and R&D Strategies in Creative Service Industries: Online Games in Korea

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1 RR2007olicyesearcheportInnovation Characteristics and R&D Strategies in Creative Service Industries: Online Games in Korea Choi, Ji-Sun DECEMBER, 2007 Science and Technology Policy Institute P

2 Summary 1. Introduction Background The advent of experience economy has encouraged the proliferation of ITbased creative (or cultural) service products since the early 1990s. The online game industry (as the representative of IT-based creative services) has prospered for over a decade after the appearance of the game Lineage in Korea in Lineage has gained the position of a dominant design in the Korean online game industry and made online games an industry. When the Korean government realized the economic potential of the game industry, it started to support a wide range of creative industries since the late 1990s. However, there have been many obstacles to a successful game industry; the social atmosphere for games was weak and the balance between promotion and regulation policies was not easily reached. Fierce global competition in the online game industry in recent years has urged policy-makers as well as industrial leaders to find ways to upgrade domestic competitive advantages. 1

3 Purpose of Study The purpose of this study is to understand the innovation characteristics of online games as service products and to draw on the academic, policy and managerial implications. This study first creates a conceptual framework for analyzing the innovation characteristics of an online game as a service product. Second, it analyzes the innovation characteristics of online games, based on the conceptual framework. Third, it categories successful online games into several types based on the criteria of the innovation characteristics. Fourth, it overviews how the successful types of online games change over time, highlighting the influence of network externalities. This study also investigates the attributes of the public support programs for game industry for the last 5 years. After the discussion of the implications of this study, the paper ends with some propositions for research in the future. Research Design This study chooses an exploratory research design instead of a conclusive research design. It does not focus on the exemplification of strict hypotheses due to a lack of relevant literature. Rather, it explores the attributes of research subjects and develops insights into them. In-depth interviews are carried out with the developers and the marketers of successful online games over the last 10 years. The number of the games for in-depth interviews amounts to 21, including major MMORPGs (Massively Multiplayer Online Role-Playing Games) and casual games. Questionnaires are also performed. A 2

4 literature review is also considered as an important research method in this study. In addition, the secondary data acquired from some reliable public authorities are used for empirical analyses. 2. A Conceptual Framework from Literature Review A conceptual framework for analyzing the innovation characteristics of online games is a service product decomposition map, where a service product is broken down into several types of characteristics and value chains. The service product decomposition map is a starting point for investigating the innovation characteristics of online games as service products. The map comes from the two kinds of previous research in service innovation. The first kind is from Gallouj and Weinstein (1997) and De Vries (2006), where a service product is defined as a set of characteristics including service characteristics, technical characteristics, the competence mobilized and customer competences. The second one is related to the OECD (2005a), where service innovation is measured based on the area where innovation happens. As the first step, a service product is decomposed from a perspective of a characteristics-based approach. The technical and competence characteristics are again divided from a perspective of a value chain approach. The decomposition map of an online game as a service product for this study is shown in Fig.1: 3

5 [Fig. 1] The service product decomposition map of online games 3. Major Findings The major findings of this study are summarized as follows: First, this study reveals five important innovation characteristics after the investigation of online games based on the service product decomposition map. Results emerge from case-study interviews, but are also evident in the questionnaire survey. They include soft innovation, service product innovation (or outward-looking innovation), exploitative innovation, continuous innovation and (partially) open innovation. Soft innovation means that the value-added in online games comes from creative ideas and strategies, not necessarily relevant to technological characteristics. 4

6 Service product innovation reflects that innovation in online games is involved with the product itself, relatively neglecting the internal efficiency, productivity in terms of development processes and organizational practices. As for exploitative innovation, it is more important in online games to optimize existing technologies and to derive new ways of utilizing oldfashioned technologies, rather than to explore advanced new technologies. Continuous innovation tendency represents that online games as service products innovate constantly along service product life cycles. Open innovation characteristics are related to the external collaboration along the whole value chain and the role of users as innovative sources (user innovation). Second, the study groups the most popular online games into a new typology under the differences in the innovation characteristics. MMORPGs are divided into three types by the innovation characteristics such as technology-leading games, market-oriented games and concept-oriented games. In comparison, casual games are grouped into four types including concept-oriented games, market-oriented games, concept/technology balanced games and knowledge accumulation-oriented games. Third, this study analyzes the evolutionary path of innovation types by the released year of the most popular online games. It is specifically interested in the impact of network externalities on the historical path. As for MMORPGs, the evolution starts from the introduction of the dominant design, the game Lineage in Following it, technology-leading games became popular for 5

7 some years. However, the emphasis moved to market-oriented ones and recently, concept-oriented ones, although the dominant design still maintained its market position to some extent. In comparison, because of a short development period, conclusions on the evolution of casual games are hard to make in this study. However, soft innovation tends to be preferred over time. As a whole, the tendency toward soft innovation is related to the realization of the network externalities of a few representative games that became a serious market barrier for the introduction of new games even when they had been regarded as innovative. Fourth, this study also analyzes public support programs for promoting the Korean online game industry. It especially centers on how they have contributed to the enhancement of the innovative capabilities of the industry. After the examination of public R&D support programs for the last 5 years from the four main public institutions, this study argues that existing public R&D programs have put emphasis on the traditional types of R&D. They have pursued the exploration of new and advanced technological innovation, limited attention on non-technological R&D and the optimization of exiting or old-fashioned technology. 4. Implications This study proposes academic, managerial and policy implications from empirical analyses. It draws on the three policy implications for the 6

8 development of Korean online game industries. The first is to redefine the concepts and boundaries of the traditional R&D in online games as service products, from just technological R&D to innovative R&D, covering the main innovation characteristics in the industry. Second, as a way to develop the innovative R&D, the functions of R&D investment/personnel are required to be subdivided. Service innovation research (SIR), service innovative development (SID), service productive development (SPD) and service business (SB) need distinguishing. Among them, the capabilities of SIR and SID should be enhanced. Because production does not exist in services, often R&D intensity measures the capabilities of SPD. It results in mistaking productive development capabilities for real innovative research/development capabilities in the industry. The final policy suggestion is the introduction of the innovative R&D planning division (or institution) to concentrate on the above policy recommendations carefully on a long-term basis with powerful initiatives. 7

9 [Fig. 2] The policy implication diagram for online games This study concludes with the ten propositions, which deserve the examination in future research at the final section. 8

10 CONTENTS Abstracts 1 Chapter 1. Introduction 1. Background Purpose of study Organization of study...92 Chapter 2. Research Design 1. Research design and methodology Research procedure and data collection.100 Chapter 3. Korean Online Game Industries 1. Current status Value chain characteristics Historical development R&D intensity 138 Chapter 4. Literature Review I: Game & Innovation 1. Experience services and innovation Network externalities and innovation Exploratory hypothesis Chapter 5. Literature Review II: Service Innovation 9

11 1. Definition of service products Trends in service innovation studies Research framework Chapter 6. Innovation Characteristics and Typology 1. Five innovation characteristics Typology by innovation characteristics Comparison between successful games and others 312 Chapter 7. Network Externalities and Evolution of innovation path 1. Network externalities of online games Evolutionary path of innovation: MMORPG Evolutionary path of innovation: Casual games Influence of network externalities on the Evolutionary Path.365 Chapter 8. Innovativeness of Public Support Programs 1. Research outline Characteristics of public support programs Role of public support programs as innovation facilitators Chapter 9. Implications 1. Academic contribution and limitations Policy implications Managerial implications.451 Chapter 10. Implications for Service Innovation Studies 1. Future research agenda for other services Future research directions of STEPI service innovation studies

12 References 475 Appendix 1: In-depth Interview Questionnaires..489 Appendix 2: Questionnaires Appendix 3: Data gathering sheets for the public support programs 509 Summary..515 Contents

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