Value Creation and Power Asymmetries in Digital Ecosystems : A Study of a Cloud Gaming Provider

This is a self-archived version of an original article. This version may differ from the original in pagination and typographic details. Author(s): Title: Year: Version: Copyright: Rights: Rights url: Please cite the original version: CC BY 4.0 https://creativecommons.org/licenses/by/4.0/ Value Creation and Power Asymmetries in Digital Ecosystems : A Study of a Cloud Gaming Provider © 2020 the Authors Published version Ojala, Arto; Helander, Nina; Tyrväinen, Pasi Ojala, A., Helander, N., & Tyrväinen, P. (2020). Value Creation and Power Asymmetries in Digital Ecosystems : A Study of a Cloud Gaming Provider. In T. Lynn, J. G. Mooney, P. Rosati, & G. Fox (Eds.), Measuring the Business Value of Cloud Computing (pp. 89-106). Palgrave Macmillan. Palgrave Studies in Digital Business and Enabling Technologies. https://doi.org/10.1007/978-3030-43198-3_6 2020 89© The Author(s) 2020 T. Lynn et al. (eds.), Measuring the Business Value of Cloud Computing, Palgrave Studies in Digital Business & Enabling Technologies, https://doi.org/10.1007/978-3-030-43198-3_6 CHAPTER 6 Value Creation andPower Asymmetries inDigital Ecosystems: AStudy ofaCloud Gaming Provider ArtoOjala, NinaHelander, andPasiTyrväinen Abstract Digital platforms connecting users and service providers have a central role in determining the value creation structure of ecosystems. Platform developers try to achieve a dominant position for the platform with a strong ecosystem around it. The size and attractiveness of the services can attract new users, and growing user volume can bring new cooperative service providers to the service partner network. An interesting question is how the presence of power and potential power asymmetry affect the value A. Ojala (*) School of Marketing and Communication, University of Vaasa, Vaasa, Finland e-mail: ar[email protected] N. Helander Faculty of Management and Business, Tampere University, Tampere, Finland e-mail: [email protected] P. Tyrväinen Faculty of Information Technology, University of Jyväskylä, Jyväskylä, Finland e-mail: pasi.tyr[email protected] 90 creation capability and the structure of a network around a platform? This chapter describes an example of value creation and the influence of power asymmetry in a digital ecosystem built around a cloud gaming platform. Keywords Digital ecosystems • Digitalisation • Digital platforms • Partner networks 6.1 IntroductIon The digitalisation of artifacts provides new opportunities that change traditional business models and how services are delivered to end-users (Baber etal. 2019; Ojala 2016; Yoo etal. 2010). In particular, digital platforms that enable emergence of new kinds of ecosystems are changing the way people interact with digital technology (Adner 2012; Yoo 2010). These ecosystems can be conceptualised as “a loosely coupled network of actors who interact and offer resources of different kinds, which together form a digital service around the platform” (Ojala etal. 2018, p.729). In ecosystems, digital platforms have a central role that determines the structure of the ecosystem. Achieving a dominant position for a platform and building a strong ecosystem around the platform is a demanding process in which value creation has a central role. Compared to the traditional value creation chains where value moves from a firm to customers (Porter 1985), digital platform providers must consider how value is generated for multiple sides of the platform (Eisenmann etal. 2006). Furthermore, actors on the different sides of the platform depend on the size and attractiveness of the other side of the market (Adner 2012). For instance, in the videogame industry where competition among various gaming platforms is intense (Lee 2012), game studios are more likely to develop games for platforms that have a lot of existing players. In line, video game players tend to favour gaming platforms that provide a high volume of interesting game content. Developing a platform that provides value to multisided markets and building a strong ecosystem is a complex and demanding process (Ojala and Lyytinen 2018). Even if a firm has an excellent innovation for a gaming platform, the firm’s value creation still largely relies on other innovations within the ecosystem (Adner 2012; Lee 2012) and the power the firm has over other firms. To better understand value creation and the concept of power in digital ecosystems, this chapter examines the value creation literature (Allee A. OJALA ET AL. 91 2000) and management studies on organisational power (Astley and Sachdeva 1984; Mintzberg 1978). Specifically, we contribute to understanding of this topic in the context of digital platforms by studying (1) what kind of direct and indirect value is generated in the focal partner network, (2) how the focal network and the power positions evolve over time, and (3) how power asymmetry influences value creation within the network. We focus on the videogame industry because it has multisided markets, and ecosystems have a strong role (Lee 2012; McIntyre and Srinivasan 2017). Further, the industry has a relatively long history with well-established gaming platforms (Lee 2012). This makes the entry of newcomers challenging as they may have very little power in the market, and they have to create new ecosystems from scratch (Ojala 2016). 6.2 dIgItal Platforms andEcosystEms Digital platforms are generally organised in a network-like architecture, referred to as a layered modular structure with loosely coupled interfaces (Yoo etal. 2010). The architecture forms a hybrid of a modular structure and a layered structure (cf. Ulrich 1995). The architecture emerges when digital components and functions form the primary platform services or when the components and functions are embedded in hierarchically organised product structures (Yoo etal. 2010). In the loosely coupled, multi-layered architecture, the digital platform is organised in four layers: (1) device, (2) network, (3) service, and (4) content. The device layer refers to physical devices that connect and interact with the platform and its services, such as a television set, a mobile phone, or a gaming console. The network layer refers to the networking protocols that the platform offers to communicate over the networks to devices at the device layer. The service layer relates to the functionality of the applications that run on the platform and that enable users to use the content across different devices. The content layer covers the content that customers interact with, such as music, games, or videos. These layers form an ecosystem around the digital platform where several diverse actors, such as platform owners, content providers, telecom operators, device manufacturers, end-users, etc. (Koch and Windsperger 2017; Tiwana 2013), may participate, create value, and form multisided markets (Eisenmann etal. 2006). All these actors shape the competition and power asymmetries around the digital platform because each actor has unique interests and motivations for participating in the ecosystem. 6 VALUE CREATION AND POWER ASYMMETRIES IN DIGITAL ECOSYSTEMS… 92 6.3 ValuE crEatIon WIthIn dIgItal EcosystEms In this chapter, we use term “partner network” to refer to various actors within the ecosystem that cooperate directly with the focal firm. To operate successfully in the ecosystem, a firm must recognise the potential and current actors in the ecosystem that contains the firm’s partner network (Ojala and Helander 2014). Thus, a partner network is a more focused part of the larger digital network. In the platform context, the network has the characteristics of the triangular structure typical of two-sided markets (Eisenmann etal. 2006). These partners can usually be grouped into producers and customers, and in the gaming industry, into game developers and consumers. Between these two main actor groups, the platform provider as the focal firm acts as an intermediary for creating value. Further, the focal firm needs to identify the value of their own offering, and how this value can be delivered to benefit other actors in the network. Thus, a firm should map all the actors in the ecosystem that could benefit from the firm’s offering and the resources that the firm will need to commercialise their service (Allee 2000). Created value can be defined as a trade-off between benefits and sacrifices (Lapierre 2000) that can be monetary or non-monetary. Monetary benefits and costs are usually easier to measure. However, the role of nonmonetary rewards and costs in value perception is significant, too. Nonmonetary rewards can be a status reward, emotional reward, or gain of new competences, while non-monetary costs may include the time, effort, energy, and amount of conflict customers engage in to obtain the product or service (Walter etal. 2001). Value creation from a functional perspective (Walter etal. 2001) offers a view on the types of activities that actors may perform to create more value for network members. According to function-oriented value analysis, a firm may gain value from relationships with direct and indirect functions. Direct value can be produced through profit, volume, and safeguard functions. (Walter etal. 2001). For example, a safeguard function is a direct value creation function: If the firm has a long contract with the customer, this relationship creates safeguard value for the firm. Indirect functions, in contrast, require the input of third parties. Indirect functions include market, access, and innovation functions. For example, the market function means that one actor gives access to another market area with new potential partner actors. A. OJALA ET AL. 93 6.4 thE concEPt ofPoWEr InPartnEr nEtWorks Astley and Sachdeva (1984) identified three sources of power: hierarchical authority, resource control, and network centrality. Hierarchical authority often relates to official positions that actors have over one another, so they are usually coupled with actors like authorities or supervisors (Astley and Sachdeva 1984). Resource control looks at the environment of an organisation, as it states that everyone is dependent on the resources of others: “organizations are open social systems that require a supply of resources from the environment in order to sustain their operations” (Astley and Sachdeva 1984, p.106). Thus, no organisation or actor can act alone. Power based on resources is naturally higher in the case of critical or hardtoobtain resources than in bulk resources. The third source of power, network centrality, refers to the position of an actor in a network (Easton 1992). Håkansson and Snehota (1989) argued that network actors aim to increase their own power and influence in networks as the actors believe that more powerful positions within a network will enable the actors to achieve other objectives. An actor’s power and position within a network are closely related. In the end, power is realised in the interaction processes that form a relationship (Turnbull and Valla 1986); there cannot be power without the other part of the relationship. 6.5 rEsEarch mEthod This chapter examines a qualitative, longitudinal case. A case study provides detailed (Edmondson and Mcmanus 2007) and empirically rich data (Eisenhardt and Graebner 2007) connected to a complex phenomenon. A longitudinal case study also facilitates examination of the evolution of a firm’s activities (Eisenhardt 1989) and partner networks (Ford and Redwood 2005). In the data collection, we combined interview and secondary material covering the whole history of the firm from 2000 to 2015. We conducted 15 interviews, each lasting 45–90 minutes. Secondary data sources included the firm’s brochures and press releases, which provided an extensive and detailed historical description of the firm. By using this information, we also triangulated the information. In the data analysis, we followed the steps: (1) data condensation, (2) data display, and (3) drawing and verifying conclusions as recommended by Miles and Huberman (1994). 6 VALUE CREATION AND POWER ASYMMETRIES IN DIGITAL ECOSYSTEMS… 94 6.6 g-clustEr The case firm, G-cluster, develops games-on-demand services. Throughout the history, G-cluster has been small, employing 10–40 persons. Compared to traditional videogame platform providers (see Lee 2012), G-cluster’s business idea is based on a completely different way of providing videogames to players. Traditionally, games are installed on a computer or a game console that runs the game. In the G-cluster business model, games are run on the platform operated by telecom operators on their game servers. The game server transmits the game content to the end users’ devices over the broadband network. The client devices receive the stream, display the game, and transmit users’ commands back to the game server. Thus, G-cluster’s gaming platform makes it possible to bring games to the cloud environment. The commercialisation has been challenging as the industry is dominated by large and well-known gaming platform providers making market entry for newcomers difficult. However, as G-cluster was the first cloud-based gaming platform provider in the market, the firm’s innovation attracted increasing interest among potential partners. 6.6.1 Creation ofaPartner Network G-cluster’s business goal was new in 2000 and took time to evolve, thus the first real partner network emerged in 2005 (Fig. 6.1). The figure shows the key partners within the ecosystem that G-cluster acted with directly (straight arrow) when the firm commercialised its service. First, G-cluster needed content for the gaming platform. To acquire game content, which was critical for G-cluster’s service, the firm partnered with game publishers and licensed games for the platform on a revenuesharing basis. Revenue sharing gave G-cluster access to a portfolio of games while protecting the firm’s cash flow. However, the potential revenue was not, in many cases, appealing as a primary partnering factor for the game publishers. As a result, G-cluster had to demonstrate other benefits—benefits that would bring value to the game publishers—if they provided games for the platform (see also Ojala and Tyrväinen 2011a, b). G-cluster motivated game studios by emphasising the benefits of cloud computing, like avoiding piracy, illegal copying, and second-hand markets for the games. G-cluster also needed partners that are capable of running their cloud gaming service on their servers and provide access for players to services. A. OJALA ET AL. 95 Consequently, G-cluster developed relationships with telecom operators that became important partners within the ecosystem. Telecom operators had good marketing channels and a large, existing customer base. As they are big players in the market, they also offered more visibility and a brand name that could be used for marketing purposes. Operators also motivated game studios to make their games available on G-cluster’s platform. However, the move toward cooperation with telecom operators was not easy due to their powerful market position. G-cluster needed to demonstrate the value of their product for telecom operators. In addition to monetary benefits, G-cluster’s service offered a good opportunity to extend the telecom operators’ existing product portfolio and differentiate their offering from that of competitors. To commercialise the service and to partner with telecom operators, G-cluster needed resources from video-on-demand service providers, settop box manufacturers, and middleware software providers. For video-ondemand service providers, G-cluster’s game platform offered new functionalities and enabled them to offer more content for telecom operators. Set-top box manufacturers needed new functions for their devices, G-cluster (platform provider) Set-top box manufacturers Video-ondemand providers Middleware providers Game publishers Telecom operators Portals End-users Pirates Second-hand markets Direct relationship = straight arrow Indirect relationship = dashed arrow Fig. 6.1 The partner network in 2005 6 VALUE CREATION AND POWER ASYMMETRIES IN DIGITAL ECOSYSTEMS… 96 and G-cluster’s gaming platform brought extra value. Middleware software providers, which sell software to telecom operators, benefited from G-cluster’s platform, as they were able to integrate game-on-demand services in the telecom operators’ set-top boxes. The cooperation among these three different types of firms was based mainly on the mutual benefits that the partner network provided rather than on monetary benefits. These relationships were symmetric in the power aspect. Portals (like Yahoo) were also important partners within the partner network that gave PC users access to G-cluster’s cloud gaming service, and enabled multihoming of the service. The portals also took care of marketing activities and charged customers via the portals’ invoicing systems. For the portals, G-cluster’s cloud service generated revenue without requiring any investment, and the service was easily integrated with their current business. 6.6.2 Evolution inPartner Networks Over a five-year period, changes in the ecosystem, markets and G-cluster’s services impacted the partner network (Fig.6.2). Due to the increasing competition in the PC game markets and the emergence of free-to-play G-cluster (platform provider) Game publishers IPTV operators End-users Free-to-play PC game providers Server manufacturer Direct relationship = straight arro w Indirect relationship = dashed arro w Fig. 6.2 The partner network in 2010 A. 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