer relationships: In order to obtain profitable customers, alongside with customer
segmentation and channel decisions, a company also requires to determine which type of
relationship they want to have with their customer segments. Customer relationships is about how a
company should acquire new customers and work to retain customers, for example meaning that
customers continuously purchase or use the company's service. Various forms of customer
relationships include e.g. (Osterwalder, 2010):
• Personal assistance or Self-service: Refers to if a company has direct (human) or no direct
relationship with its customers. Self-service means that the customers are provided with all
the necessary means for them to be able to help themselves.9
• Communities: A platform which allows for interactions between company and customer as
well as customer to customer. This allows for customers to exchange knowledge but also for
the company to understand the customers needs and problems.
• Co-creation: An interaction, where a company allows for direct input by customer to the
customer’s product/service.
The self-service concept is seen in most companies in the video game industry. It is a result of games
being purchased online without further contact with the company, and as a result the physical sales
of games have declined (Thegamer, 2020).
Communities are common in the PC/Console segments. The degree of communities is highly
correlated to the targeted audience, with larger and more developed communities for games with
core and hardcore user bases, and less developed or no communities for games with casual user
bases (Burger-Helmchen & Cohendet, 2011). Many companies also utilize communities to encourage
core-and hardcore players to help out others by editing wikis, having official forums etc. This also
allows the companies to analyze the current needs of the player base, while generating a value
creation cycle for gamers with interaction (Gidhagen & Sörhammar, 2011).
Co-creation is highly relevant in the video game industry. Different degrees of co-creation is often
found in the PC/Console market with companies and their customers co-producing value. This is
achieved by actions such as beta-testing, meaning players get to play a first version of the game in
return for sending feedback to the developers before the actual release. Mods is another concept
where players can modify the game to their own style and share it with other players, thus creating
value for the company and other players by further extending the game to fit certain needs. To prove
this further, one of the most famous shooter games in video game history, Counter Strike, was made
as a modification of the zombie-shooter game Half Life (Gidhagen & Sörhammar, 2011).
2.2.3 Key activities, key resources and key partnerships
Key activities: In order for a company to get a business model to work as intended and be successful
there are some important activities within the business that must be done. These are called the key
activities, and they vary from business to business. Just as for key resources, the purpose is to create
and offer a value proposition, reach markets, maintain customer relationships, and earn revenues.
According to Osterwalder, key activities can be categorized as production, problem solving or
platform/network activities. Production as a key activity dominates the business models of
manufacturing while the core of some business models are problem solving, that is to for individual
customers, create customized solutions. The third form, platform/network refers to when business
models are dominated by platform or network-related activities. Networks, matchmaking platforms,
software, and even brands can function as a platform. For example, eBay´s business model requires
that the company continually develop and maintain its platform eBay.com. (Osterwalder, 2010).
Of these three key activity categories, the platform/network is the most relevant activity in the video
game industry. Many video game companies of the PC/Console segment require continuous
development and maintenance of its gaming platforms, thus requiring a high level of software
development. The mobile platform on the other hand requires less developed software due to
limitations of hardware (Stacktips, 2012).
The Key Resources building block describes according to Osterwalder the most important assets
required to make a business model work. Key Resources allow businesses to offer a value proposition10
to its customer segments, reach markets, maintain relationships with customer segments, and earn
revenues. There exists different types of key resources and their importance for a business depends
on the business model. Key Resources can be categorized as follows (Osterwalder, 2010):
• Physical: Physical assets might be vehicles, buildings, machines, systems etc.
• Intellectual: Intellectual resources are increasingly important components of a strong
business model. It can be for example brands, proprietary knowledge, patents and
copyrights, partnerships, and customer databases. According to Osterwalder intellectual
resources are difficult to develop but when successfully created may offer substantial value.
• Human: All companies require human resources, but people are particularly prominent in
certain business models. Human resources are crucial in for example knowledge-intensive
and creative industries.
• Financial: Some business models are heavily dependent on the requirement of great financial
resources and/or financial guarantees, such as cash or lines of credit.
The division into key resources Osterwalder uses is broadly in line with the most important asset
classes among game developers' business models identified by Klimas (2018). Klimas, however, uses
the term informational resources, which largely corresponds to Osterwalder's intellectual resources.
Key partnership such as strategic alliances between companies and joint ventures to develop new
businesses is according to Osterwalder a major factor in many business models. Companies create
partnerships with the main motive of reducing risk, optimizing their business models or acquiring
resources (Osterwalder, 2010). The latter two are explained in more detail in the points below:
• Optimization and economy of scale: It is seldom a profitable idea for a company to perform
all activities, or own all resources needed for its product/service by itself. To maximize
utilization, share infrastructure and reduce costs it is common for companies to enter a
buyer-supplier relationship, also called an optimization and economy of scale partnership.
• Acquisition of particular resources and activities: A company can extend their own
capabilities by relying on other firms to furnish particular resources or perform certain
activities by acquiring knowledge, licenses, or access to customers.
Acquisitions in the video game industry are made for different reasons and companies are often
interested in adding different games to their brand, increasing the intellectual resources of the firm.
Larger companies can be interested in buying smaller companies because the smaller companies
simply lack the resources to advertise and distribute the games themselves. Many acquisitions are
made for buying a company containing talented teams for future development of games (Macmillan,
2020). Companies in the video game industry utilize acquisitions for reasons such as domestic
consolidation and reaching new international markets. Unlisted companies on the stock exchanges
can look to be acquired by exchange listed companies to gain the benefits of investors' capital and
the buyer's resources such as gaming platforms to extend their products to a wider player base.
Acquisitions are associated with estimated risk and are a fast way to grow, seen more often in times
when the overall industry is in good shape. (J.P. Morgan 2021). To adapt the analytical framework to
what it looks like in the video game industry, we are thus expanding the concept of acquisition to
include acquisitions of entire companies.11
2.2.4 Cost structure and revenue streams
The cost structure block describes the most important costs that occur operating under a particular
business model. Such costs can according to Osterwalder be calculated after defining Key Resources,
Key Activities and Key Partnerships. Pinpointing the important costs helps evaluate and compare
business models in a structured way. In a business there exists many types of costs and some
common types are fixed or variable costs or costs characterized by economies of scale or economies
of scope. The former means that revenues increase at a higher rate than operating costs. The latter
means when an activity benefits several of the company's activities, e.g. when certain marketing
activities or distribution channels may support multiple products (Osterwalder, 2010).
Video game companies apply to online retailers, which are defined to have a wide reach, little
infrastructure requirements, unlimited opening hours and a high degree of scalability. In order to
respond to increasing client numbers and grow by scale online retailers only need to increase the
amount of servers (Enders et al., 2000). Scalability is the ability of a system, network, or process to
handle a growing amount of work in a capable manner or its ability to be enlarged to accommodate
that growth (Bondi, 2000). Scalable companies are characterized by exponentially increasing returns
to scale (Lund & Nielsen, 2018).
Revenue streams state how a business realizes income from its chosen customer segments.
According to Osterwalder business models can involve two main types of revenue streams:
(Osterwalder, 2010).
• Transactional revenues from one time payments.
• Recurring revenues from some sort of ongoing payment.
Under the main category transactional revenues, we have in the video game industry the premium
model. The premium model contains purchase, download and play. It has become more dynamic by
usage of distribution platforms such as Steam and Battle.net with automatic updates, patches,
dynamic pricing and special offers. This pricing model is especially popular amongst video games
categorized as MMOs (massive multiplayer online for example World of Warcraft), which are mostly
considered as premium games due to the high development requirements (Davidovici-Nora, 2014).
The freemium model (free and premium) originates from the video game industry (Schenck, F., B.
2011). Freemium models often employ a micro transactional pricing strategy, meaning it does not
charge the customer for playing the game, but instead it charges for optional ingame purchases of
new functionalities, known as microtransactions (Tomic, 2017). Through these microtransactions, the
freemium model can be categorized under the concept of recurring revenues.
Revenue streams in the video game industry can also come from various forms of advertising.
Rewarding ads is a concept to monetize on a player without the player actually having to pay
anything. Instead ads are used as the revenue stream (Video Game Market Size, Share & Trends
Analysis Report. 2020).12 2.3 Summary of a framework to analyze business models in video game industry In the following, the central concepts of the BMC theory are summarized with the delimitations and adaptations to the video game industry discussed above. This analytical framework will be used to compare the business models used in the video game industry. 1. Value propositions: Products offered to customers to satisfy their needs. The following value propositions are assumed to be of special relevance. Customization: In video gaming the unique value is to a certain degree created by the players experiencing the game. Accessibility: The concept refers here to the availability of video games, where for example mobile games have a high degree of accessibility. The next three building blocks in BMC are about the company's customers. 2. Customer segments that can be assumed to be common in video games are the following: Mass market: The company focuses on one large group of customers with similar needs, for example the casual gamer category. Niche market: The company has tailored customer relationships and value propositions for a narrower customer base, for example the core/hardcore player category. Diversified market: A company serves multiple unrelated customer segments with different needs. 3. Channels describe the way a company reaches and delivers a value proposition to its customer segments. The main channels through which video game companies can be assumed to distribute their services to customers are own direct web sales or partner indirect web sales, that is sales of games through own or external distribution platforms. Distribution channels cover phases like awareness, evaluation, purchase, delivery and after sales activities. 4. Customer relationships: Important customer relationships in the video-gaming industry are assumed to be Community: Different ways a company offers its customers to communicate with each other and the company. Higher degree of community in games with core/hardcore users and lower degree in games with casual users. Co-creation: How a company cooperates with its customers, to further develop a product. Co-creation is often found in the PC/Console market with companies and their customers’ co-producing value, through, for example, beta testing and mods. Another three building blocks concern the company's infrastructure, i.e. key activities, resources and partnerships. 5. Key activities are important activities within the business that must be done in order for a company to get a business model to work as intended. In the video game industry key activities can be categorised as Platform/network - software development: Many video game companies require continuous development and maintenance of its gaming platforms, including a high level of software development. 6. Key resources: Presumably important key resources in the video game industry are the following: Intellectual resources: For example brands, proprietary knowledge, software and related intellectual property. Human resources: This kind of resource is crucial in knowledge-intensive and creative industries. Financial resources: Some business models require more financial resources such as cash or lines of credit. 7. Key partnerships: An important motive for companies to enter partnerships in the video game industry is assumed to be Acquisition (of particular resources or activities). For example a company can add games to their brand increasing intellectual resources or buy companies with talented teams for future development of games. Also Optimization can be a possible motive for partnership. For
13 example, to maximize utilization, reduce costs and share infrastructure, companies enter into a buyer-supplier relationship. Finally, the finance part of the BMC describes the cost structure and revenue streams of a company’s business model. 8. Cost structure: The cost structure describes the most important costs incurred while operating under a particular business model. Based on what are, among other things, key activities and key resources, important costs in the video game industry can be assumed to be e.g. software development costs, personnel costs and marketing costs. Also cost structures can have the characteristics of Economies of scale or scope. 9. Revenue streams: Revenue streams state how a business realizes income from its chosen customer segments. Business models can involve two main types of revenue streams. Transactional revenues: One time payments often giving the customer access to all of the contents at once. In the video game industry this is linked to the premium model. Recurring revenues: Comes from ongoing payments, for example employed in the video game industry via the freemium model where you download the game for free but then offers microtransactions/rewarding ads. 3. Methodology This section presents and justifies our choice of method in relation to the study's problem formulation and analytical framework. The selection of cases (companies) was made based on a formal case study screening procedure and a total of ten companies were chosen, five successful and five non-performing. Secondary data from public sources published online is the source of information. The data was gathered by a systematic top down approach for each case. We also describe how the collected empirical material has been analyzed. Finally some consequences of made methodological choices are discussed, especially with regard to generalizability. 3.1 Choice of Method The purpose of the study is to gain an increased understanding of the investor's choices by comparing the business models for the most and least successful companies in the Swedish video game industry. The analytical framework used is based on BMC with some delimitations and adaptations to get an analysis framework better suited to the video game industry. BMC is a tool for describing a company's business model in a simple and structured way, e.g. to be able to evaluate the same. Based on the purpose of the study and the analytical framework, we have chosen case studies as a method, a method that is applicable when a researcher wants to gain a close understanding of a particular phenomenon. Case studies are often an appropriate method when the issue, as here, is of a more descriptive or explanatory nature. Yin describes the strength of the method as "its ability to examine, in-depth, a case within its real-life contexts." (Yin, 2014, page 16). Since the main purpose of the study is to describe, compare and understand certain companies' business models rather than to obtain quantifiable results, it is based on a qualitative approach. Furthermore, since the goal also is to explain the findings of such companies related to an existing theory on business models, the study also utilizes an evaluative approach. (Saunders et al, 2012).
14 An important aspect in the choice of case study as a method was also that the method enables the use of a theoretical framework to facilitate the choice of case(s), develop data collection protocols and organize initial data analysis strategies. As mentioned above, the theoretical framework BMC is a tool for describing and evaluating companies' business models in a structured way. The analytical framework thus also becomes an important tool for investigating the cases in a structured way. Case studies as a method allow this and Yin even encourages the use of theories in some cases. This is especially true in such situations where the researcher has less experience of case studies since without theory it is harder to create a convincing study. However, a theoretical perspective also entails a risk of limitations when it comes to new discoveries, as the theory colors the study and steers it in a certain direction (Yin, 2014). Although the latter is a risk that is highly relevant to our study, the overall assessment is that a theoretical basis for the case study is preferable. 3.2 Case selection The first step in each case study is to define which case or cases are to be investigated. The selection of cases should be made in such a way that it represents the phenomenon to be studied. Depending on the phenomenon, a single case study or a multiple case study may be appropriate (Yin, 2014). Here we have chosen to do a multiple case study since this allows for the possibility to compare business models and draw cross case conclusions and parallels between cases. This is important because identifying similarities (in business models) is a central part of the purpose of the study. Further, the selection of cases to be studied is a critical step as the ability to draw more general conclusions will depend on this (Stake. 1994). As a starting point for the selection of cases, a successful company here has been defined as a company in the Swedish video game industry whose share value has increased by more than 200 percent in total over three years. This means that all successful companies in the sample can be described as multi baggers. Non-performing companies in the industry have been defined as companies with a negative development in share value during the same period. A formal case study screening procedure was made using a tool, Börsdata, and the growth criteria set up to determine if a company is successful or non-performing. Based on the screening a total of ten companies were chosen, five successful and five non-performing. In table 1 the companies selected from the screening procedure are presented. The non-performing companies will serve as a benchmark, because if we find similarities between both successful and non-performing companies, it is difficult to extract valuable information for the purpose of the study to gain a greater understanding of investors' choices. The limitation in the selection was made partly with regard to quality aspects in the investigation of each case, and partly with a view to generalizability. Too many cases means that the quality of the review of each company falls, lowering the reliability of the study. In the same way the validity becomes affected in a negative manner if too few cases are being reviewed since it lowers the chance of the company to be a good generalization of the reality (Yin, 2014).
15
Table 1: The best and the worst performing stocks among Swedish video game companies during a 3
year period 2018-05-24 - 2021-05-24.
Successful (>200% increase in stock value the Non-performing (negative growth in stock value
last 3 years) the last 3 years
1. Enad Global 7 | 817,2% 1. Starbreeze | -90,7%
2. Embracer | 288,2% 2. Jumpgate | -81,3%
3. Qiiwi Games | 255,0% 3. Nitro Games | -77,1%
4. Stillfront | 230,3% 4. Gold Town Gates | -63,1%
5. Star Vault | 203,2% 5. Paradox Interactive | -7,1%
Source: Börsdata.
Research ethics aspects
When conducting a research study, it is important as a researcher to keep a good balance between
collecting as much knowledge as possible and at the same time respecting different ethical aspects.
Research ethics considerations are very much about finding a reasonable balance between different
legitimate interests such as the interest in knowledge and the interest in integrity. Protection against
various forms of injury and risk of injury are other examples. (Vetenskapsrådet, 2017). The latter
form of interest can potentially be assumed to be of high relevance when, as here, one examines the
business models of different companies and categorize some of them as non-performing. In the
study, however, we have chosen not to anonymize the companies examined. This choice has been
made in view of the fact that all sources of information used are public. It is also mainly information
that the companies themselves have published, e.g. in annual reports and quarterly reports or press
releases. Against this background, we believe that the openness with which companies are referred
to in descriptions and analysis is legitimate from a research ethics perspective.
3.3 Data collection
Case studies allows for using several types of data, including primary data as well as secondary data
and common sources of evidence includes everything from documents (e.g., reports, newspaper
articles and e-mails) and archival records to interviews and direct observations. (Yin, 2014).
In this study secondary data from public sources published online was the source of information.
Once the screening process had been done secondary data was gathered by a systematic top down
approach (figure 3) for each case, where the obtained data controls the path for the following data to
be collected. Each review began with obtaining an overview of the case. This information was often
obtained through the company website as well as online brokers description of each company. More
general information was then collected mainly through the companies' annual reports, where the
company and its operations are often described in more detail. More specific information was
obtained from quarterly reports (interim reports) and press releases announcing certain events16
describing the business. In some cases, information was also retrieved from various data sources,
including distribution sites, but also through actual tests of the company's products.
Figure 3. Top down approach of data collection
Table 2 below presents the different data sources used in each case. The amount of sources used
varies and is a result of how informative the previous sources have been, e.g. in some cases the
annual reports were very extensive, which reduced the need for additional specific sources.
The purpose of the study is to gain an increased understanding of the investor's choices by looking at
the business models for the most and least successful companies in the Swedish video game
industry. The decision to use secondary data publicly available online as a source of information for
this report was made due to the belief that the vast majority of private investors use this type of
information as an important basis for their investment decisions, meaning very few actually contact
the company trying to extract additional information.
Possible disadvantages of using secondary data are, firstly, that the information is not adapted to the
specific purpose of the research, or secondly that there is little information available. This is
something to keep in mind to avoid erroneous conclusions. The first problem however, should not be
too troublesome for this study since, as mentioned previously, the private investors choice (which is
the purpose of the study to understand) is dependent on this kind of data.The second problem
should not be too big either, as all the companies reviewed are listed, which means that they must
constantly provide the public with information about the companies' activities.
Table 2. Summary of data sources for each of the companies
Company Source 1 (overview) Source 2 Source 3 (specific) Total
(general) pages
Embracer https://embracer.com Annual report Interim report 2 and 3 ca 210
for 2019/2020. (2020)
Group https://www.avanza.se/aktier/om-
bolaget.html/707695/embracer-group-b Annual report
for 2020/2021.
Enad Global https://www.enadglobal7.com Annual report Interim reports Oct-Dec ca 180
https://www.avanza.se/aktier/om- for 2019 and 2020 and Jan-March
7
bolaget.html/811105/enad-global-7 2020. 2021.
Company presentation
(video).17
Gold Town https://www.goldtowngames.com/en Annual report Interim reports July-Sep 60
2019. 2020 och Jan- March
Games https://www.avanza.se/aktier/om-
2021.
bolaget.html/676356/gold-town-games
Year-end report 2020.
Jumpgate https://jumpgategames.se Annual report Year-end report Q4 ca 120
2019. 2020 Three Gates AB
https://www.avanza.se/aktier/om-
Interim reports Jan-Sep
aktien.html/692334/jumpgate
2020 and Jan-March
2021.
Nitro https://www.nitrogames.com/ Annual report Interim Reports Jan – ca 80
2020. Sep 2020 and Jan-
Games https://www.avanza.se/aktier/om-
March 2021.
bolaget.html/764494/nitro-games
Press Release 2020-12-
16
Paradox https://www.paradoxinteractive.com/ Annual report Interim reports first ca 140
2020 quarter 2020, Jan-Sep
Interactive https://www.avanza.se/aktier/om-
2020 and Jan - March
aktien.html/661786/paradox-interactive
2021.
Qiiwi https://www.qiiwi.com Annual report Interim report Q1 - ca 70
2020. 2021
Games https://www.avanza.se/aktier/om-
Press Release: 2021-01-
bolaget.html/792016/qiiwi-games
21
Starbreeze https://www.starbreeze.com Annual report Interim half-year Q2. ca 160
2019. Interim report Q1 2021.
https://www.avanza.se/aktier/om-
Press Release: 2021-04-
bolaget.html/5528/starbreeze-b
14
Steam: Payday
2:Silkroad.
Star Vault https://starvault.se Annual report Interim reports 2021- ca 50
2020. 01-01 to 2021-03-31
https://www.avanza.se/aktier/om-
and 2021-01-01 to
bolaget.html/95968/star-vault-b
2021-09-30.
Press Release 2021-04-
20.
Steam: Mortal Online.
Stillfront https://www.stillfront.com/en Annual report Interim reports Jul-Sep ca 200
2020. 2020, Q4 2020 and Q1
https://www.avanza.se/aktier/om-
2021.
bolaget.html/614237/stillfront-group18 3.4 Analysis of the data According to Yin a common problem for many case studies is the false expectation that the data will speak for itself making the result obvious. This is rarely the case and in order to obtain sufficient results, the analysis of the data needs to be planned. How the analysis is to be carried out depends, and needs to be directly related to the purpose of the study (Yin. 2014). Since the purpose of this study is to identify similarities in business models we use the BMC adapted to the video game industry summarized in section 2.3 as a tool for analysing and comparing the business models in the selected companies. The starting point for the analysis is the BMC model's nine building blocks. For each company, we then made a close reading of the collected material to get a basis for describing the company's business model in accordance with the analytical framework. In some cases, we have also tested different games and platforms to get a closer look at which games and services are offered to customers, but also to see according to which models, e.g. premium or freemium, the games are priced. Some of the data is of a more "hard data" nature, while in other cases an interpretation of the data has been made. For example, a company's main costs can be read directly from the income statement in the annual report, even if the level of detail in the cost report differs between companies. Likewise, the company's main assets can often be read directly from the asset side of the balance sheet. For other parts, such as customer segments, an interpretation of the data material must be made in order for the business model to be described in accordance with the analytical framework. In the case of customer segments, for example, a categorization can be made based on the types of games that the company offers. Are they adapted to the casual or hardcore player segment and can they thus be classified as a mass or niche market? When each of the cases had been reviewed according to BMC, a cross-case analysis was performed, an analytic technique that examines themes, similarities, and differences across cases (Yin. 2014). The analytical framework eased the use of cross-case analysis and made the data easier to compare in a systematic way. 3.5 Generalisability One criticism against qualitative research is described by Guba and Linco in terms of limitations in generalization possibilities. According to the authors the results obtained might be limited to the context in which it was found (Guba & Linco. 1994). Also the case study methodology is according to Yin limited when it comes to generalization due to the same reason as qualitative research as a whole, the research is created in a narrow context (Yin. 2014). This study is done as a multiple case study with a total of 10 companies being examined. Although the number of companies is limited, the sample includes all companies that during the current period had a share price development above 200 percent (successful) and all companies with a negative development of the share value (the non-performing ones). The limitations in generalizability mentioned in the literature linked to case studies should therefore not be too troublesome in our study. However, the result is still limited to the context in which it is created, which means that it cannot be directly transferred and applied to, for example, American video game companies.
19 4. Result and analysis This section initially introduces the ten companies in the case study. After that we describe and analyze the companies' business models based on the analytical framework with central concepts of the BMC theory adapted to the video game industry, as it is summarized in section 2.3. In accordance with the purpose of the study we try to identify what similarities do the business models in the successful companies share and what similarities do the non-performing companies share. The intention is, in accordance with Osterwalder, to use BMC as a hands-on tool that fosters understanding, discussion, creativity and analysis. The sources used for each company to obtain the empirical material used in this section are shown in Table 2. in section 3.3. 4.1 Company presentations 4.1.1 The successful companies Enad Global 7 (EG7) is a mid cap company listed on Nasdaq First North with a market capitalization of approx. 10 SEK billion. The group consists of companies developing, marketing and distributing PC, Console- and Mobile games. EG7 also has a business area, services, which includes consulting activities regarding development strategies and marketing of games, as well as distribution of games as publishers, both digitally and physically. The group has 450+ game developers in around 18 companies globally, and the games are mainly sold through external distribution platforms, but they recently acquired some smaller distribution companies. EG7 states that they have some of the world's largest IPs in gaming, such as H1Z1 and Everquest. These large IPs have been active on the market for years but still have decently active communities. The company’s key activity is providing software services to companies in video gaming, with software development of video games as a smaller key activity but steadily growing. The company’s total assets consist mainly of intellectual and human resources (intangible assets, 3.16 of SEK 4.6 billion, 2020). During the financial year 2020, EG7 did 4 acquisitions of which 3 were software development companies and one publishing and distribution company. The company’s main operating costs are from bought services and goods and personnel costs (535 of 637 SEK million, 2020), and their main revenues come from selling publishing/distribution services mainly in Europe and the US resulting in predictable monthly recurring revenues. A small portion of the revenues are from gaming sales in the same areas. The potential for synergy effects is the reason why EG7 actively covers the entire value chain within video gaming. Embracer Group (Embracer) is a large cap company listed on Nasdaq First North with a market capitalization of approx. 125 SEK billion. It consists of companies developing and publishing PC, Console- and Mobile games, ruling over 240 owned franchises. With over 3000 game developers scattered globally and around 120 active game titles, the games are mainly sold through external distribution platforms. An important part of their gaming portfolio is to be able to offer welcoming and including communities. A key activity among most subsidiaries is seen as software development. In terms of key resources, the company's total assets consist mainly of intellectual and human resources (intangible assets, 14.7 of SEK 24 billion, 2019/2020). During the financial year 2019/2020, 10 acquisitions were made, mainly of software development companies. Embracer's main operating costs are license fees and royalties, as a result of acquisitions, and personnel costs (3.7 of SEK 6 billion, 2019/2020), and their main revenues come from gaming sales in Europe and the United
20 States with pricing models of both premium and freemium, but mainly premium. The subsidiaries within Embracer share positive synergies such as resources, distribution power and marketing capacity, but the companies are independent, often under the leadership of founders who remain active in the companies. Qiiwi Games is a small cap company listed on Nordic First North with a market capitalization of approx. 405 SEK million. It develops games adapted for mobile platforms, with a focus on branded games, meaning a large portion of their games are linked to some externally known brand such as Hell's Kitchen. The company has 31 employees spread between Sweden and Cyprus, and the games are sold through the external distribution platforms App Store and Google Play. Most of the games lack extensive communities. Its key activity is software development. The company’s total assets consist mainly of human, intellectual and financial resources (intangible assets 8 and financial assets 15 of SEK 33 million, 2020). To have branded games, they enter into agreements with licensees of each brand, which is a form of partnership. The company’s main costs are from marketing and personnel costs (a total of 83 of approximately SEK 102 million, 2020) and their main revenues come from microtransactions and rewarding ads in App Store and Google Play, where ad revenues account for 86% and microtransactions only 14%. Stillfront is a large cap company listed on Nasdaq Stockholm with a market capitalization of approx. 29 SEK billion. It is developing games for the global mobile market but has a market segment on the PC platform as well. It has about 1000 employees who are scattered over 19 game studios globally, and the games are mainly sold through the external distribution platforms. Most of the games lack extensive communities. The key activity among most subsidiaries is software development. Their total assets consist mainly of human and intellectual resources (intangible assets, 11 of SEK 12 billion, 2020). Stillfront made 5 acquisitions during the financial year 2020. The company’s main costs are from platform fees, marketing and personnel costs (2.4 of SEK 3.3 billion, 2020), and their main revenues come from microtransactions and rewarding ads in App Store and Google Play, where microtransactions account for 93% and rewarding ads only 7% of their platform revenues. Star Vault is a small cap company listed on Nordic Growth Market with a market capitalization of approx. 230 SEK million. It develops games specifically in PC and the genre of Massive(ly) multiplayer online role-playing games (MMORPG’s). Star Vault only has 10 employees all located in Sweden, and the game is sold through an external distribution platform, as only 1 game is currently released and the other 2 released during 2021. The company’s active game Mortal Online is of the MMORPG category and has dedicated and loyal community consisting of hardcore players, often playing the game for years, which leads to a large and lively community. The company’s key activity is software development. Their total assets consist mainly of intellectual and human (intangible assets, 9.4 of SEK 10.7 million, 2020). The company has no extensive partnerships. Most of the company’s operating costs are from research and development (R&D) (3.2 of SEK 4.6 million, 2020), and their main revenues come from Europe and the US, commonly in the form of predictable monthly recurring revenues. Players can also donate if interested to contribute to specific developments in the unreleased Mortal Online 2. 4.1.2 The non-performing companies Starbreeze is a small cap company listed on Nasdaq Stockholm with a market capitalization of approx. 935 SEK million. It develops PC- and Console games, and recently the addition of Mobile games as well. They have 124 employees scattered in 4 countries, and the games are sold through
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