1.1 Research Objective
Since the largest online video website -- Youtube was found in 2005, the online video market is one of the most important internet-related industry. Popularization of the internet in China change life style of Chinese even more, which watching online video has become daily entertainment for a lot of Chinese. Meanwhile, domestic online video companies like Youku-Tudou, Sohu Video, Iqiyi, etc. always keep rapid growth over the past years.
In this huge and fast-growing online video market, the profit of online video platforms which play key roles in online video platform provider is not high. Improving profitability has always been tough to all the online video platform providers. In the past several years, online video industry in China has gradually formed a basic value chain with the component parts of the content provider, platform providers, users and extension elements. But current profit model can be more optimized and elaborated.
Xunlei Kankan is an important online video platform provider in China, and the company have similar profit model and similar problems comparing other online video platform providers. How to solve the problems, and improve the company's profitability, is the problem which Xunlei Kankan needs to think about and solve.
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1.2 Research Significance
Significance of this paper includes: First, it might help to practice which using learned theory of value chain and profit model to actual environment through the example case of Xunlei Kankan. Secondly, it might help Xunlei Kankan to understand the industrial value chain of online video industry, and to position Xunlei Kankan itself clearly in the value chain, then find out a suitable profit model to raise the company’s profit level.
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Chapter 2 Literature Review
2.1 Theories of Value Chain
2.1.1 Concept of Value Chain
The concept of value chains is proposed by Michael Porter in his book of Competitive Advantage (1985) for the first time. Porter believes that, “Every fire is a collection of activities that are performed to design, produce, market, deliver, and support its product.” The generic value chain of every company is consists of a series of interconnected activities of value creation which distribute from raw materials accessing to the final product consuming. All these activities are interrelated and interact。
Value chain theory believes that, the analysis of value chain is based on the value, rather than cost; value chain is made up of various value creating activities, includes basic value-added activities and supported value-added activity; a basic value chain can be further decomposed, as shown in Figure 1. The basic activities include inbound logistics, operation, outbound logistics, marketing and sales, services. Specifically, the internal logistics refers to activities associated with the acceptance, storage and other activities related to materials; operation refers to activities to transform the input materials into the final products; external logistics mainly refers to the activities to delivered the products to the buyer; marketing and sales refers to the activities to attract customers to buy and provide them promotion; service mainly refers to the activities that improve or maintain product value. The supported activities includes procurement of resources, technology development, human resource management and firm infrastructure.
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2.2 Theories of Profit Model
At present, both in academia and in business, have recognized the profit model is critical to business growth that successful enterprises are successful in large part because the company has established a successful business model. Therefore, entrepreneurs or managers are working hard for enterprises looking for or establishing a good business model, scholars have the profit model is also a lot of research.
At present, it was realized that the profit model is critical to the growth of enterprise, and build a successful profit model is what make a successful enterprise succeeds. Therefore, the entrepreneurs and mature enterprise managers make great effort to find or found an excellent profit model, and the scholars conduct a lot of studies on profit model.
In 1960s, Bruce D. Henderson from Boston Consulting Group believed that, if the enterprises can gain bigger market share in the industry, they can have cost advantage, because they can provide cheaper products comparing their competitors according to economies of scale. And if the cost advantage can be passed on to the customers, the enterprises have continuous competitive advantages in the industry. This theory provides a basic profit model which helps the enterprises of physical products to gain continuous profit from the market.
In 2000, Adrian J. Slywotzky and another three cooperators study the business models of 12 most successful enterprises in modern era, and they believed the profit model based on advanced enterprise design make these enterprises might satisfy the customers rapidly and earn high profits. They also believed that the traditional “profit by market share” concept is not adapted the modern market competition environment, and the innovative enterprise design method centered on the customers and profit becomes the core of the profit model.
Four strategic elements that should be included during enterprise designing are: customer chosen, value capture, strategic control, business scope (refer to Table 1). The enterprise designing should grantee that the elements is correspond with the most important conference of customers, and the enterprise designing should pursue the profit zone. Meanwhile, the coordination between each elements should be verified to ensure the enterprise designing is coordinated and mutually productive. The “Customer Chosen” refers to the customers chosen by the enterprise; the “Value Capture” refers to how to earn profit while the enterprise are creating value for the customers; the “Strategic Control” refers to the ability that the enterprise protect its profit stream; the “Business Scope” refers to the businesses, products and services of the enterprise.
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Chapter 3 Description of Xunlei Kankan’ Case ........ 17
3.1 Introduction of Online Video Industry .............. 17
3.2 Introduction of Xunlei and Xunlei Kankan ........... 18
3.2.1 Introduction of Xunlei....................... 18
3.2.2 Introduction of Xunlei Kankan ............... 20
3.2.3 Introduction of Xunlei Kankan’s main business .......... 23
Chapter 4 Analysis of Xunlei Kankan’ Case ................ 28
4.1 Value Chain of Online video Market in China......... 28
4.1.1 Main Elements ............... 28
4.1.2 Relations between Main Elements ........... 33
4.1.3 Construction of Industrial Value Chain ..... 35
Chapter 5 Suggestion for Xunlei Kankan .................... 39
5.1 Backward integration with Content Providers .............. 39
5.2 Integrating with Customers ....................... 41
5.3 Integrating with Advertisers ............... 43
Chapter 5 Suggestion for Xunlei Kankan
According the analysis in previous chapter, in the background of national policy tightening and external competition increasing, Xunlei Kankan should innovatively renew its profit model based on the value chain analysis. And its strategies should include: focus on video content; advertising profit as the main profit source; reconstructed the value chain based on different value chain integrating methond.
5.1 Backward integration with Content Providers
Xunlei should integrate with the content providers by strengthening the procurement process, producing self-owned content, reorganizing (merging, consolidating, etc.) with content providers, strengthening integration with content providers, optimizing the cost structure, improving relative cost levels.
With developed strategy, Xunlei Kankan should initiatively strengthen the connection to content providers to acquire more unique and exclusive video content, therefore attract more customers, and raise their loyalty to Xunlei Kankan, and decrease the silent traffic of Xunlei Kankan, which should bring the website business value and profit. Xunlei Kankan should also improve the quantity and quality of content procurement. As the parent company, Xunlei, listed in the US, Xunlei Kankan might get more finance support in content purchasing, and improve the video content library by different channels. In the strategy conference 2015 of Xunlei Kankan, the CEO Zhizhong HAO promise to invest 2 times of content purchasing capital in 2015 comparing to which in 2014, and hope to give the customers better user experience on content.
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Chapter 6 Conclusion
This thesis analyze the profit model of Xunlei Kankan, one of the important online video platform by value chain theory.
First, this thesis analyze the elements and construction of online video industry, There are five main element in online video industry, which includes: content providers, platforms, customers, advertising providers, technology providers. The elements and value exchange between each other construct the value chain of online video industry.
Then, the thesis analyze the position and profit model of Xunlei Kankan, And Xunlei Kankan participate as online video platform and technology providers in this industry. Xunlei Kankan’s profit model are mainly three types which includes advertising profit model, value-added profit model and technology model. Advertising profit model operate based on secondary sales of customers’ attentions to the advertisers and advertising agencies which earn the advertising profit. Value-added profit model directly sell the popular video content to the customers by varies of marketing methods to earn the value-added profit. Technology profit model operates by providing video streaming technology to small online video websites to earn technology providing profits.
Then, the thesis analyze through the formula of profit model and value chain theory, to find out the problem of Xunlei Kankan’s profit model. The cost of Xunlei Kankan mainly includes content costs, bandwidth costs and marketing cost. The income of Xunlei Kankan includes advertising income, value-added income, and technology providing income. Xunlei should increase its income and decrease its cost to improve its profit. According to the analysis of value chain, the profit model of Xunlei Kankan contain the problems of unstable connection to the backward and forward elements.
Finally, the thesis give suggestions for Xunlei Kankan to improve and optimize the profit model, includes: backward integration with the content providers; integrating with customers and advertisers, shrinkage value chain. The suggestions above might help Xunlei Kankan to improve its profit level.
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