This document discusses business model innovation in the digital games industry and implications for policy. It examines how the Finnish games industry has grown through digital distribution platforms, virtual economies that allow user-generated content and microwork, and crowdfunding. However, these new models face regulatory hurdles around digital markets, virtual currencies, micro-employment, and crowdfunding. The author argues that policies are needed to support seamless digital markets, clarify rules on virtual currencies and microwork, and promote frictionless donations and micro-investments, as well as grassroots digital culture and gaming ecosystems.

1. Game Ecosystems
Business Model Innovation in the Digital
Entertainment Sector: Implications for Policy
Dr Vili Lehdonvirta
LSE Innovation Co-Creation Lab
vili.lehdonvirta.com
Twitter: @ViliLe

2. Why Games?
— $65 Billion industry, bigger than music or cinema
— Digital game companies are pioneers in innovations
that drive today’s digital economy
— Games have contributed to the worldwide
development of computer hardware more than any
other application
— What can we learn from business model innovation
in the Finnish game industry?

3. Finnish Game Industry
Turnover 165 M€ – 90% from export (2011)
— Represents ~0.25% of Finland's total exports
— CAGR 22%! (2004-2011)
1300 employees (2011)
— Average employees per company: 16
— Young males

4. Business Model Innovation 1: Digital Distribution
Source: Neogames, The Finnish Game Industry 2010-2011

5. Business Model Innovation 1: Digital Distribution
Hurdles:
1. Fragmented e-payment infrastructure
2. Fragmented e-commerce regulation
3. Fragmented taxation systems
Integrated distribution platforms (App Store, Steam)
solve this – but at the cost of 30% of revenues to
California
→ Policies aimed at creating a seamless digital
market

6. Business Model Innovation 2: Virtual Economies
Consumer sells
Consumer buys content to other
Virtual Currency consumers to earn
Consumer uses money/VC
Virtual Currency to
buy content / Developer redeems
Consumer earns Creates content
Virtual Currency Virtual Currency
through gameplay for earnings from
or ads publisher
— From credit card payments to stored value and micro-
payments (virtual currency)
— Users and third-party developers not only consume but
also create value (user-created content, microwork)
— Users and third-party developers can redeem virtual
currency for real money

7. Business Model Innovation 2: Virtual Economies
Regulatory hurdles:
— Virtual currencies’ unclear regulatory/tax status (closed
loop/open loop, accounting rules, breakage, ...)
— Micro-employment not recognized in employment
regulation
— Electronic payment infrastructure does not facilitate
payments back to consumers
— PayPal solves this, but at the cost of ~5% of earnings to
California
→ Explicit policy development on virtual currencies and
microwork

9. Business Model Innovation 3: Crowdfunding
Kickstarter.com

10. Business Model Innovation 3: Crowdfunding
Regulatory hurdles:
— Donations-based crowdfunding
— Regulations designed for physical donations
— Global digital online donations
— Investment-based crowdfunding
— Heavy regulation of investment offers
— Number of investors can be 10,000s
→ Policies aimed at frictionless donations and
micro-investment

11. Finnish Game Ecosystem
— The biggest business model innovation in the Finnish
game industry is the ecosystem
— The ecosystem is vital for talent, technology, investment
and innovation
— Consists of developers, universities, industry events &
organizations, informal networks, angel investors, public
R&D support, gamers, gamer events, media
— Most important component is game culture: high
acceptance of digital gaming in Finnish society &
history of hobby game programming competitions
→ Policies aimed at promoting grassroots digital culture!

12. Summary
Policies needed for:
— Seamless digital market
— Virtual currencies
— Digital micro-employment
— Digital donations & micro-investments
— Game culture!
Thanks for listening!
vili.lehdonvirta.com
Twitter: @ViliLe