Value Creation from Complements in Platform Markets: Studies on the Video Game Industry

This dissertation is comprised of three empirical studies that examine the effect of platform-level variation on value creation strategies and market performance for providers of complementary goods (“complementors”) in platform-based markets. The studies all investigate the video game industry as a canonical example of a platform market. Three empirical studies are preceded by an industry chapter outlining the evolution of the video game industry as perceived by one of the industry’s key actors: Nintendo. How does platform maturity affect the adoption of complements in two-sided markets? A key feature of two-sided markets is the existence of indirect network effects. In the first empirical study, I argue that demand heterogeneity from end-users adopting the platform at different points in time, moderates the extent to which complements enjoy these indirect network effects. An inflow of late adopters that buy fewer complements and mimic earlier adopters’adoption behavior, increasingly offsets the benefits of a growing installed base. Using a dataset of 2,855 sixth-generation console video games, I find that platform maturity has a concave curvilinear effect on video games’ unit sales. Platform maturity, however, does not affect all types of games equally. Late adopters increasingly favor non-novel video games at the cost of innovative ones. Furthermore, the adoption disparity between superstars and less-popular video games also widens as platforms mature. In the second empirical study, I and my co-authors (Joseph Lampel and Thijs Broekhuizen) contribute to the debate between researchers who argue that the emergence of online distribution platforms allow content producers in the creative industries to bypass powerful publishers and distributors, and other researchers who argue that this strategy cannot succeed without the complementary assets that these intermediaries provide. We use a case study of the Dutch Video Game Developer (DVGD) bringing to market an identical video game using two different but comparable distribution platforms as a quasi-experiment: in the first release DVGD used online distribution to reach consumers directly, whereas in the second it used an alliance with an established video game publisher. We find that, while the alliance required DVGD to share with the publisher a substantial fraction of the value appropriated by the game, the alliance strategy resulted in greater absolute financial performance and relative market performance compared to the self-publishing strategy. We conclude that the differences in performance can be traced back to specialized complementary assets required for successful commercialization. Technological change, such as the advent of digital distribution platforms, facilitates the implementation of novel business models. Yet, we know little about how managers make sense of novel pathways for doing business after the emergence of a widespread technological change. The third empirical study aims to shed light on this issue by asking why managers in the context of the video game industry changed their business models following the advent of digital distribution platforms, and how? A mixed-method study comprised of a sector-wide survey and four in-depth case studies in the market for digital video games in the United Kingdom provides insight into mangers’ reasons and motivations. I and my co-authors (Joost van Dreunen and Charles Baden-Fuller) find that managers moved away from the de facto work-for-hire business model into three novel business models: artist-led-distribution; freemium; and multisided. In changing their business models, managers do not have increased economic gains as solitary objective per se. Instead, novel business models offer ways of doing business in which a cognitive tension between important organizational objectives – a desire for creative autonomy versus mitigation of financial risks – can be resolved in alternative and typically preferred ways.