Sports Interactive operates a service (or work-for-hire) business model in which a wholly developed video game is prepared bespoke for a publisher. Unlike some other service business models, Sports Interactive has just one primary customer, Sega. This model is similar to a contract writer for a magazine, or a designer-in-residence for a fashion company. Sega pays Sports Interactive when the latter reaches pre-agreed project milestones. Sports Interactive develops the highly popular “Football Manager” video game series for various online and tangible goods distribution channels. These channels include PC (Steam and retail) and Apple’s iOS. Publisher Sega has the exclusive publishing and distribution rights to the Football Manager franchise. New versions to the game are released annually to include updated player profiles and statistics. Sega monetizes the game using a premium pricing revenue model.
Sports Interactive was incorporated in 1994 in London, UK. The firm first’s product was football simulation game Championship Manager which was released in 1992 on PC and Atari platforms. After working with established publisher Eidos (UK) for various instalments of the game, in 2006 it was announced that Sports Interactive would be acquired as an independent subsidiary by Japanese video game giant Sega. Since being acquired the Championship Manager brand was replaced by Football Manager, which Sports Interactive has produced on an annual basis since. Contrary to other video game developers, the digital revolution has not changed Sports Interactive’s business model other than an increase in the number of technology platforms on which its games can now be played. In 2013, Sports Interactive employed over 90 full-time employees. Other firms that operate a similar business model in this industry include most traditional console video game developers such as Rockstar (GTA, Red Ded Redemption), Bungie (Halo, Destiny), and Vigil Games (Darksiders).
Operating as an independent subsidiary, Sports Interactive’s customer is parent firm video game publisher Sega. Each year, contingent on last year’s game’s performance and other external factors, Sega frees up budget for the development of the latest installment of Football Manager. Looking at trends in the market and at what comparable titles do, Sega requests for certain features (additional downloadable content) or compatibility with specific platforms (e.g. Valve’s Steam) to be included in the content’s development trajectory. Sega sets milestones upon which certain deliverables – including beta and alpha versions of the game – are due for delivery by the developer.
Indirectly, Sports Interactive has two additional customer groups. Game marketplace owners such as Steam and Apple have their own strategic agendas that determine what types of content they will offer favorable placement to within their respective digital distribution shops. Additionally, platform owners are incentivized to promote ‘Superstar’ games with exceptional market performance since they receive a revenue share from every game sold on the platform. End-users are the final arbiters of value. Since Sports Interactive’s development budget in part depends on the market performance of previous installments of Football Manager, it is paramount for Sports Interactive to take these indirect customer groups into account.
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A dyadic relationship where your physical good or service can only be designed and delivered after prior interactions with the customer.
Engagement — Value Creation Proposition
Football Manager is a football management simulation game in which players have to ‘manage’ a team of their choice to compete in a given football season. The game’s primary value to Sega is the creation of a product that end-users find entertaining and want to return to year after year. The franchise placed among Sega’s top three best-selling properties in 2013. The franchise’s 2014 installment sold over 790,000 copies in Europe and North America and currently has a Metacritic expert score ranking of 85/100 – indicating high quality. By creating a new version of the game every year, according to the required specifications of its customer, Sega, Sports Interactive’s service business model deploys a “taxi” approach to customer engagement.
Football Manager holds ancillary value for football clubs. Underlying the game’s algorithm is an extensive database with player statistics that is being kept up to date after every transfer season concludes. The database is maintained through voluntary fan-based crowd sourcing. Sports Interactive currently licenses the database to several football clubs who use it to make more informed player acquisitions.
Delivery — Value Chain
For many video game developers, the choice of distribution channel is one of the most important value delivery related questions. Traditionally, Football Manager video games are distributed in boxed product for PC and Mac platforms. Releasing for the first time in digital format, Football Manager 2014 was offered to consumers who bought the game via online distribution portal Steam two weeks in advance of its official release date. Since 2009, a slimmed down version of the video game is offered for download on Apple’s iOS platform. Notably, Sports Interactive crowdsources the maintenance of its database of football statistics – it leverages fans’ knowledge for free, and, as described below, can sell this database to football clubs.
Monetisation — Value Capture
Sports Interactive main revenue stream is lump sum payments by Sega upon meeting project milestones – pre-commercialization of the content. Post-commercialization, additional income may be generated when Sega has recouped all costs (including expenses incurred for distributing and marketing the game) at which point Sports Interactive is entitled to income from royalties. In the video game industry, income from royalties tends to be marginal, if existent at all. Royalty rates usually reside in the single digits (≈ 5 per cent of publisher income) and many games do not break even. Sports Interactive generates additional auxiliary income from licensing its player database to football clubs. Sega sells Football Manager directly to end-users. Sega is currently experimenting with offering additional content that is not elemental to the core value proposition on a downloadable content (DLC) basis.
Disclaimer — Written by Joost Rietveld and edited by James Knuckles under the direction of Prof Charles Baden-Fuller, Cass Business School, this case is designed to illustrate a business model category. It leverages public sources and is written to further management understanding, and it is not meant to suggest individuals made either correct or incorrect decisions. © 2014