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					                     Thematic Network ECOLIFE II
                                N° G1RT-CT-2002-05066
                         Duration: April 1, 2002 – March 31, 2006

                 Thematic Network ECOLIFE II
                     N° G1RT-CT-2002-05066
              Duration: April 1, 2005 – March 31, 2006
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                                                                                     Formatted: English (United Kingdom)




                ECOLIFE II
     - New Business Models Functional Sales
                    Report -
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  -Sustainable Business Opportunities -                                              bullets or numbering
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                    Report Date: SeptemberMarch 31, 20054




Report n°                 2                                                          Formatted: English (United Kingdom)
Reporting period          From April 1, 20053 –March 31, 20064

                                                                                     Formatted: English (United Kingdom)
Reporting partner        Centre for Sustainable Design                               Formatted: English (United Kingdom)
Partner status           Member                                                      Formatted: English (United Kingdom)
Working person(s)        Martin Charter, Kate Geraghty, Bernt Kopacek, Peter         Formatted: English (United Kingdom),
                         Meyer, Raymond Nyer, Lutz-Guenther Scheidt.                 Pattern: Clear (White)
                                                                                     Formatted: English (United Kingdom)
Report authors           Graham Adams, Joachim Hafkesbrink, Stefan Steiner.          Formatted: English (United Kingdom)
Report authorDate of     Graham Adams29th September 2005., Martin Charter            Formatted: English (United Kingdom)
reporting(s)                                                                         Formatted: English (United Kingdom)
Date of reporting*       2931sth MarchSeptember 20054
                                                                                     Formatted: English (United Kingdom)
                                                                                     Formatted: English (United Kingdom)
                                                                                     Field Code Changed
        Co-ordinated by the Austrian Society for System Engineering and Automation
                  http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
        Co-ordinated by the Austrian Society for System Engineering and Automation
                  http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
             Thematic Network ECOLIFE II
                        N° G1RT-CT-2002-05066
                 Duration: April 1, 2002 – March 31, 2006

         Thematic Network ECOLIFE II
             N° G1RT-CT-2002-05066
      Duration: April 1, 2005 – March 31, 2006
                                                                             Formatted: Font: 8 pt




                                                                             Field Code Changed
Co-ordinated by the Austrian Society for System Engineering and Automation
          http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
Co-ordinated by the Austrian Society for System Engineering and Automation
          http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                                          Thematic Network ECOLIFE II
                                                         N° G1RT-CT-2002-05066
                                                  Duration: April 1, 2002 – March 31, 2006

                                 Thematic Network ECOLIFE II
                                     N° G1RT-CT-2002-05066
                              Duration: April 1, 2005 – March 31, 2006
                                                                                                                                                                             Formatted: Font: 8 pt

                                                                                                                                                                             Formatted: English (United Kingdom)


Table of content
                                                                                                                                                                             Field Code Changed
Table of content ................................................................................................................................................... 32

Executive Summary ............................................................................................................................................ 53
   Definitions ....................................................................................................................................................... 106
   Scope of the Study ........................................................................................................................................... 117

Review of the Business Models for Existing Product Service Systems ......................................................... 148
   Mobile telephone product service systems ...................................................................................................... 148
   Downloadable music, films and radio............................................................................................................. 189
   Mobile navigation systems ............................................................................................................................ 2211
   Electrolux pay per wash trial ........................................................................................................................ 2411
   Online games ................................................................................................................................................ 2512
   Remote Disease Control ................................................................................................................................ 2916

Case Studies ..................................................................................................................................................... 3219
   Mobile Communications ............................................................................................................................... 3219
   Downloadable Music .................................................................................................................................... 3420
   Mobile Navigation System............................................................................................................................. 3521
   Lease of White Goods ................................................................................................................................... 3722

Future Business Opportunities ........................................................................................................................ 3923
   e-Newspapers, Magazines and Books ........................................................................................................... 3923
   Network Home Services ................................................................................................................................ 4124

Conclusions ...................................................................................................................................................... 5328
   Type of Product Service system ..................................................................................................................... 5328
   Key Drivers ................................................................................................................................................... 5429
   Different Elements of the PSS ....................................................................................................................... 5429
   Customer ....................................................................................................................................................... 5429
   Basic needs and drivers ................................................................................................................................ 5529
   Initiator of the Product Service System ......................................................................................................... 5530
   Financial flow through the product service system ....................................................................................... 5630
   Sustainability of the business model.............................................................................................................. 5631
   Collaborators within the product service system .......................................................................................... 5731                           Field Code Changed
             Co-ordinated by the Austrian Society for System Engineering and Automation
                          http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
             Co-ordinated by the Austrian Society for System Engineering and Automation
                          http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                                          Thematic Network ECOLIFE II
                                                          N° G1RT-CT-2002-05066
                                                   Duration: April 1, 2002 – March 31, 2006

                                  Thematic Network ECOLIFE II
                                      N° G1RT-CT-2002-05066
                               Duration: April 1, 2005 – March 31, 2006
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   Marketing Tactics ......................................................................................................................................... 5731

References ........................................................................................................................................................ 6133

23555566810111111121717181920Table of content ........................................................................................... 2

Executive Summary .............................................................................................................................................. 3

Introduction ........................................................................................................................................................... 4
   Definitions ........................................................................................................................................................... 4
   Scope of the Study ............................................................................................................................................... 4

Review of the Current Status of Functional Sales .............................................................................................. 5
   Business to Business............................................................................................................................................ 5
   Business to Consumer ......................................................................................................................................... 7
   The Developing Countries................................................................................................................................... 8

Sustainable Business Opportunities .................................................................................................................. 10
   Financial Forces ............................................................................................................................................... 10
   Environmental Forces ....................................................................................................................................... 10
   Technological Forces ....................................................................................................................................... 11
   Functional Sales Opportunities in B2B ............................................................................................................. 15
   Functional Sales Opportunities in B2C ............................................................................................................ 15
   Functional Sales Opportunities in the Developing Countries ........................................................................... 16

Conclusions .......................................................................................................................................................... 17

References ............................................................................................................................................................ 18
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                    Co-ordinated by the Austrian Society for System Engineering and Automation
                              http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                    Co-ordinated by the Austrian Society for System Engineering and Automation
                              http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                         Thematic Network ECOLIFE II
                                     N° G1RT-CT-2002-05066
                              Duration: April 1, 2002 – March 31, 2006

                     Thematic Network ECOLIFE II
                         N° G1RT-CT-2002-05066
                  Duration: April 1, 2005 – March 31, 2006
                                                                                                        Formatted: Font: 8 pt



Executive Summary
This report is an in-depth study on business models used for ‘Product Service Systems’ (PSS)
A PSS is a term used to describe a product that consists of both hardware and a function rather than
                                                                                          1
just a physical product (hardware). Product Service Systems can be classified in four ways :

       Product-oriented services: service integration (adding products or functionality), product      Formatted: Bullets and Numbering
        extension (providing upgrades, maintenance)
       Use-oriented service: product owned by the service provider who sells the function not the
        product or software e.g. leasing and rental
       Result-oriented service (product substitution): e.g. virtual answering service replacing
        answering machine, web- based information replacing directories
       Result-oriented service (vertical integration): e.g. production transferred to user.

Business models are mechanisms by which a business intends to generate revenue and profits, and a
summary of how a company plans to serve its customers. It involves both strategy and
implementation.

There are many types of business models in use, but the following definitions are for business models
that are used on one or more of the products researched in this study:
     Bait & Hook: With this model the product is sold at a reduced price or even given away, (Bait)    Formatted: Font: Bold
         and the profit is made on disposables or service (Hook). Examples are printers and ink         Formatted: Bullets and Numbering
         cartridges, and mobile phones and service contracts.
     Bit Vendor: Deals in digital products. An example is Apple iTunes.                                Formatted: Font: Bold
     Leasing: Ownership is retained by the producer and the profit is made by charging for the         Formatted: Font: Bold
         time the customer uses the product.
     Subscription: Regular payment for a product or service. e.g. magazine subscription.               Formatted: Font: Bold
     Utility Model: Metering usage, or a "pay as you go" approach. E.g. electricity supplies.          Formatted: Font: Bold

Eight case studies were used as the basis for this study. Six were on established PSSs and two on       Formatted: Normal, Indent: Left: 0", First
probable major future PSSs. For each of these the following was looked at:                              line: 0", Tab stops: Not at 0.25"
     What is the product service system                                                                Formatted: Bullets and Numbering
     Who is the key driver
     What are the different elements?
     Who is the customer
     Basic needs and drivers
     The initiator of the product service system
     Financial flow through the product service system
     Sustainability of the business model
     Collaborators within the product service system
     Customer/provider relationship
     Marketing tactics

The PSSs looked at were:
    Mobile telephone product service systems (current)                                                 Formatted: Bullets and Numbering
    Downloadable music, films and radio (current)
    Mobile navigation system (current)
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            Co-ordinated by the Austrian Society for System Engineering and Automation
                      http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
            Co-ordinated by the Austrian Society for System Engineering and Automation
                      http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                          Thematic Network ECOLIFE II
                                      N° G1RT-CT-2002-05066
                               Duration: April 1, 2002 – March 31, 2006

                      Thematic Network ECOLIFE II
                          N° G1RT-CT-2002-05066
                   Duration: April 1, 2005 – March 31, 2006
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       Leasing of Large Household Appliances (current)
       Online games (current)
       Remote Disease Control (current)
       Downloadable newspapers/magazines (future)
       Networked Home. (future)


Who are the key drivers for the PSSs?                                                                    Formatted: Font: Bold
In most cases the key drivers are the service providers. However instances are starting to arise where   Formatted: Font: Bold
the product manufacturers are starting to become key drivers. This is happening particularly e mobile
phone industry where manufacturers are making deals with content providers other than the service        Formatted: Font: Bold
providers. Good examples of this are Motorola who have teamed up with Apple to produce a mobile
that can download music from the iTunes music store, and Sony Ericsson who has joined forces with
online music service Napster to develop a service for mobiles.

What are the different elements of the PSSs?
The elements of the PSSs looked at in the case studies were dependent on the PSS being offered.
With the move towards integration of different features and services on products the picture can
become very complex. This complexity will only grow in the future as the network home becomes a
practical reality. Most of the elements within the case studies were brought together by the service
provider.

Who are the customers?                                                                                   Formatted: Font: Bold
Most of the PSSs looked at in this study were pure business to consumer (B2C) and they have the          Formatted: Font: Bold
following basic differences from business to business customers:
      Consumers are much more style and fashion driven.                                                 Formatted: Bullets and Numbering
      Consumers are more culturally driven. Ownership in most countries has become a sign of            Formatted: Bulleted + Level: 1 + Aligned at:
        success, and most consumers prefer ownership to leasing.                                         0.25" + Tab after: 0.5" + Indent at: 0.5"

Basic needs and drivers
The basic needs and drivers for the PSSs’ looked at fall into one or more of the following categories:
    Saves time and convenience: Downloading music and other media for instance avoids                   Formatted: Bullets and Numbering
       travelling to retail outlets and the media can be access almost immediately.
    Addresses a need not covered properly by other products. An example of this are navigation
       systems that tells you exactly where you are, which a map can not do directly without some
       form of local landmark such as a street name.
    Access to products that a consumer can not normally afford. Pay-per-use white goods is an
       example of this. Is a fashion item and is the ‘cool’ thing to own.

The initiator of the product service system
In general the case studies showed that the initiator was the provider of the service. However with
hardware starting to be designed to carry out many functions this is becoming less clear and the
manufacturer is sometimes becoming one of the main initiators of a PSS. In addition some companies
that have historically been producers are also moving towards becoming solution providers to improve
their profit margins.

Financial flow through the product service system
One of the main differences between a hardware product and PSS is that the service element can
often provide a long term continuous income. Because of this the hardware is often used as the bait
by being subsidised or given away free, and the service element as the hook and is where the profits     Field Code Changed
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                        http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                          Thematic Network ECOLIFE II
                                      N° G1RT-CT-2002-05066
                               Duration: April 1, 2002 – March 31, 2006

                      Thematic Network ECOLIFE II
                          N° G1RT-CT-2002-05066
                   Duration: April 1, 2005 – March 31, 2006
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are often made by the PSS provider. From this income flow the provider has to pay the producer of the
associated hardware and for any media content produced by third parties.

Sustainability of the business model
A PSS is not necessarily more sustainable than non-PSS solution. Research by Digital Europe
showed that downloading digital music can be more environmentally damaging than purchasing CDs.
In order to determine whether a PSS is better or worse environmentally than a non-PSS solution the
boundaries for analysis have to be set so they capture all significant influences on the product and
PSS being compared.

Very little research has been done on the total environmental impact of different PSS. There is a real
need for life cycle analysis to be done, taking into account within the models all the major influences,
including projected market size and product life changes expected or resulting from these PSSs. Such
research would give a much clearer picture for governments so they can make sensible decisions on
whether to encourage particular PSSs.

One disturbing aspect of many of the PSSs looked at in this report is the impact they are having on
retail trade. Many town and city centres are already struggling to compete with out of town
supermarkets and shopping centres. This is now being further aggravated by many PSSs that make it
less necessary to leave the house and this trend is going to increase dramatically over the next
decade. This together with increased home working will result in much less face to face interaction
within society and the impact of this is not really understood, but could result in increased anti-social
behaviour.

Collaborators within the product service system
Often PSS consists of different companies working together. Often the producer of the hardware and
the service provider are different companies since few companies have the business and technical
skills to do both. There are some exceptions and Apple with iTunes is one example. Where the service
and hardware elements are handled by separate companies, the service company usually is the lead
company and the hardware company a supplier.
                                                                                                            Formatted: Normal, Indent: Left: 0", First
Marketing tactics                                                                                           line: 0", Tab stops: Not at 0.25"
The examples looked at in this study showed that the following marketing strategies are common for
PSS.
    Traditional business models such as bait and hook, pay per use, and subscription, are used             Formatted: Bullets and Numbering
       along with the more recent bit vendor model.
    Use of modern communications channels such as the internet, satellite or mobile phone
       network to deliver the PSS.
    Exploitation of the global marketplace.
                                                                                                            Formatted: No bullets or numbering




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                      http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                           Thematic Network ECOLIFE II
                                       N° G1RT-CT-2002-05066
                                Duration: April 1, 2002 – March 31, 2006

                       Thematic Network ECOLIFE II
                           N° G1RT-CT-2002-05066
                    Duration: April 1, 2005 – March 31, 2006
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        e.g. e.g. UThis study looks at the history, current status, and future opportunities for functional
sales, where functional sales are are defined as leasing or the rental of a product or software rather
than its sale. Three areas were studied:
Business to Business (B2B) in the developed countries                                                         Formatted: Bullets and Numbering
Business to Consumer (B2C) in the developed countries
Functional sales in the developing countries.


Within In the B2B area, the history of functional sales within the Xerox Corporation was examined in
detail, and. This showed how it the company moved from a mainly functional sales model from in its
early days because it had a monopoly on the technology, to a product sales orientation in the
1970s/80s when the its patents ran out and competition intensified, and how they moved back again
towards functional sales over the last few years as the networked office has become a practical reality.

The business model used by Xerox (for taking responsibility for the product life cycle) is likely to be
copied more replicated by other companies as the new environmental product legislation e.g. Waste
from Electrical and Electronic Equipment (WEEE) within Europe and other countries e.g. Home
Appliances Recycling Law (HARL) is implemented. This will be helped by what is expected to be the
widespread adoption of thin client computing, which puts the sophistication ????? into a central server
and simple terminals are used on the desk tops rather than individual networked personal computers
(PCs). This will allow desktop equipment to have a much longer useful life, with component reuse also
becoming more attractive. The advent of thin client computing is likely to result in remote server
services becoming common on all sizes of businesses. This will drastically reduce information
technology (IT) overheads and allow companies to have access to a vast range of software, but only
paying for what they use e.g. pay-per-use (PPU).

On B2C the study looksed at some of the functional sales business models of used in the 1950/60s
and why they have fallen out of favour with consumers. Functional sales in the B2C area are currently
only a niche market in the following areas:
Amongst pPeople not wealthy enough to buy a particular product.                                               Formatted: No bullets or numbering
For expensive products only needed for occasional use.                                                        Formatted: Bullets and Numbering
For people living short term away from their normal place of residence
For the future this could easily change, partly because the increasing personal debt crisis hitting many
developed countries could result in consumers turning from loans to rental/lease, and partly because
of some of the new technologies being introduced.

Home networking is one technology that could dramatically flip the market from purchase to functional
sales. The study explores why that is, and shows this technology can be used to provide ????? via the
central remote server for the home network a large range of services not even being marketed at the
moment by the main players in this technology.

In developing countries, whilst the individual does not have a lot of purchasing power, as a group there
is a very big, largely untapped market. Satifying a group rather than individual consumer needs is
often done better with functional rather than the normal product sales. A number of examples in the
information and communication technology (ICT) area were looked at in this study, showing they make
good commercial sense.

One of the technologies expected to have the largest impact within developing counries is wireless
Local Area Networks (LAN) which that lets local businesses communicate with the outside world
without having to have the expensive landline infrastructure. This will result in many business
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                      http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
            Co-ordinated by the Austrian Society for System Engineering and Automation
                      http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                         Thematic Network ECOLIFE II
                                      N° G1RT-CT-2002-05066
                               Duration: April 1, 2002 – March 31, 2006

                      Thematic Network ECOLIFE II
                          N° G1RT-CT-2002-05066
                   Duration: April 1, 2005 – March 31, 2006
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opportunities for supplying static or mobile computer and telecommunication centres for individuals
and local businesses to use.

NEED TO INTRODUCE IN EXEC SUMMARY OF THE REPORT WHERE FUNCTIONAL SALES FITS                           Formatted: Normal, Indent: Left: 0", First
IN THE SUSPRONET METHODOLODY OF PSS + FUNCTIONAL SALES CHOSEN FOR THE                                 line: 0", Tab stops: Not at 0.25"
FOCUS OF THE REPORT + NEED TO COMMENT ON SUSTAINABILITY ASPECTS OF
FUNCTIONAL SALES E.G. MAYBE SOME COMMENTS BASED ON GOTLAND EXAMPLE




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                      http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                            Thematic Network ECOLIFE II
                                       N° G1RT-CT-2002-05066
                                Duration: April 1, 2002 – March 31, 2006

                        Thematic Network ECOLIFE II
                            N° G1RT-CT-2002-05066
                     Duration: April 1, 2005 – March 31, 2006
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Introduction




Definitions

A ‘Product Service System’ (PSS) is an academic term for a product that consists of both hardware
and a functional sale means the selling of the function rather than just a physical a product (hardware).
In practice the definition is not quite so simple, since almost all products have a functional sales side
such as service or guarantee, and all functional sales involve a product. Functional sales forms part of
                                                                                 1
what is called ‘Product Service Systems’ which can be classified in four ways has four parts:               Formatted: Superscript

       Product-oriented services: service integration (adding products or functionality), product
        extension (providing upgrades, maintenance)
       Use-oriented service: product owned by the service provider who sells the function not the
        product or software e.g. leasing and rental
       Result-oriented service (product substitution): e.g. virtual answering service replacing
        answering machine, web- based information replacing directories
       Result-oriented service (vertical integration): e.g. production transferred to user.

In general, PSS and the above terms are not recognised within industry, and many companies provide
combinations of products and services as part of mainstream business development. In practice there
is no such thing as a pure product or pure service. Even within academia the boundaries are not
always clear and there is some discussion whether software is a product or a service.

A business model is the mechanism by which a business intends to generate revenue and profits, and
a summary of how a company plans to serve its customers. It involves both strategy and
implementation and contains the following components:
     Marketing strategy                                                                                    Formatted: Bullets and Numbering
     Differentiation from the competition
     Target customer base
     Acquiring and retaining customers
     Methods of generating income/profits
     Organisation and processes required to run the business
     How a business resources are managed
                                           2
There are many types of business models and with the advent of global supply chains and increased           Formatted: Superscript
services they are tending to become more complex. However most can be put under a few broad
categories, even though the details may vary considerably and in some cases there can be a mixture
of the category types. The following definitions are for business models that are used on one or more
of the products researched in this study:
      Bait & Hook: K. C. Gillette has been recognised as the first main instigator of this type of         Formatted: Bullets and Numbering
         business model. He realized that a profit could be made by selling a safety razor at a reduced     Formatted: Font: Bold
         price (bait) and then making a profit margin on the inexpensive disposable blades (hook). He
         developed a blade made out of very thin sheet-steel. Once the blade became dull, it was
         discarded and replaced by a new one, using the same holder. This model has become
         extremely popular today and in many cases the bait (e.g. mobile telephone) is given away free      Formatted: Font: Bold
         and not just sold at a loss or low profit margin.
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                         http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                           Thematic Network ECOLIFE II
                                       N° G1RT-CT-2002-05066
                                Duration: April 1, 2002 – March 31, 2006

                      Thematic Network ECOLIFE II
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       Bit Vendor: This is a merchant business model that deals strictly in digital products and             Formatted: Indent: Left: 0.25"
        services and, in its purest form, conducts both sales and distribution over the web. An
        example is Apple iTunes. This is a rapidly growing business model as the performance of the
        intranet continues to improve.
       Leasing: With the leasing business model, ownership is retained by the producer and the
        profit is made by charging for the time the customer uses the product. This is an extremely old
        form of business model that has its roots in the leasing of agricultural land in the Roman times,
        and is popular for many PSSs in today’s marketplace.                                                  Formatted: Font: Bold
       Subscription: The subscription business model is a business model that has been used for a            Formatted: Tab stops: Not at 0.25"
        long time to sell magazines, but is becoming much more widespread today. It is seen as a
        good way for a company to get a recurring sale of a product or service rather than just a one
        off product sale.
       Utility Model: This is also known as "on-demand" model and is based on metering usage, or
        a "pay as you go" approach. Traditionally, metering has been used for many years for
        essential services such as gas, electricity and water.
                                                                                                              Formatted: No bullets or numbering, Tab
Business models for PSSs are heavily influenced by the type of company producing and marketing the            stops: Not at 0.5"
                                                                 3
product. Companies can be categorised into the following types :                                              Formatted: Superscript
    • Assembler Company: Buys in parts, assembles and badges product for sale.
                                                                                                              Formatted: English (United Kingdom)
    • Hollow Company: Sub-contract design, production, and most services and add own brand
         name to the product.
                               4                                                                              Formatted: Font: Bold, English (United
                                                                                                              Kingdom)
    • Partnership Company: Works in partnership with other companies to provide a product
         service system.                                                                                      Formatted: Bullets and Numbering
    • Bit Merchant: Sells and/or creates digital data rather than physical products. Often data               Formatted: English (United Kingdom)
         comes from other company sources. e.g. Music in digital format from the record companies.
                                                                                                              Formatted: Font: Bold, English (United
    • Solutions Company: Builds a system to address a customer’s requirement, buying in                       Kingdom)
         products and writing/purchasing software.
                                                                                                              Formatted: English (United Kingdom)
    • Mixed Content Company: Uses a mixture of the above. These are sometimes different
         businesses within the same company.                                                                  Formatted: Superscript
In order to get a more focussed view of functional sales, it was decided to restrict the definition of        Formatted: English (United Kingdom)
functional sales to that described as Use-oriented service use-oriented service.
                                                                                                              Formatted: Font: Bold, English (United
                                                                                                              Kingdom)
PERHAPS ADD COMMENT THAT PSS IS ACADEMIC TERM – MANY COMPANIES PROVIDE
COMBINATIONS OF PRODUCTS + SERVICES                                                                           Formatted: English (United Kingdom)
                                                                                                              Formatted: English (United Kingdom)
                                                                                                              Formatted: Font: Bold, English (United
                                                                                                              Kingdom)
Scope of the Study                                                                                            Formatted: English (United Kingdom)
                                                                                                              Formatted: English (United Kingdom)
This study will mainly concentrate on examining the business models for Functional sales are not
anything new. For instance in the 1950s/60s few people in the UK owned a television set, and the              Formatted: Font: Bold, English (United
                                                                                                              Kingdom)
majority were rented. The rental companies would often install the television, repair it, and replace it at
the end of its life. As the price of televisions dropped, and their reliability substantially improved ????   Formatted: English (United Kingdom)
the market changed, so that now almost everybody owns a television. The reasons for this change
were that it has now become better financialeconomic sense to buy, people can more generally afford
it, and in a material society ownership has become the culturally the preferred option.

Just as technology and wealth has radically changed markets over the last 20 years, the indications
are that new emerging technology and environmental pressures could once more move the pendulum
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back over the next 20 years. This report looks at these pressures, the evidence pointing to functional
sales again becoming more main stream in the future, and what new business models could emerge
and how they couldexisting PSSs, finding out how they differ from straight product sales and the         Formatted: English (United Kingdom)
differences between the business models for the different types of PSS. The following will be looked     Formatted: English (United Kingdom)
at:
      What is the product service system                                                                Formatted: Bullets and Numbering
      Who is the key driver
      What are the different elements?                                                                  Formatted: English (United Kingdom)
      Who is the customer
      Basic needs and drivers
      The initiator of the product service system
      Financial flow through the product service system
      Sustainability of the business model
      Collaborators within the product service system                                                   Formatted: English (United Kingdom)
      Customer/provider relationship
      Marketing tactics

The report looks in detail at the business models for the following PSSs:
    Mobile telephone product service systems                                                            Formatted: Indent: Left: 0.25"
    Downloadable music, films and radio                                                                 Formatted: Bullets and Numbering
    Mobile navigation system
                                                                                                         Formatted: English (United Kingdom)
    Leasing of large household appliances
    Online games                                                                                        Formatted: English (United Kingdom)
    Remote Disease Control                                                                              Formatted: English (United Kingdom)
be translated into business opportunities.

The final part of the report looks at a couple of the emerging PSSs resulting from advances in
technology and the sort of business models they will probably be required in order to be successful in
tomorrows world. Examples looked at include:                                                             Formatted: English (United Kingdom)
     Downloadable newspapers/magazines (electronic paper)                                               Formatted: Indent: Left: 0.25"
     Networked Home. (interconnection and control of household equipment)
                                                                                                         Formatted: Bullets and Numbering

                                                                                                         Formatted: Indent: Left: 0", First line: 0"




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Review of the Business Models for Existing Product Service
SystemsCurrent Status of Functional Sales
Most business models for PSSs have evolved as companies have moved from just producing
products to offering products and services under a PSSWhen looking at the current status of
fFunctional sSales, there are major differences between business to business (B2B) and business to
consumer (B2C). With B2B it is common for companies to lease equipment, whereas with B2C it is
very much a niche business. Another major difference is between the developed and developing
nations of the world. The markets of the developing nations are a n area relatively untapped area
which that offers large business opportunities, although they will require major differences in their
approach. Often the organisation structures have not been radically changed and this has had it
influence on the formation of the business models. As an example the product design organisation
and service departments are often still very separate entities within a company even though many
products now have a large service element.

BuMobile telephone product service systemssiness to Business


The first commercial use of mobile telephones was launched by Bell Laboratories in 1946. In 1947 the
reuse of radio frequencies among hexagonal "cells" was conceived, leading to today’s cellular
communications.Functional However at that time the number of frequencies available was very limited
in the US allowing only up to 23 simultaneous phone conversations to be held in the same cell area.
This position did not change until 1968.

Motorola in 1973 was the first to incorporate the technology into portable device that was designed for
other than the use in police cars. It was not until 1981 that the first commercial cellular telephone
system began operation in Tokyo. A year later the FCC in the US gave authorisation for the first
commercial US service.

In 1982, the Conference of European Posts and Telecommunications (CEPT) began the process of
creating a digital cellular standard that would allow users to roam from country to country in Europe.
By 1987, the GSM standard was established and was the only communication standard that could
provide data services such as email, fax, internet browsing, and intranet/LAN wireless access.

Since the late 1980s mobile telephones have gone from being rare and expensive product used
almost exclusively by businesses to a low-cost personal item. In many developed countries, mobile
phones now outnumber land-line telephones. Mobile phone penetration is also increasing dramatically
in the developing countries, where there is little existing fixed-line infrastructure.
                                                                                                          Formatted: Font: Bold, Italic
The mobile phone has now become a fashion item, and its use is being extended to become smart
phones which can adopt the roles of Internet browser, game console, personal music player, and
personal digital assistant. As the PSSs in the mobile telecommunications industry develop the
business models are adapted. However most of them in the developed world work are based on the
‘Bait & Hook’ business model with the mobile phone being either given away free or at a very low price
(bait) and the income comes from the line rental, call charges, and other data services (hook). Some
fall under the subscription business model (pay as you go) although this type is more common in the
developing countries.
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In most cases the user owns the phone and product service therefore falls under the class of PSS
called Product-oriented services. However with new models having extended use as a camera, music
player etc the product service system is rapidly moving into Result-oriented service (product
substitution) category.
                                                                                                            Formatted: Font: Bold, Italic
The European mobile telecommunications market is very fragmented. Pan-European mobile                       Formatted: English (United Kingdom)
telecommunications services are not available, nor are fixed-mobile converged services. This has
resulted in many differences in the business models between member states.

Within the mobile telecoms industry there are a number of different types or organisation involved in
bringing the PSS to the user. These are:
     Mobile phone producers.                                                                               Formatted: Bullets and Numbering
     Retailers
     Service Provider
Often the service providers own retail outlets and also handle sales and replacement phones directly.
The mobile phone manufacturers are normally independent organisations from the service providers.
Since the service provider put together the complete PSS package that organisation is a key driver of
the PSS.

In general the mobile phone manufacturers are multinational and offer the features on a mobile rather
than the content. The latter is normally handled by the service provider, although this picture is
becoming more complex as new features are introduced. As an example Motorola has teamed up with
Apple to produce a mobile that can download music from the iTunes music store. Sony Ericsson on             Formatted: English (United Kingdom)
the other hand has joined forces with online music service Napster to develop a service for mobiles.

From the above the question is raised on who is the initiator of the product service system? Whilst it is
the service provider that puts the PSS together along with the revenue generation model it is the
mobile phone manufacturer that seems to be in most cases the PSS initiator and they are now
showing the ability to initiate PSSs with content providers other than the service providers.

Since there appears to be a multitude of different business models it is difficult to make an overall
judgement on sustainability. Certainly the drive by manufacturers to offer more features to retain high
sales levels results in short product life. If those manufacturers had a revenue stream from content
rather than almost exclusively from the sale of the phone then a much more sustainable business
model would probably evolve. This however is unlikely to occur. On the plus side the move to include
                                                            5
other features such as camera, PDAs and music players reduces the number of devices a user
requires and saves on material resources. Within the developing world the mobile phone is allowing
communications structures to come into place where landlines are not available and helping those
countries to develop faster.


ssales have become very common in business to business (B2B) transactions. One of the leaders in
this field is the Xerox Corporation. In 1937, athe copying process using electrostatic energy called
Xerography was invented by an American law student - Chester Carlson. Carlson had invented a
copying process based on electrostatic energy. Xerography is derived comes from the Greek for "dry
writing" and became commercially available in 1950 by the Xerox Corporation. Xerox closely guarded
this technology and the ownership of the copying machines remained with the company, with users
being charged on the basis of cost per copy (pay per use e.g. PPU). Installation and maintenance
remained under the control of Xerox, and users were not allowed to open the machines. With a
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monopoly on this copying process Xerox rapidly grew into a huge multinational company dominating
the market in this sector.

When the patents started to run out, other manufacturers moved into this business arena and the
business became much more price competitive, with the ownership of the majority of copiers moving
to the user. Xerox moved into other areas such as scanners and fax machines. In 1992 the company
noted:

“As we move into this systems world, we aren’t just making and selling boxes anymore. Increasingly
we are working with customers to design and redesign their basic business processes. In the future,
Xerox won’t just sell copiers. It will sell innovative approaches for performing work and for enhancing
productivity. . .it’s a partnership [with the customer] in which we take a more consultative approach”
(Howard,1992).

Xerox in many ways is leading the way on what may be a model for other businesses, not just for the
B2B but for B2C. They are using both technology and ‘the environment’ as drivers. In doing this most
observers believe that they have largely succeeded in the reorientation of their business back to
functional sales, and services is the fastest growing area of the company.

The main technology driver for Xerox is the networked office. Within this technology Xerox offers
services expertise on to helping businesses develop online document archives, analysing how
employees can most efficiently share documents and knowledge in the office, operating in-house print
shops or mailrooms, and building Web-based processes for personalising direct mail, invoices,
brochures and more. Xerox also offers associated software. This is put together in a strategy called
                                1
‘Reinvent, rethink and redefine ’:
    By “reinventing our machines” – a challenge that is driven, in part, by the need to create higher     Formatted: Bullets and Numbering
        quality, faster, more cost-effective products and services.
    By “rethinking how we work” – the creative process that is central to most of our lives and which
        is being dramatically altered by the power and potential of technology.
    And by “redefining the document” – to include paper and new types of media and the bridges that
        make the transfer of information from one to the other transparent.
A brochure has been produced that gives many examples of services offered under this strategy.

The other major driver for Xerox is environmental performance. Xerox has operated a policy for a
number of years of taking back machines at the end-of-life and reusing/recycling the parts. Equipment
returned to Xerox at end-of-life can be remanufactured - rebuilt - reusing 70 to 90 percent by weight of
machine components, while meeting performance specifications for equipment with all new parts. This
process is shown in figure 1.




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Figure 1


Xerox’s new DocuColor iGen3 Digital Production Press uses non-toxic dry inks with a transfer
efficiency of nearly 100 percent, reducing the potential for waste. Up to 97 percent of the machine’s
parts and 80 percent of the waste it generates can be reused or recycled,

Much of this success is based on Xerox retaining ownership of their equipment. Where equipment is
purchased, customer acceptance remains a challenge for Xerox’s programme. Despite a decade of
proof, there remains a misperception among some customers that products with recycled parts are
inferior to those built from all-new parts.

At first sight using technology and environmental drivers together would suggest the ideal
combination. Certainly from the business perspective it has worked remarkably well for the company.
However Xerox also expects the technology transformations of: analogue to digital; black and white to
                                                                             2
colour; and non-networked to network to substantially increase overall usage . It is here that the
dilemma arises. Looking at the big picture the overall environmental impact could still be negative.

Whilst Xerox is a good example of B2B functional sales, there are many other companies that lease
out a large percentage of their products. This is particular true for the information and communications
technology (ICT) industry. This move from purchase to lease has accelerated over the past 10 years
partly because company accountancy practices have resulted in capital expenses being a thing to
avoid, and partly because ICT equipment becomes quickly out of date. As a result of the latter most of
the companies involved do not reuse parts at the end-of-life like Xerox. An example of a company that
has invested heavily indeeply into the functional sales business is HP. Much of their equipment to
industry is leased rather than sold, and they take responsibility for repair, upgrading and end-of-life.
                                                                                   3
HP has also started to move into pay- per- use (PPU) on their Superdome servers . A base monthly
payment is made to cover minimum usage. For the rest of the monthly payment, customers are                 Field Code Changed
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charged for actual usage, creating a direct link between IT costs and business demand. Businesses
with seasonal activity or unexpected new business opportunities will have capacity available and will
only pay for the IT power they need, when they need it. This offers significant advantages to
customers during slow periods of business as they will not have to pay for processing they do not
utilise. In addition, customers do not have to risk having additional processors instantly available
during periods of high activity.

Metering technology is used to read the actual utilisation of each central processing unit (CPU) and
charges a customer for the processing power they use. CPU utilisation data is automatically collected,
encrypted and securely transmitted to HP's billing engine. The equipment devices and automated
metering technology are physically located at the customer site.

Whilst the above example shows how pay on usage e.g. PPU and leasing can be combined into a
workable business solution, this approach is still rare, and most functional sales are straight leases
with equipment replaced after two to three years.

Whether the move from product sales to functional sales in ICT is has a positive or negative
environmental impact is not clear. For certain the average life span of a leased computer is one to two
years less than a purchased machine. Since life-span is a key element in determining environmental
impact this would not seem to be a good sign. However the energy use of successive equipment
models has been dramatically reduced over the last few years and this may have resulted in an overall
positive impact. Equipment power consumption will have to continue to fall substantially if the situation
is not to get worse. There is however two other technology changes that could result in longer overall
life cycles for ICT equipment, and these are discussed in the section on business opportunities. .



BDownloadable music, films and radiousiness to Consumer (B2C)
                                                                                                            Formatted: Font: 12 pt, Bold, Italic
                                                                                                            Formatted: Indent: Left: 0"
IThen the mid-1980s, at the Fraunhofer Institut in Erlangen, Germany, work began on a high quality,
                                                                                                            Formatted: English (United Kingdom)
low bit-rate audio coding with the help of Dieter Seitzer, a professor at the University of Erlangen. In
1989. Fraunhofer was granted a patent for MP3 in Germany and a few years later it was submitted to
the International Standards Organization (ISO), and integrated into the MPEG-1 specification. The first
MP3 player was developed by Fraunhofer in the early 1990s. MP3 was mainly used for illegally
downloading music off the web. Portable players did not take off in a big way, because the higher
quality sound from a portable CD player was preferred by consumers and the refusal of the music
industry to sell over the internet as they attempted to protect their existing business models of selling
CDs through shops.

When Apple launched the iPod the landscape changed and it suddenly became the fashion item to
have one and sales went through the roof. Erik Wilde of the Swiss Federal Institute of Technology
(ETH) wrote in a paper entitled ‘When Business Models Go Bad: The Music Industry’s Future’

‘While the music industry is mainly concerned with protecting their traditional sources of income, the
record sales, other companies concentrate on new business models. Apple’s iTunes was the first
online music distributor to become rather popular, and one of the reasons is that the concept is
modelled around user-friendliness rather than the goal to protect old business models. The online
distribution on music still is in its infancy, but it seems to be able to support a business, given the
business is designed to work within the new world rather than against it. Users are willing to pay for a    Field Code Changed
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real alternative to P2P, if they can choose among titles of major labels, in user-friendly formats,
without copy protection and for Windows and Apple platforms. Business models with copy restrictions
                                                                 6
or proprietary formats are less attractive and less successful.’
 business to consumer (B2C) market is heavily influenced by fashion and culture. During the 1950s
products using new technologies started to become available in the Western World. However many of
these products were much too expensive for the average individual to afford. As a result it became
common to wash clothes in launderettes, and rent televisions, telephones and other products. As the
Western World became more affluent, ownership became a sign of success within a competitive world
and that preference for ownership lasts up to this day. As a result of this functional sales are now
almost exclusively restricted to niche markets within the developed nations of the world. These niche
markets are:
  Amongst pPeople not wealthy enough to buy a particular product.                                         Formatted: Bullets and Numbering
  For expensive products only needed for occasional use.
  For people living short term away from their normal place of residence.
                                                            4
  In November 1999 Electrolux started a field trial in Gotland , Sweden for washing clothes based on a
pay per wash e.g. PPU principale. The model included providing a washing machine to the consumer,
and charging approximately €1 per wash at 1kWh/wash cycle, rather than charging for the washing
machine. The machine remained the property of Electrolux, although the consumer paid for the
installation which that was about €45. A 24-hour service and repair was guaranteed as well as new
machine after 1000 wash cycles. The intention was then to refurbish the used machines at the
Electrolux refurbishment facility which was a separate project. The basic process is shown in figure 2.




                             Electricity
                           Service, up-            Delivery
                              grading                  :
                           Product take-            A wash
                               back                function                      Basic needs:
                                                                                 Clean clothes


Figure 2

The partners in the project were Vattenfall a major electricity production/distribution company, GEAB
the local electricity company based ion Gotland and one Electrolux Home store on Gotland. The
uUsage of the washing machine was monitored by a smart electricity meter installed in the washers,
and connected to the electricity and telephone networks. Each month the households received a bill
listing the
washing expenses as part of their regular electricity bill from GEAB.

The trial did show that families washed more conservatively by maximising the load, etc. This
has a positive environmental impact through using less water, electricity and detergent. However
generally the Gotland trial was not a big success, since households seemed to prefer to own their
appliances. Most of those that participated were 2 person families with limited income. THowever even     Field Code Changed
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take up in the take up in low income families was not high, since many supermarkets could offered low
price/quality machines on credit, with monthly repayments lower than the cost of pay per wash e.g.
PPU. When buying a washing machine, it is clear that most consumers do not take account of life time
eElectricity, detergent, and repair costs. are not generally taken into account by the consumer.
MTTTWT

The Gotland project illustrates another big difference between the situation now than in the 1950/60s
and that is the availability of credit. In the 1950/60s if you wanted something you could not afford you
either rented it or used a communal service such as a launderette. Today companies are falling over
themselves to lend you money and this has become the prime source of getting products???? that you
cannot afford to buy outright. The consumer debt in the Western world is now so huge that many are
predicting that it is not sustainable and the bubble will soon burst.

COMMENTS ON THE LESSOSN LEARNT

Where Electrolux haves had some success in using the ffunctional ssales model forin washing
machines , is in supplying the equipment to blocks of apartments in countries such as the Netherlands
and Switzerland where it has become custom for each block of apartments to have their own
communal washing area, with no facilities within the apartment to install private machines. Although
this could be classed more B2B, it does show how cultural aspectsstoms in different countries can
influence the acceptability of functional sales.However, there maybe opportunities related to the PPU
model in B2B market segments such as hotels and hospitals, where there is large volume of laundry.

The market for ffunctional ssales of products that are rarely not often used is well established. A
classic example of this is the rental of tools such as cement mixers, scaffolding etc for Do-it-yourself
(DIY) projects. However there are many other examples such as robotic lawn mowers and marquees,
crockery, and juke boxes for functions. This however is, and always will be, a niche market. In addition
whilst it obviously is highly beneficial environmentally to hire these products rather than purchase
them, it is costs and not environmental impact thatwhich drives this niche market.

The final class where ffunctional ssales has had some impact is for people such as sales men,
students or expatriates that are away from their normal place of residence for periods of time. Toshiba
in particular has targeted this group in Japan and have developed aon ‘home appliances’ package.
The user pays a monthly rental fee for a package of four appliances for a three-year contract is 3,800
yen (about U.S.$31). Users have a choice of a two, three, or four-year rental period. The package
consists of a 4.2 kg automatic washing machine, a 120-litere two-door fridge-freezer, a 15-inch flat         Formatted: English (United Kingdom)
television, and a cooking oven-range. Although prices of electrical goods are lower in Japan, this is
still pretty cheap for what is offered, and the limited market it is addressing.

Toshiba covers within the rental package any repairs, delivery, installation and removal. The company
also pays the recycling fees at end-of-life. These fees result from legislation called the Home
Appliances Recycling Law (HARL) that. This requires manufacturers to take back for recycling TVs,
Refrigerators, Air-Conditioners, and Washing Machines for recycling. The recycling fees are normally
paid for by the user rather than the manufacturer. It is unlikely that similar schemes will be launched in
other countries since Japan is fairly unique in having a large number of sales persons that fall into the
category they are addressing
Apple reported that since its inception, customers have purchased and downloaded more than 250               Formatted: English (United Kingdom)
million songs from the iTunes Music Store. iTunes users are now downloading one and a quarter
million songs per day, which is an annual run rate of almost half a billion songs per year. The iTunes

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Music Store is now available in fifteen countries, which together represent more than 70 percent of the
global music market.

The downloading of complete films via the internet is at an even earlier stage of development. There
are two major road blocks preventing it becoming a large commercial market. These are:
      As with the music industry the desire of the Hollywood studios to protect their existing revenue    Formatted: Bullets and Numbering
         stream model.
      Lack of fast enough broadband connections to the majority of households.
The first issue is already disappearing since some of movie producers are in both the film and music
business and are starting to find the digital music business model a lucrative business to be in. Warner
Music in 2005 reported digital revenues climbed substantially, reaching $44 million, or 6 percent of
overall company revenues. That percentage is likely to increase even further as overall CD sales
continue to decline. In addition in the US, Sony, Warner Bros., Paramount, MGM and Universal have
created a joint company called Movielink from which movies at a cost of between $3.99 and $4.99 per        Formatted: English (United Kingdom)
film can be downloaded. The films can be watched while they are being downloaded although there
are only about 450 titles currently available.

Apple are now moving into streaming of radio programmes to the iPod. This has been called
podcasting and is gaining in popularity at a tremendous rate. It is being embraced by conventional         Formatted: English (United Kingdom)
radio companies and amateur broadcasters. Both the BBC and Virgin Radio are 2 conventional
companies pushing podcasts. Virgin’s breakfast show is being downloaded 85,000 times a month               Formatted: English (United Kingdom)
through Apple’s iTunes. Colleges are using podcasting to make lectures available to students and a         Formatted: English (United Kingdom)
vicar in the UK is podcasting his sermons which have been downloaded by over 2400 people.

Podcasting is not without its problems. There is a big fear though that it will destroy the conventional
business model for commercial radio in that the podcast audience will stop listening to advertisements     Formatted: English (United Kingdom)
by skipping them. In addition there is the digital rights issues on how to legally include music in
podcasts. The solution to the latter may not however be insurmountable. Adam Klein, executive vice-
president for strategy and business development for EMI stated:                                            Formatted: English (United Kingdom)

‘We’ve all become a lot more sophisticated about how to create business models that could meet a           Formatted: English (United Kingdom)
                                                                                              7
broad range of interests. Everybody’s trying to work out what’s a responsible way to do this.’             Formatted: English (United Kingdom)

The downloading of music, films and podcasts falls into the PSS category of ‘Result-oriented service’      Formatted: Font: Italic, English (United
                                                                                                           Kingdom)
since the films and music replace cassettes and CD/DVDs. The normal business model used is the
‘Bit Vendor’ model. Apple for instance charges in the US 99 cents per tune. For each tune downloaded
a royalty is paid to music producers. Some companies use the subscription business model where you
pay a monthly fee for downloads.

The downloading of music and films at first glance would seem to be an ideal way of reducing the
environmental impact of the industry. In truth the actual situation is much more complex. ICT Digital
                                                             8
Europe has issued a booklet called ‘Making the Net Work. Steps to a sustainable networked world’ It        Formatted: Superscript
is a summary of two years of research on the effects of ICT on sustainable development. It showed
that downloading music can result in less than half the environmental impact of purchasing from a
shop, if the consumer uses a broadband connection and does not burn the music to a CD. However a
narrowband user who does burn the music can have an environmental impact of over three times that
from the shop. Furthermore a user that down loads the same piece of music over broadband more
than twice again has a larger environmental impact than purchasing a CD. This shows how complex
the analysis of PSS in ICT can become. The study did not touch on the impact of transferring music to
MP3 players or the increase in market resulting from such a PSS.
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The social impacts are similarly complex. Certainly it is of social benefit for people that can not easily
leave the house because they are infirmed, but it also adds to financial pressures within town and city
centres which are already suffering from many retail businesses closing down. Furthermore most of
the business for this PSS is within the developed world as few countries in the developing world have
broadband connections available to a significant proportion of their population..



TheMobile navigation systems Developing Countries


Mobile navigation systems have developed out of the concept of using global positioning satellites to
determine the exact position of missiles for accurate targeting at enemy positions. The first concepts
were developed in the late 1960s. In December 1973, the proposal for a GPS system was approved
by the Defence System Acquisition and Review Council (DSARC). In 1989, the Magellan Corporation              Formatted: English (United Kingdom)
introduced the first hand-held GPS receiver. Development in commercial applications was held back
by the decision to reduce the location accuracy for non-military applications from 15-25 metres to
about 100 metres. This limitation was lifted in May 2000. The European Union is building its own
                                                 9
global navigation satellite system called Galileo , currently projected to be operational in 2008.           Formatted: English (United Kingdom)

Commercial navigation systems are mainly used for navigation of road vehicles. The largest
organisation providing the maps for such systems is Navteq. They have formed partnerships with most
of the manufacturers of such systems. Over the last couple of years mobile navigation systems often
combined with a PDA have started to become very popular. Navteq provides the maps for most of
those devices as well.

The PSS for mobile navigation systems mainly falls under the category result-oriented service since          Formatted: Normal, Indent: Left: 0", First
the service replaces the use of maps. Payment is normally either on a subscription basis or pay-per-         line: 0", Tab stops: Not at 0.25"
use. The navigation hardware is either sold or included in the subscription. Like the downloading of
music it is now starting to be integrated into the mobile phone services.

Mobile navigation systems are seen as an important tool in reducing the environmental and social
impact of road congestion. This has been recognised within the EU Commissions report ‘Intelligent            Formatted: English (United Kingdom)
Transport Systems’ and is a key element within that initiative. Such systems have the potential to
reduce congestion, time, money and energy use on the roads if used on the majority of vehicles on the
road. There has though been little detailed research into the subject and there is a lack of real data to    Formatted: English (United Kingdom)
quantify the overall benefits. These systems are expected to become an integral part of long term
plans for road pricing within Europe.                                                                        Formatted: Font color: Red

uch of
     the developing world market remains untapped. Over 65% of                                               Formatted: Font: 14 pt, Bold, Kern at 16 pt
                                                                                                             Formatted: Font: 14 pt, Bold, Kern at 16 pt
the world’s population earns less than $20005 per annum, yet put
                                                                                                             Formatted: Font: 14 pt, Bold, Not
together this can still be a huge market. A number of companies                                              Superscript/ Subscript, Kern at 16 pt
have started to work in these markets, but it does require a different                                       Formatted: Font: 14 pt, Bold, Kern at 16 pt
approach taking into account the individuals purchasing power is                                             Formatted: Font: 14 pt, Bold, Kern at 16 pt
low but the combined purchasing power is high. In a paper entitled                                           Formatted: Font: 14 pt, Bold, Kern at 16 pt
‘Serving the World’s Poor’ (reference) a number of examples of                                               Formatted: Font: 14 pt, Bold, Kern at 16 pt
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successful business ventures in the developing world were cited
which clearly indicate how this change of approach is implemented.
                                                                                     Formatted: Font: 14 pt, Bold, Kern at 16 pt

Need to add the context of the below e.g. what lessons for ICT
For example, Hindustan Lever, a subsidiary of Unilever introduced
a high quality confection for under a penny each in India, and it has
become the fastest growing company product, and expected to
generate up to $200 million per year in the targeted markets. The
success uses the fact that the customer base is huge, and
concentrated mainly in densely populatacked cities. In addition
distribution costs are low because of the much lower wages in
those markets.,

Another example given is a company called Gyandoot working in
an area of India where 60% of the population is below the poverty
level. The company has set up a network of 39 internet-enabled
kiosks that provide local businesses with internet and
telecommunications access. Each kiosk serves 25 to 30
surrounding villages. The entire network reaches over half a million
people--(PPU) . This latter case is a good example of how
ffunctional ssales can be made to work in the developing countries.
Need explain a bit more clearly why this is functional sales


Whilst the business opportunities in the developing world are huge,
so too will be the environmental impact. Most of the future growth
will come from the developing countries. The U.S. Energy
Department says much of the projected 58 percent growth in
worldwide consumption of commercial energy up to 2025 is
expected to occur in rapidly industrialising developing countries
such as India, China and South Korea. With little sign of the
developed countries willing to significantly reduce their own energy
use the outlook looks bleak environmentally. Many of the business
opportunities in ffunctional ssales will require information networks
which that use energy. Although it makes commercially and social
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ly it makes sensince to put in such networks, it can only have a
negative impact environmentally.



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Electrolux pay per wash trial                                                                             Formatted: Heading 2, Indent: Left: 0",
                                                                                              10          Hanging: 0.3"
Electrolux completed a pilot scheme based on a pay-per-use system with washing machines during
1999/2000 in Gotland, Sweden. Instead of selling or renting out the appliances they were paid by the      Formatted: Font: Not Italic
consumers according to how much the appliances are used. When the project was started, 7.000              Formatted: Normal, Indent: Left: 0", First
smart meters were installed, mainly around the city of Visby. Since the EU has calculated up to 90% of    line: 0"
the environmental impact can be attributed to the use stage of a washing machine, the pay-per-use
method would give a financial incentive to do fewer washes. In addition Electrolux chose their most
energy efficient machine for the trial.

The business model included providing a washing machine to the consumer, and charging
approximately €1 per wash at 1kWh/wash cycle, rather than charging for the washing machine. The
machine remained the property of Electrolux, although the consumer paid for the installation that was
about €45. A 24-hour service and repair was guaranteed as well as new machine after 1000 wash
cycles. The intention was then to refurbish the used machines at the Electrolux refurbishment facility.
The basic process is shown below:




                          Electricity
                         Service, up-             Delivery
                            grading                   :
                         Product take-             A wash
                             back                 function                      Basic needs:
                                                                                Clean clothes

                                                                                                          Formatted: Font: Bold
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                                                                                                          line: 0"
The partners in the project were Vattenfall a major electricity production/distribution company, GEAB
the local electricity company based in Gotland and one Electrolux Home store on Gotland. The usage
of the washing machine was monitored by a smart electricity meter installed in the washers, and
connected to the electricity and telephone networks. Each month the households received a bill listing
the washing expenses as part of their regular electricity bill from GEAB.


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The PSS for this business model is a ‘Use-oriented service’ since the washing machine remains the
property of the manufacturer. This is one of the main reasons this project failed to take off as a viable
business since most of the targeted market preferred to own the equipment in their house rather than
that ownership being retained by the manufacturer. This is a cultural issue that has to be taken into
account when setting up a business model. It could change with time, but currently to be successful in
the consumer market compelling advantages of not owning the equipment must be apparent to the
consumer. These could be:
      The product is needed for a task or tasks but is very expensive and not used that often. (e.g.       Formatted: Indent: Left: 0.25"
         Marquee for a wedding reception)                                                                   Formatted: Bullets and Numbering
      It is a product the consumer wants but there is no other manufacturer currently offering this
         product for sale. (e.g. Initially time slip hard drives for television programmes were only
         available on a monthly lease)
      A product or system which offers many advantages to the consumer but requires central
         technical support to operate it. (e.g. The networked home may fall into this category)
In the case of the Gotland project users were able to purchase washing machines from local stores on
hire purchase, where the monthly payments were lower than the costs of pay per wash for the
Electrolux machines.

What could give the cultural shift required to make pay-per-use attractive to the consumer? The debt
mountain could be one factor. The consumer debt in the Western world is now so huge that many are
predicting that it is not sustainable and the bubble will soon burst. This could result in consumers
moving from hire purchase to pay-per-use over the next few years.

Whilst this example was not a commercial success, it does point the way to how producers can take a
more responsible environmental approach within a business model. As the home becomes more
integrated and dependent on electronic communication systems this approach could become much
more commercially viable.
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Online games
It is believed the first true online game was released in 1969 for the Plato gaming platform. In 1972 the
same platform supported a game called ‘Empire’ that allowed 32 simultaneous online players. In 1984
Atari put Plato on its 8-bit computer. It had a $5/hour connect fee. During 1986 MUD2 launched in the       Formatted: English (United Kingdom)
UK as a pay-for-play service. In 1993 the Mosaic web browser was launched giving a graphical
interface to the internet for the first time. Sony launched a PlayStation with broadband capabilities in
2001. However with connection speeds still being very low many games depended on the graphics
being on a CD-ROM for multi-player online games. As broadband appeared along side software
developments such as ‘Flash’ which uses a native Vector graphics animation format to deliver crisp,
                                                                                          11
stunning graphics in very small files, the need for the CD-ROM has started to diminish.                     Formatted: English (United Kingdom)

Today there are many companies offering online games. They usually entice new customers with free
games, or a free trial period. The following are typical example of pricing structures available:


       Completely Free: No software or subscription fees are involved to play these games.                 Formatted: English (United Kingdom)
       Free Trial: New players are able to try these games for a limited time before paying.               Formatted: Indent: Left: 0.25"
       Free Software: The player does not have to purchase the software to play these games,
                                                                                                            Formatted: Bullets and Numbering
        although subscription fees may apply.
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       Free Subscription: The player does not have to pay a subscription fee to play these games,
        although the software may not be free.
     Pay Software: The player must purchase the software to play these games.
     Pay Subscription: The player must pay a periodical subscription fee to play these games
Another interesting part of the revenue model is the mixture of software purchase and subscription.
The purchase part is in general for games that require the graphics to run on the machine rather than
from a server on the internet. However it does get a revenue stream from those users that do not wish
to pay a regular subscription.

In addition to online games available on the web, many games are sold on CD or DVD for playing over         Formatted: English (United Kingdom)
the web. The product part of the PSS consists of:
    ● The initial software package, delivered on CD or DVD, which has to be purchased                       Formatted: Bullets and Numbering
    ● Web-based content to allow the customer to interact with other customers using message
         boards and/or chats
    ● The game server(s) to which the software connects to and on which the customer plays the
         game
    ● The update server(s) that ensures that all customers have the same version of the software at
         any given time


The service part of the PSS consists of:
   ● A web based account management system that enables the customer to view/modify the data                Formatted: Bullets and Numbering
       of their purchased game account(s), which is maintained by a dedicated team of web
       designers, administrators and accountants
   ● A dedicated bulletin board for technical support and general customer information, which is
       maintained by customer support staff
   ● In-game 24/7 customer service, provided by a team of customer service representatives
   ● A dedicated hotline, active on weekdays, maintained by customer support staff
   ● A team of developers to create new game content (Industry standard would be to release
       major content updates as purchasable expansion, provided either as retail package or as
       digital download)
   ● A dedicated operations team to maintain the server infrastructure required to play the game
   ● A team of public relations specialists that ensures sufficient advertising for the product is done


An online game is offered by a software publisher, which is in most cases also the focal leader (i.e. the   Formatted: English (United Kingdom)
publisher decides when to release game expansions, and the development studio that creates the
game content will make the requested changes to the product). Please note that nowadays most
game development studios are owned by the publishing company.

The customer base is owned by the publishing company, which also provides all accounting services.
The customer base for most online games begins to evolve years before the actual public release of
the product, since the publishing company would start advertising for the product way ahead of
schedule.

Additionally, before the initial release the publishing company will usually enable the customer base to
have a “sneak preview” of the game in the form of a so called “beta test” (for which the customer           Formatted: English (United Kingdom)

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doesn't need to purchase the game and/or a game subscription) allowing the company to evaluate the
product before its actual release, and to have a very successful method of advertising.

The publisher needs the following suppliers or partners in order to offer the PSS:
   ● A game development studio that has the know-how to create and maintain game content                  Formatted: Bullets and Numbering
   ● A data-centre with a sufficient connection to host the server infrastructure, sufficient bandwidth
       capacities usually are in the 5 to 10 g bit range.
   ● A company to print the initial software package on CD or DVD in order for the publisher to
       deliver it to the retailers
   ● An advertising company to handle the initial advertising of the product and/or to provide staff
       in order to train personnel the publisher can use to do the advertising by themselves

In a typical online game the product requires, in order for the customer to play it, a monthly
subscription fee, additionally to having the customer purchase the initial product package (the program   Formatted: English (United Kingdom)
CD/DVD). Subscription fees are paid to the publishing company. Additionally the publishing company
will usually offer extra services related to the game which create an additional income, though these
services are optional. Such services could be special in-game abilities or rewards which are only
available to the customer if purchased.

The publishing company has to pay for the development of the game, staffing and advertising and the
technical infrastructure required to offer the product, not to mention office space running costs.

An initial investment was made to create the technical infrastructure to run the game platform,
including the development and distribution of the software package and tools needed later on by the
customer service department in order to maintain the product. Further investments had to be made
into advertising and web content development in order to introduce the product to the customer base.

The basic need to be satisfied is the long term entertainment of the customer base.                       Formatted: English (United Kingdom)
Because of the competitive nature of an online game, these online environments offer a way for the
customer to “escape real life” and to experience something interesting out of the normal world. An
online game offers the customer a unique experience in which they can “grow” and learn by doing,
while interacting with a vibrant community.

Additional innovation drivers would be the game development studios. These companies employ a
multitude of dedicated, highly creative staff that create game content based on their ideas. Example: A   Formatted: English (United Kingdom)
current online game was created after the development studio presented their ideas to the publisher
that owns the development studio.

Another very important factor is the customer base that provides feedback based on their experience
with earlier online games. The industry responds to this feedback in order to create a product that       Formatted: English (United Kingdom)
suits the needs of most of the customer base.

In order to realize the PSS a highly redundant and adaptive technical infrastructure is needed. As
online games consist of multiple “areas” in which a lot of customers can play together at the same
time, the architecture needs to be clustered and “load balanced”, allowing the system to scale if
more/less performance is needed.

Also, media creation technology is needed to create game content. Especially complex voice and
sound recording/editing as well as the rendering of 3D cinematics are key technologies for any
successful online game.                                                                                   Field Code Changed
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The PSS is initiated by the customer base, which displays an interest into this type of game.
Feedback and requests are made to game development studios which then consider ways of creating
game content to fulfil the needs of the customer – The game development studio will set up a concept
and propose it to the publisher, which then makes the call to develop the game or to cancel the
project.

The common problem with online games is new content. If asked nowadays, customers would most
likely respond that the content in any given (current) online game is repetitive and lacks innovation.

In order to satisfy the customers need the development studios must to come up with new, fresh ideas
and implement them into the games, then again it is not guaranteed that the customer base will
respond well to all of those ideas. In the worst case, a lack of innovation can cause a PSS to fail
completely, which has happened multiple times in the past.

To avoid such a scenario, it should be ensured that the development studios that are creating the
game content show a lot of talent and creativity with their work, and keep a close connection with the
customer base in order to receive constant, valuable feedback (free of charge!).

In order for an online game to develop quickly the publishing company has to ensure that the game is
distributed quickly among the customers.

To do so, contracts with Internet Service Providers are not unusual. The ISP offers a way to download
the latest game information and/or content updates from their own web presence, while being able to
advertise for their own products on the very same website. The publisher company in return benefits
from reduced load on their own infrastructure (reducing the costs required to maintain the platform)     Formatted: English (United Kingdom)
and increased advertising for their product.

Further thought is often given to expositions, such as the Games Convention in Leipzig, which offer a
convenient way to introduce new products and/or make existing products more attractive.

All online games currently on the market have a dedicated “community management team”. This team
is the point of communication between the customer base and the publisher/game developer, and
ensures that the community is always up to date with the latest product related information.
Additionally the community management team maintains the product's bulletin boards and creates
content to be published on the product web presence.

The community management team are the ears and eyes of the publisher and developers, allowing
them to learn the current mood and trends in the customer base, to adjust the product to the needs of
the customer if warranted. Also, they are usually the company employees to introduce the product at
expositions and talk to the press.

The community management team usually consists of former online game players, that know how the
customer can feel in certain situations, and how to respond to issues where excessive customer
criticism and/or frustration shows.

Additionally to standard ways of marketing (put the product in a store and advertise in the media), an   Formatted: English (United Kingdom)
online game draws a lot of its customers from web advertisement. For that purpose, contracts with
companies that offer game related content are signed, so that the publisher may advertise on their
                                                                                                         Formatted: English (United Kingdom)
web space.
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Furthermore the community (customer base) is provided with “sneak previews” of game content prior
to its release, which usually raises the interest in the game. This can happen several years before the
actual product release without risking a loss of customer interest.

A new way of selling the product are online stores. For that purpose the publisher company would
create a store on their web presence, allowing the customer to purchase a “product key” for the game,
instead of having to go to a local retailer and purchase the software package.

Once the product key has been purchased, the customer may then directly set up their game account
and download the software from the publisher company's web presence. All these services are offered
through the game's web portal.

One of the main social issues arising out of online games is addiction. Both Korea and China are in         Formatted: English (United Kingdom)
the midst of a campaign to address the issue of online addiction, and are working with game operators       Formatted: English (United Kingdom)
on systems to discourage compulsive behaviour. The online game sector is growing explosively in
Asia, worth an estimated $1.1 billion last year with annual growth set to average 19 percent through        Formatted: English (United Kingdom)
2008. Reuters reported                                                                                      Formatted: Left
‘the industry's rapid growth gives rise to a new generation of addicts, like the South Korean man who       Formatted: English (United Kingdom)
died of heart failure after playing a game called "StarCraft" for 50 hours at an Internet cafe. The 28-
year-old Korean had quit his job to spend more time playing games, and left his seat only to go to the      Formatted: English (United Kingdom)
toilet and take brief naps, according to media reports.’                                                    Formatted: English (United Kingdom)
                                                                                                            Formatted: English (United Kingdom)
Little is known about the environmental impact of online gaming, but it probably has a far greater
impact than the downloading of music or other media as users tend to be online longer, and often a          Formatted: Font: Italic, English (United
                                                                                                            Kingdom)
CD still has to be purchased.
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Remote Disease Control                                                                                      English (United Kingdom)
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The remote management of chronic illnesses is a relatively new area for PSS . There are two main            Formatted: English (United Kingdom)
systems coming on to the marketplace that uses a mobile phone to monitor and manage illnesses.              Formatted: Superscript
The first to market was from Healthpia in Korea with their diabetes phone. This was followed in
January of this year by e-San Ltd in the UK with the t+ diabetes system.

Healthpia who have carried out trials in Korea will shortly be putting their system on the marketplace in
the US again for diabetes. Other health-care handsets in development are diet phones which will
contain devices which can measure human-body fat and beauty phones which will be incorporated
with a massaging function as well as equipment to gauge skin humidity level. The diabetes system is
shown in the figure below:




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It is expected that Healthpia will charge a subscription for the service side of the system. The CDMA      Formatted: English (United Kingdom)
KP8400 handset used was co-developed with LG, and sells for the equivalent of about US$380 in
LG's home market of Korea.

The t+ diabetes system product consists of a GPRS mobile phone, a One Touch Ultra meter and a
Blue Tooth cradle. As soon as the reading is taken, the phone display provides immediate feedback
represented as a bar chart or scatter graph, whilst also sending data to a secure server where it is
stored with previous readings. The results are further processed and sent out as a printed monthly
report to the diabetes sufferer. Readings can also be viewed via a secure web page. The business
model for this system is similar to the first one in that the main revenue model is by subscription. The
phones are standard phones with Bluetooth, but the sensor and sensor cradle is thought to be paid for
out of the subscription. The figure below shows how the system works:




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                                                                                                            Formatted: Centered




Both products from the systems’ provider point of view fall under the PSS category called Result-           Formatted: English (United Kingdom)
oriented service since they both provide a remote service. With the Healthpia system the system could       Formatted: English (United Kingdom)
be seen to fall under Product-oriented services from LG’s point of view as they are adding functionality
to their mobile phones.

Whilst such systems probably don’t have a very large environmental impact they do have a
considerable social impact, in that it provides continuous remote monitoring of patients. These sort of
systems are likely to grow, and potentially in the long term could be used beneficially in the developing   Formatted: English (United Kingdom)
world for remote communities.                                                                               Formatted: English (United Kingdom)
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Case Studies
The following are specific company business model case studies for the types of PSS discussed in the   Formatted: Normal, Indent: Left: 0", First
previous section.                                                                                      line: 0"
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Mobile Communications                                                                                  Hanging: 0.3"
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                 Mobile Communication – “Simyo”
What is the product service system                                                                     Formatted
Simyo offers mobile voice-telecommunication and SMS.
Who is the key driver
Simyo was launched in June 2005 by E-plus, a major player in the German market in.
What are the different elements
Simyo offers only cheap telecommunications, not hardware. The service uses any existing unlocked
mobile phone for its services.
Who is the customer
Customers are normally young people/children using prepaid cards, or people who already have an
existing mobile phone contract and want to use a cheaper alternatives.
Basic needs and drivers
Accessibility of communication, the need to be available and peer-group pressure.
The initiator of the product service system
E-plus in order to attract new costumers.
Financial flow through the product service system
Simyo works as a prepaid system: Prepaid cards are available from 10 to max 200€ and are valued
for 6 months. Talking via a mobile phone is charged at 19cents per minute to all numbers within
Germany on the prepaid card. SMSs are charged at 14cent each.
                                                                                                       Formatted: English (United Kingdom)




Sustainability of the business model
Mobile phones no longer used and out of date get the chance of a second lifetime in a reuse phase.
There is for example no Multimedia Messaging (MMS) possibility via Simyo so older models can still     Formatted: English (United Kingdom)
use the services. Newer mobile phones are often equipped with two sim-card slots, so customers
who want to use the (in some cases cheaper) Simyo services can switch back and forth between their
standard network and Simyo. Extra value is provided to the existing mobile phone.
Collaborators within the product service system
No known collaborators
Costumer/provider relationship
All customer contacts are either over the web or through a call centre, including the ordering of a
starter package.
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Marketing tactics
Under the brand “Simyo” E-plus is able to offer “no-frills” services for costumers. E-plus is able to
skim the market in a different market segment.
Details
www.simyo.de




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Downloadable Music


       Downloadable Music – Chello Musiczone
What is the product service system
Chello Musiczone offers under www.chello.at music for legal download and streaming. A search               Field Code Changed
button is used to find songs under different categories such as country; dance; folk; jazz; klassik;
poprap/hip hop; rock; world; deutschpop.
Who is the key driver
The key driver is Chello Musiczone.
What are the different elements
Chello Musiczone offers two listing modes. The user can either listen to the music online via a music-
stream, or can download the music and burn it on to CD-ROM or flash for an MP3 player.
Who is the customer
Customers are persons having access to the internet and wanting to listen to legal MP3-music.
Basic needs and drivers
Customers have the advantage of availability of up to date music as well as oldies without spending
too much time on searching (for example in music stores). The user is attracted by the convenience of
fast access, without the need to go to a retail outlet.
The initiator of the product service system
Chello: Offer new products to the customer and to enrich the service of a standard provider.
Financial flow through the product service system
Chello Musiczone offers three different credit-packages:
o 500 Pack: Price 4.99€, 30 hrs online music, 4 downloaded songs + 0.99€ each further song.                Formatted: Bullets and Numbering
o 1600 Pack: Price 14.99 €, 100 hrs online music, 11 downloaded songs + 0.94€ each further song.
o 2800 Pack: Price 24.99 €, 180 hrs online music, 2 downloaded albums + 0.89€ each further song.
o 6000 Pack: Price 49.99 €, 400 hrs online music, 4 downloaded albums + 0.83€ each further song.
The packages have to be paid by credit cards online.
Sustainability of the business model
The download of music from the internet would at first glance suggest it is more sustainable than
purchasing CDs. However research by Digital Europe has shown that this is not necessarily the case         Formatted: English (United Kingdom)
since it depends on many factors including modem versus broadband, whether the songs are burnt on
to a CD or how often a song is streamed or downloaded.
Collaborators within the product service system
The existence in the different laws regarding online music acts as a framework for music industry,
provider and customers.
Customer/provider relationship
Customers only have contact with the provider via internet. The bill is paid online via credit card.
Support contact details are published on the webpage of the provider.
Marketing tactics
Provider offers free trial membership or the download of 50 songs for free from time to time in order to
overcome potential customers inhibitions of buying products in this manner. Long time customer
relationship is supported through special offers for members purchasing specific credit-packages. The
bigger the credit-package – the cheaper the download is (per song).
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Mobile Navigation System


                        Mobile Navigation System – “A1 Navi”




What is the product service system
GPS based routing and navigation system for mobile phones.
Who is the key driver
A1 Navi was introduces by the “Mobilkom”, a provider of mobile communication in Austria.
What are the different elements
A1 Navi offers navigation from the current position of the user to a specific target. The current location
of the user is based on GPS. To navigate the user is directed with the help of maps and/or arrows
and voice (several voice modes are available). The service can be used via a mobile phone. Its
application is therefore not just limited to use in cars. It can be used on bikes and motor bikes as well
as by walkers. A1 Navi offers European wide maps and special support in the case of searching for
“points of interest” like hotels, railway stations etc.
Who is the customer
Business men and private customers with a focus on travelling.
Basic needs and drivers
A1 Navi was launched to meet the growing demand for navigation systems. With increasing global
mobility people are travelling more into areas they do not know and such products assists them in
their travels and helps them to save time.
The initiator of the product service system
Mobile communication providers looking to satisfy market demand and offer new services.
Financial flow through the product service system
Two different structures of payment are available. The “A1 Navi Basis” rate is a classic pay per use-
system. The customer has to pay 1€ for each day the navigation system is used (excluding UMTS
and GPRS charges). “A1 Navi Package” offers a monthly package for 6€ (5€ if you pay for a whole
year). With this base fee the using of A1 Navi is covered for the whole month (excluding UMTS and
GPRS charges). In both cases using A1 Navi outside the domestic country costs an additional 1.9€
per day of use. Payment is charged with the monthly cost statement of the Mobilkom.
Sustainability of the business model
The purchase of extra (and expensive) navigation system is not necessary. The A1 Navi system is
very flexible and can be used in most situations without the dependency of standard navigation
systems. The mobile phone replaces the hardware of the normal navigation systems.
Collaborators within the product service system
Hardware producers are interested in bringing capable products to market, which allow the use of a
product in various ways and mark their products off from competitors with less capable products.
Customer/provider relationship
As per the normal mobile network supplier, since the A1 Navi is an add-on accessory.
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Marketing tactics
A1 Navi gives the Mobilkom the chance to introduce new products for existing costumers and to
foster the growth of the company in the mature mobile phone market in Austria.
Details:
www.a1.net                                                                                      Field Code Changed
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Lease of White Goods

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       Lease instead of buy: “Extra-Rent”
What is the product service system
Extra-Rent offers white goods for rent. On a 5 year basis the newest generation of electrical
equipment is available for a calculated monthly fee. All maintenance costs are covered through the
rental fee. In case of a breakdown the product will be repaired by a service technician of the company
for free. The offer comprises fridges, washing machines, tumble-driers, cookers, microwaves,
dishwashers, vacuum cleaners and freezers. The retailer delivers the products onsite for free,
performs the setting up and checks the functionality. The Extra-Rent service is a ready to run system.
Who is the key driver
Siemens in conjunction with local electrical service centres and retailers.
What are the different elements
The rental service comprises of high quality products, with no cash down payment or repair charges.
Who is the customer
Private households as well as companies.
Basic needs and drivers
Allows customers to own modern white goods who lack the funds to buy the equipment.
The initiator of the product service system
Siemens introduced the rental service with the help of its retailers.
Financial flow through the product service system
The rental contract lasts 5 years, with monthly payments of:
         fridge: 16.70€                            washing machine: 17.00€/22.50€ (2 types available)
         tumble-drier: 14.30€                      cooker: 11.00€
         microwave: 14.70€                        dishwasher: 19.10€/21.90€
         vacuum cleaner: 4.90€                    freezer: 16.70€
         oven: 14.50€
Sustainability of the business model
The average life of white goods is normally between 10 to 12 years. Since the rental period is over 5
years and after that a new product is supplied such a PSS could impact negatively on the
environment. A lot will depend on what Siemens does with the equipment at the end of the 5 years.
Collaborators within the product service system
Retailers and maintenance companies
Customer/provider relationship
The service is the core of the customer relationship. The following services are included:
Consultation, delivery to the customer, implementation of the product in the individual household,
waste management, on-site instructions by specialised stuff as well as via hotline repair within the
rental period for free.
Marketing tactics
The marketing idea is based on:
     o A premium line of goods                                                                           Formatted: Bullets and Numbering
     o No cash down payment
     o No repair charges                                                                                 Field Code Changed
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    o State of the art equipment
    o On a rental basis with small amounts.
    o rental period for free.
Details:
http://www.extraklasse.at/BSH/www/frontdoor.aspx?CURI=cms-DE_277_O_pf%3dln_6406        Field Code Changed




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FutureSustainable Business Opportunities
With the rapid changes of technology, new business opportunities are arising at an ever increasing
rate with product service systems. This section looks at how a couple of those technologies could
heavily influence PSS and the business models in the industries they will impact.It can be seen from
the previous section that there are major differences in ffunctional ssales between B2B and B2C and
between the developed and developing countries. It is also clear that the opportunity for ffunctional
ssales changes with time and depends on external factors. Also selling a function rather than a
product does not necessarily mean it has less detrimental environmental impact. However what is
clear in all cases is that both technology and environmental impact play an important part in defining
the opportunities for functional sales. There are currently huge changes taking place in both these
areas which that could result in ffunctional ssales taking a major role in future markets. This section
looks at those forces for change, and identifies possible sustainable business opportunities for
functional sales.


Are the UK examples true of the rest of Europe – perhaps need to add a caveat

e-Newspapers, Magazines and BooksFinancial Forces

News papers, books and magazines have been available for many years on the web. However they
have never gone mainstream because firstly you needed to be at a computer to read them, and
secondly it is very tiring to read from a computer monitor because the contrast is much lower than
traditional paper. Recent technical developments have resulted in flexible plastic screens being able to
display text to the same level of clarity as paper and this could radically change the market.

Electronic paper would allow information to be sold to the user, such as news, stories, articles etc.
rather that the physical newspaper, magazines or books. The savings in printing and distribution could
make it very attractive for readers to be supplied with free readers, and only charge for content.
                                         12
An electronic paper developed by Xerox , in partnership with 3M was the first commercial application          Formatted: Superscript
of e-paper. It is a 2 colour display (black/white or other contrasting colours) and only requires power to
change what is displayed. Like paper it is flexible, works on reflective light and has a wide viewing
angle. The first application was in retail pricing displays (SmartSign™) that allows fast update of prices
in stores. The second application was e-paper (SmartPaper™). Electronic printers, scanners and pens
have been developed.
The Bank of England in the UK recently revealed that the average household debt has now increased
to just under £6,900. A UK Citizens Advice Bureau survey showed that one in five people borrows
money to pay for ordinary household bills, and that nearly one third found it difficult to keep up bill and
credit repayments. In the US there are similar concerns on debt. Bankruptcy filings in the federal
courts broke a record during calendar year 2003, according to data released by the Administrative
Office of the U.S. Courts. Total bankruptcies filed in the 12-month period ending December 31, 2003,
totalled 1,660,245. The overwhelming percentage of bankruptcy filings are non-business (personal)
filings, totalling 1,625,208. Similar concerns are occurring in many other countries in the developed
world.

In most countries a person that has become bankrupted can not hold a credit card or take out further
loans, and as the numbers rise, this could become a sizable proportion of the population. Could this
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generate a market for renting products rather than purchasing them? Furthermore there is a
reasonable probability that the fashion for obtaining goods on credit will switch to ffunctional ssales
where consumers can obtain the same product/services without crippling themselves with debt. Whilst
it is not the intention of this study to dwell too much on this aspect, it is a possible future scenario that
should not be dismissed out of hand. It may provide significant business opportunities in the future.
                                    13
Philips, Sony and E Ink in 2004 produced the world's first consumer application of an electronic                Formatted: Superscript
paper display module. The e-book costs about $375 and is sold under the Sony brand name Librie                  Formatted: English (United Kingdom)
only in Japan. The Sony Librie is so remarkably crisp that most people assume that the page on
display is just a sticker (for demonstration.) In fact, unlike with a TFT display, you can view the Librie
page from any angle, and in any light, just like paper. Power is used only when a page is "printed" to
the display, meaning that 2 AA batteries can turn about 10,000 pages. The Librie has 10mb of internal
memory, and a Memory Stick slot so capacity can be increased to 4gb. The Sony Librie is shown in                Formatted: English (United Kingdom)
the figure below:

                                                                                                                Formatted: English (United Kingdom)
                                                                                                                Formatted: English (United Kingdom)
                                                                                                                Formatted: Centered




Once electronic paper becomes main stream there will be major shifts in the existing business models            Formatted: English (United Kingdom)
for newspapers, books and magazines. The printing, distribution and retailing of these products will            Formatted: English (United Kingdom)
disappear and a business model close to that developing for downloading music is likely to emerge.
Long term one would expect the readers to be given away free with the revenue stream coming from
the content. Advertisements are likely to be the main source of income for newspapers/magazines.
Once the network home is established this is likely to become one of the main delivery channels for             Formatted: English (United Kingdom)
these products.

The social impacts of moving to electronic news, magazines and books could be large. Once again
the retail industry could be adversely affected by such a move, and the service providers of
newspapers no longer have to reside in the countries of their readers, and are likely in time to move to
countries having lowest production costs. With the ability of consumers to choose what they want in
their newspapers there is a risk of even further dumbing down on content for the majority of readers.
On the plus side there should be a lot more choice from the global network of newspapers likely to be
set up. Within the developing world they could be of great assistance in schools where books are often
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in short supply, and electronic newspapers/magazines could start to appear in internet cafes in these
countries.

Electronic distribution of newspapers, magazines and books will considerably reduce energy use in
printing, distribution and retailing and on the surface looks like it could give very substantial
environmental gains. Very little research however has been done on this, and like the down loading of
music may not be so clear cut. One big question is what impact it will have on market size? If the
overall market ends up far bigger than it is now then that will also increase the environmental impact.   Formatted: English (United Kingdom)



ENetwork Home Servicesnvironmental Forces
                                                                                                          Formatted: English (United Kingdom)
                                14
Networking of home appliances similar to what has taken place in the office will almost certainly         Formatted: Superscript
happen at some stage in the future. It is likely to be a gradual move as communications to the home
become faster and more reliable. A network home can be used for:
    Entertainment                                                                                        Formatted: Bullets and Numbering
    Security
    Information
    Equipment monitoring
    Energy conservation

Both Philips and Toshiba have been working hard in this field. Toshiba have launched a home network
system in Japan called Toshiba Feminity. The elements of this system are shown in the figures below.




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The individual items of home appliances are purchased by the consumer like other equipment in the
house along with the IT Gateway which acts as the control interface with the web and can be used as
a router in the house or a home server for the home appliances. The installation is done by a specialist
under the control of Toshiba. Once the user has signed up to the Feminity Club which is paid for by
subscription the householder can control the home appliances in the network, both from within and
externally from the house, by cell phone, PC or digital TV.

Philips have concentrated more on the entertainment aspect with a system Window on the World of
Communication and Entertainment (WWICE). Broadband always-on internet is taken as the main
driver for this home network. It is being tested in a house called HomeLab. During their residence,
individuals or families will go about life as usual, while interacting with the new technologies Philips
has installed in the facility. Electronics is seamlessly integrated into the home with built-in flat-screen
monitors, wireless connections and voice or gesture recognition. Unlike the Toshiba system this has
not yet been launched as a product.
Within Europe there are major changes in environmental product legislation, which puts the
environmental responsibility of a product on to the producer for the complete life cycle. The Restriction
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of the Use of Certain Hazardous Substances in EEE (RoHS) controls the substances which can be
used in electrical and electronic products, whilst the Waste from Electrical and Electronic Equipment
(WEEE) puts the responsibility and costs for dealing with end-of-life products on to the producer. Both
these Ddirectives are now European law, and similar clones are appearing in other countries outside
                                   6           6
the EU. Not far behind the WEEE and RoHS is the ‘Framework for the Setting of Eco-design
                                                    6
Requirements for Energy- Using Products’ (EuP) Directive which requires Llife-cycle thinking and
eco-design to be integrated into the product design and launch process.

All of the above legislative requirements could be very expensive to implement and if a producer is
made responsible for the product throughout its life cycle - those costs may be better controlled if
ownership is retained by the producer. This is particularly relevant to multinational companies for
whom this is a more practical option. The Xerox business type of model may then spread too many
more companies.

Within the developing world the European legislation will considerably impact the supply chain. Not
only on how products and parts are made, but in the communication networks needed to supply the
information required by producers in the EU. The latter should stimulate the creation of better
information networks, which in turn stimulate ffunctional ssales.

It will probably be many years before the network home becomes the norm. However once it does it is
likely to embrace most of the following product service systems:
      Security control                                                                                   Formatted: Bullets and Numbering
      Curtain/blind control
      Energy management
      Lighting control
      Heating control
      Air conditioning control
      Control of home appliances: washing machines, cookers, microwave, refrigerators, freezers.
      Equipment maintenance.
      Electronic Mail
      Entertainment: Television, radio, movies, music, newspapers, magazines, books.
      Clock timekeeping
      Telecommunications
      Online software (Thin client computing): Games, word processing etc.
      Information

As the home network gets more complex it is probable the ownership of the equipment will start to
move away from the consumer to the home network provider, and the business model changes from
equipment purchase to leasing and service subscription. This should allow the service providers to
include in their business models, extended product life, energy management and end-of-life
management. Systems similar to office systems offered by Xerox for the networked office could start
to appear. Equipment returned to Xerox at end-of-life can be remanufactured - rebuilt - reusing 70 to
90 percent by weight of machine components, while meeting performance specifications for
equipment with all new parts. Such approaches in the network home will be crucial in order to avoid
the network home adding considerably to the negative environmental impacts of consumer activity.


Socially the network home will eventually have a tremendous impact. It will
   bring together most of the case studies looked at in this report plus many
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    more under one product service system. For the infirmed that can not
    easily leave the house it will be a considerable help, but at the same time it
    could see households being further isolated from the community around
    them as the need to go to shops, cinemas, the workplace etc diminishes.
    Little is understood on what the impact of this will be financially,
    environmentally and socially on individual countries. Technological
    Forces

Changes in technology within systems integration is likely to be the biggest single factor in swinging
the pendulum back towards ffunctional ssales, especially in B2C. Many of the examples already given
depend on systems integration whether it is in B2B with the Xerox business model, B2C with the
Electrolux Gotland project, or the Gyandoot project in India. However it is likely to be some of
technologies that are just emerging that will have the biggest impact. This section covers some of the
most important of these.


Computer Systems
Personal computers (PCs) both at home and in the office are now widely used. Rapid technological
changes, combined with the computer hardware design layout have meant that the life cycle of these
machines has become very short. Even where a machine upgrade could extend the life of a PC, few
do it because of the need to open up the machine which scares most offthe average domestic
cosnumer. Software as well has also become increasingly complex, with even programmes such as
Word having only 5% of its features used by 95% of its users.
p(PPU)
During 1996 the Network Computer (NC) was originally introduced. The concept was to replace the
traditional desktop PC, with all its cost and complexity, with a simple terminal running a Web browser
and downloading applications from network servers. It was good idea supported by much of industry –
as they who liked the idea of reducing the high price and headache of constantly upgrading and
supporting PCs. The only problem was the NC included alternative operating systems to Microsoft.
Few IT managers were willing to abandon the well-established standard and bet their networks on a
new idea.

Three years later, thin client computing was introduced which promised most of the benefits of the NC,
without forcing customers to abandon Windows. Thin client computing defines a network-based
approach to information processing that is comprised of both hardware and software elements. On the
hardware side, thin clients do not require many of the features of a PC because network servers do
most of the work running programs and storing data. Thin clients use less RAM and slower
processors, and don't have their own drives, because applications and data are stored on the server.
From a software perspective, the advantages of thin client computing are fast performance, easy
installation and upgrades, simpler administration and management, and enhanced security.

Thin client computing also have 2 other huge advantages, cost and greatly reduced environmental
impact. A terminal is far cheaper than a full PC workstation. A 15 seat system on average costs 75%
less than individual PC systems. In addition it uses far less power than a PC workstation. This can be
between 1/5th and 1/12th of the energy of their PC counterparts. This is not only good from the cost
aspect, but also in substantially reducing the environmental impact. In fact there are major
                                                                                                         Formatted
environmental gains that can be made from using this technology. These are:
                                                                                                         Formatted: Bullets and Numbering
     Massive energy reductions                                                                           Field Code Changed
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     Significant reduction in the amount of hardware required, which reduces environmental impact
        through all stages of the life cycle.
     Extended product life, since technology does not become dated so quickly.
ay (PPU) Reinforce the link to functional sales
                                                                              7
A second development is the next-generation PC Cards called ExpressCards that will be coming onto
the market in the second half of 2004. .ExpressCards will not only replace notebook slots but also find
their way into "sealed-box" desktops as a user-friendly way to add new features or upgrade
performance. Relatively large vertical market PDAs ???????? may also use the cards. This will be the
expansion slot for future desktop and notebook systems. It's thethe way that new technologies will be
joined tocome into those platforms for the first time. New applications for the cards might include high
definition televisions ???? (HDTV) or other high-end streaming media decoders. Dell has shown
concept desktops using PCI Express modules to create separate, plug-and-play CPU, graphics and
other core modules. This card will probabley find its way into the terminals of thin client networks for
the main interface with the network. Figure 3 shows the 2 configurations that will be used.




                Figure 3

Reinforce the link to functional sales

Regarding power management, the ExpressCard supports features that allow for module applications
to be placed in very low power states while maintaining the ability to detect and respond to wake-up
requests. Examples of how these features may be used by an ExpressCard application include
receiving network messages via a wireless communications module that come in are transmitted while
the PC is in a sleep state. Effective use of these features is the key to creating high performance
applications which that are both power and thermally efficient.


Home Networks Again, throught the section link it clearly to functional sales
        8
Toshiba has released home network units which that, can receive/send via the internet living
information such as new operation modes and controlling the home management. Three models of
networked home electric appliances have been launched, a refrigerator, microwave oven, and home

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laundry. The appliances have built-in self-monitoring capabilities that will notify a repair company if a
problem should arise.

By means of BluetoothTM, the user is connected via a wireless access point to the Toshiba Web
service which that controls home electric appliances. The system can propose cooking menus,
manage the food in the refrigerator and other tasks by simple operation of home terminal.
Furthermore, by using customer's mobile phone the contents in the refrigerator can be checked from
the supermarket.

A recipe can be sent to the refrigerator and micro oven, and a washing method is sent to the washing
machine, thus offering a new operation mode meeting the home requirements. The home terminal
(BHT-1002A), coupled with BluetoothTM, serves as an entertainment system which that allows the
user to enjoy the internet, e-mail, etc. in a wireless environment everywhere in the house. Toshiba is
planning to offer a system which wirelessly monitors the door/window opening/closing information,
lighting ON/OFF, etc. in the house.

Toshiba like many of the large electronics manufacturers are moving more towards being a service
supplier, simply because price competition is not so great in this area. It is therefore not surprising that
the website that the appliances are connected to is owned and run by Toshiba. However appliances
from different manufacturers will have to be compatible if this market is to take off. Bluetooth, which is
used by Toshiba, is the most likely standard to be used since it has now been adopted by over 2000
companies. These products are currently only sold in Japan.

Other manufacturers are also actively involved in home networking. Hitachi Home & Life Solutions, are
developing networked home appliances. They stated 'A business that handles conventional, single-
function consumer products is impacted by price competition. At Hitachi Home & Life Solutions, the
aim is to establish a business model that adds to the attraction of the hardware products by also
incorporating added value through software and services.'

Merloni, who manufacture washing machines, are working on a product that contains a Bluetooth RF
transmitter to keep in touch with its service status. One version has a GSM phone to summon the
service centre when its performance degrades or it breaks down. These appliances are connected to
the web via the mains electricity supply.
           9
Electrolux has developed a fridge with an inbuilt ICL Pentium PC in the door, which consists of a
touch screen and bar code scanner. As you load your shopping you scan the codes, and do the same
as you take things out again. This enables the onboard computer to keep a running tally of the
contents and phone up your local Internet connected supermarket as soon as you get too low on
goods. All it needs is a Bluetooth transmitter and the fridge will always be well stocked. See figure 4.




Figure 4

(PPU)
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Wireless/Telecommunications Add functional sales link
Possibly one of the technologies that will have the largest impact in the developing countries of the
world will be wireless LAN. These allow connection of remote communities to the World Wide Web
(WWW) for both internet and telephone connection-- (PPU) . Some examples of this technology are
                                                                    10
now starting to be applied. For instance in Afghanistan Telekiosks have been set up in post offices.
These Telekiosks are connected to the Ministry of Communications’ satellite data access; having a
backbone of 1.5 Mbps, via an IP-compliant 802.11a wireless LAN that will provide a maximum
throughput of 11 Mbps between the Ministry and Post Office Telekiosks at the ISM license-free 5.8
GHz band. This is a cost-effective way to provide a quick and easy connection to the Ministry's
Internet backbone while avoiding any infrastructure problems that may face a landline implementation.
thatSee figure 5




          Figure 5.


An organisation called W2i has been set up to promote this technology. It is an independent think tank
bringing together stakeholders around the world to accelerate the adoption of wireless Internet in
support of universal connectivity for economic, social and educational development.




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Electronic Paper Clearer functional sales link
only Research into electronic paper has been taking place for many years. It potentially has an
enormous market in newspapers, journals, books, advertising and even clothes. Within the last year
this technology has matured and practical systems are being launched in 2004that. There are three
competing systems:
                                                                                                            Formatted: English (United Kingdom)
                 11
     Gyricon is an electronic paper developed by Xerox, in partnership with 3M. It is the first             Formatted
       commercial application of e-paper. It is as 2 colour display (bBlack/white or other contrasting
                                                                                                            Formatted: Bullets and Numbering
       colours) and only requires power to change what is displayed. Like paper it is flexible, works
       on reflective light and has a wide viewing angle.. The first application was in retail pricing
       displays (SmartSign™) that allows fast update of prices in stores. The second application was
       e-paper (SmartPaper™). Electronic printers, scanners and pens have been developed to
       refresh the media. An obvious application for the latter is electronic books where the e-paper
       replaces the paper, and the content is held in memory in the spine.
            12
     E Ink is the second major player in this field. The technology produces a black/white display
        from applying a positive or negative field to microcapsules. A small amount of power unlike the
        Gyricon system is required retain an image. It could be printed on to virtually any surface,
        including glass, plastic, fabric and even paper. Ultimately electronic ink will permit almost any
        surface to become a display, bringing information out of the confines of traditional devices and
        into the world around us. Current contracts are:
             oPhilips: Joint venture to develop high-resolution electronic ink displays for use in smart    Formatted: Tab stops: Not at 0.5"
                 handheld devices for 2004. Applications include personal digital assistants (PDAs)
                 and electronic books.
             oLucent/Bell Labs: The companies will collaborate on developing "electronic paper":
                 flexible, plastic electronic displays made with a process similar to ink-on-paper
                 printing.
             oVossloh, Germany: E Ink will produce custom electronic ink display cells based on its
                 new character and segmented display platform. Vossloh IT will develop the
                 electronics and integrate the display cells into their passenger information systems to
                 be launched in 2003.

       13
Philips have developed a multi-coloured technique, called "photo-enforced stratification," which
involves painting a liquid crystal-polymer mix onto a surface, such as a sheet of plastic film, then
exposing it to two doses of ultraviolet radiation. The radiation forces the mixture to separate into a
honeycomb of tiny individual cells covered by flexible, see-through polymer. When connected to a
computer, the crystal-filled cells change colour to create a picture, like any LCD display. Electronic
journals, LCD-enhanced clothing and portable computer/television screens are seen a two large
markets for this technology.

 They have also produced a completely flexible display that can be rolled into a tube just two              Formatted: English (United Kingdom)
centimetres in diameter, the most flexible electronic display ever made. The use of organic electronics
should also make the device cheap. Such a display could, for example, be used create a fully
updatable newspaper which could rolled up into a coat pocket. Flexible displays could also be used to
create new mobile phones and other easily collapsible gadgets. See figure 6.



Figure 6                                                                                                    Formatted: English (United Kingdom)
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o    Functional Sales Opportunities in B2B                                                                    Formatted: Indent: Left: 0", Hanging: 0.3",
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The move to thin client computing within multi-national companies over the last year has accelerated
considerably, and this trend is likely to spread to medium and even small companies. With these
systems the sophistication is at the server end, and the terminals are much simpler. As a result their
useful life will be far longer than traditional PCs. It is also probable the terminals will become closed
sealed boxes, with any local upgrade achieved by changing the ExpressCard. This same card could
be used to communicate with PDAs and lLaptops. The increase in the resulting product life would
make the leasing of terminals a much more sustainable. It would also allow manufacturers to design
their products to much more easily meet the recycling targets under WEEE, since there is no need for
the large printed wiring boards as used in desktop PCs.

There would seem be considerable business opportunities to provide industry with remote servers for
their thin client terminals(PPU) . This could be very attractive for all sizes of companies, since it would
have the following benefits:

     The requirement for sophisticated IT support is removed.                                                 Formatted: Tab stops: Not at 1"
     Companies would have access to a very large number of software packages but only have to                 Formatted: Bullets and Numbering
       pay for time of use e.g. PPU.
     For small companies in particular a higher level of data security.

Companies running the remote servers would then be able to offer other services such as document
control, specification libraries, supply chain management systems etc.

A bit more discussion somewhere – may here or somewhere else - of some of the organisational,
marketing, etc implications of shifting towards a functional sales model – perhaps extract key extracts
from the notes from Budapest

Again, need to continue to make link to functional clear

o    Functional Sales Opportunities in B2C                                                                    Formatted: Indent: Left: 0", Hanging: 0.3",
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The future trends in B2C functional sales are more difficult to predict because history has shown that
consumers tastes depend on many variables, not least perceptions (true or false), fashion and culture.
PLUS ownership is a major issue. TOne only has to look at the Apple MP3 player iPod provides for a
present day example of this. It started in the mid-1980s, at the Fraunhofer Institut in Erlangen,
Germany, which began work on a high quality, low bit-rate audio coding with the help of Dieter Seitzer,
a professor at the University of Erlangen. In 1989. Fraunhofer was granted a patent for MP3 in
Germany and a few years later it was submitted to the International Standards Organization (ISO),
and integrated into the MPEG-1 specification. The first MP3 player was developed by Frauenhofer in
the early 1990s. MP3 was mainly used for illegally downloading music off the web, but portable
players did not take off in a big way, because the higher quality sound from a portable CD player
which was much prefered by consumers. However when Apple launched the iPod it suddenly became
the fashion item to have and sales went through the roof.

Whilst it is true that predicting the future in B2C functional sales is more difficult, the indications are
that there is a fairly high probability of them growing considerably over the next few years, and this
should present considerable business opportunities. Much of this will depends on how fastsuccessful
the technologies - discussed in the previous section - iares taken up by the population as a whole.           Field Code Changed
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Probably the biggest impact will come with the networked home. Once this moves into mainstream
households it opens a whole range of possibilties, not even being mentioned by the companies
currently working in this field. For instance the move to thin client computing in the home from the
central server connected to the home network would seem an ideal business opportunity. It would
allow the user to have access to a vast range of games, utilities, graphics and other software without
having to buy them and only having to pay for the time they are used. With this model it could make
sense to supply the terminal without charge and the income comes from the use of the software. The
terminals could double up as televisions and even to play downloaded films and music. This model will
probably overcome the current preference to own, if the pricing is right. Further advantages are the
reduction of energy costs to the user, longer product life, and the product ownership remaining with
the manufacturer so they can control it at end-of-life.

Electronic newpaper is another technology that could piggyback off of the networked home, with news
being downloaded when required from the central server. One of the big advantages of electronic
newspapers is that you can choose the areas that interest you and effectively customise your paper to
your tastes. For instance if you have no interests in sports news then just leave it out. The current
indications are that these devices, will once produced in quantity, not be very costly. This could like
the thin client terminals make it attractive to supply the readers free and either charge by the amount
down loaded or by advertisements.

With regard to the large home appliances such as refridgegorators, and washing machines within the
home network, it will probably be easier to convince customers that it is better for them to pay for the
function rather than the product when it is part of a home network, providing choice was not limited.
Actual having a home network will be seen by many as a status system, and remove the perceived
stigma of not owning. A lot will depend on how it is marketed by the system providers on how
successful this strategy is.
--(PPU) PPU t

A bit more discussion somewhere – may here or somewhere else - of some of the organisational,
marketing, etc implications of shifting towards a functional sales model – perhaps extract key extracts
from the notes from Budapest

Again, need to continue to make link to functional clear



                                                                                                           Formatted: No bullets or numbering, Tab
o        Functional Sales Opportunities in the Developing Countries                                        stops: Not at 1"


Functional sales within the developing countries have the potential for extremely high growth. To a
large extent it will depend on how successfully wireless LANS can be introduced into these countries.
It is for this reason that the United Nations (UN) is pushing this area extremely hard. India is a good
example of how with their lower wages and the right communication structure in place they have
managed to attract major business as call centres and for software.

Within ICT, business should not be considered on an individual customer level, but on the basis of a
group of customers since it is the combined buying power that will allow them access to ICT. This shift
from individual to group is also what makes selling the function rather than the product athe more
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practical option. There is then considerable scope for kiosks, (mobile and permanent) where local
businesses and individuals can get access to the web, software, and cheap telephone service. With
the latter, the establishment of local WiFi hot spots will also open up the market for mobile phones in
remote communities.

and Marketing A key element of developing functional sales will be the development of new
organisational and marketing models. Some issues are briefly considered below:

Organisational:
        In the ICT sector many companies now produce solutions that include a combination of              Formatted: Tab stops: Not at 1"
        products and services.                                                                            Formatted: Bullets and Numbering
        For example, a number of mobile phone service providers are now moving away from PPU
        models to flat monthly fees.
        Some web-based new business models are needed to look at alternative approaches to
        income generation e.g. pay-by-click and selling space through banner advertising.
        There maybe a need for new multi-media organisations that start to arise due to increasing
        technological cross-over between input devices and services e.g. mobile phones providing
        internet, films, etc
        To enable functional sales new approaches to organisational development will be required
        that build partnerships with a range of organisations to enable the supply of solutions.
functional salesfunctional sales functional sales functional salesfunctional sales Product elements of
functional sales: (business to government)Pal elements of functional salesAs the marketing mix for
functional sales

                                                                                                          Formatted: Normal, Tab stops: Not at 0"

Organisational:
       In the ICT sector many companies now produce solutions that include a combination of               Formatted: Bullets and Numbering
       products and services.
       A number of mobile phone service providers are now moving away from PPU models to flat
       monthly fees.
       Some web-based new business models are needed to look at alternative approaches to
       income generation e.g. pay-by-click and selling space through banner advertising.
       There maybe a need for new multi-media organisations that start to arise due to increasing
       technological cross-over between input devices and services e.g. mobile phones providing
       internet, films, etc


        A bit more discussion somewhere – may here or somewhere else - of some of the                     Formatted: Bullets and Numbering
        organisational, marketing, etc implications of shifting towards a functional sales model –
        perhaps extract key extracts from the notes from Budapest
Again, need to continue to make link to functional clear




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                                                                                                            Formatted: Font: 14 pt, Bold, Kern at 16 pt
Conclusions
This study into PSS business models showed that there are no fundamentally new models used
specifically for PSS, but those business models as for non-PSS businesses are getting ever
increasingly more complex. The reasons are:

       The supply chain has become global.                                                                 Formatted: Bullets and Numbering
       The internet has opened up a global marketplace for all sizes of business.
       Technology advances are opening up opportunities for new types of PSS.
       The increasing product system complexity has resulted in organisations forming partnerships
        so they can obtain access to the required skills and be successful in the marketplace.
                                                                                                            Formatted: Indent: Left: 0.25"
The study looked at specific examples of PSS and the sorts of business model they have generated.
The specific aspects looked at were:
    What is the product service system                                                                     Formatted: Bullets and Numbering
    Who is the key driver
    What are the different elements.
    Who is the customer
    Basic needs and drivers
    The initiator of the product service system
    Financial flow through the product service system
    Sustainability of the business model
    Collaborators within the product service system
    Customer/provider relationship
    Marketing tactics



Type of Product Service system

Many of the PSS looked at often fall under more than one type of product service system. See table
below. This shows the difficulty of trying to describe a PSS particularly when digital media is involved.
Industry in fact seldom attempts to distinguish between products and product service systems.
Product Service                Product-oriented         Use-oriented service         Result-oriented        Formatted: Font: Bold
System                              services                                              service
                                                                                                            Formatted Table
                                                        (product owned by the (product substitution)
                            e.g. service integration     service provider who                               Formatted: Centered
                              (adding products or        sells the function not        e.g. product         Formatted: Centered
                             functionality), product       the product) e.g.       substituting service
                             extension (upgrades,         leasing and rental       (e.g. web database
                                 maintenance)                                      replacing telephone
                                                                                        directories)
Mobile Telephone           User owns phone             Service provider retains Digital services            Formatted: Font: Bold
Services                                               ownership
Downloadable music, Specific equipment                                          PSS replaces CDs /          Formatted: Font: Bold
films and radio            required to play media                               DVDs
Mobile Navigation          If specific hardware                                 Direct replacement of
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Systems                   needed for this PSS                                   maps                       Formatted: Font: Bold
Pay-per-use White                                    Provider retains                                      Formatted: Font: Bold
Goods                                                ownership
Online Games              Where CD is sold PSS                                  Falls in this category     Formatted: Font: Bold
                          partly falls in this                                  fully when PSS is          Formatted: Font: Bold
                          category.                                             completely online.
Remote Disease            Sensor system is           Sensor system is           Self monitoring and        Formatted: Font: Bold
Control                   purchased                  leased                     remote analysis



Key Drivers

In almost all cases the main driver is the service provider, although in the case of mobile phones the
picture is getting more complex with Motorola teaming up with Apple to produce a mobile that can
download music from the iTunes music store, and Sony Ericsson with Napster. In these cases you
could argue the key driver for the PSS has passed to the producers of the mobile phones.


Different Elements of the PSS

Most of the cases looked at had many elements that was brought together by the service provider

Product Service                  Hardware                    Service                Delivery Mode          Formatted: Centered
System
                                                                                                           Formatted: Font: Bold
Mobile Telephone          Mobile phone,              Voice and data             GSM, CDMA
                                                                                                           Formatted: English (United Kingdom)
Services                  accessories                services
Downloadable music,       MP3 players                Supply of audio/visual     Internet
films and radio                                      media
Mobile Navigation         Navigation device          Current position &         Satellite, GSM and
Systems                                              electronic format maps     internet
Pay-per-use White         White goods and            Installation, repair,      Internet and/or phone
Goods                     meters                     removal at end-of-life
Online Games              CDs                        Servers to connect on-     Internet
                                                     line gamers.
Remote Disease            Sensor system              Results analysis           GSM, internet
Control


Customer

PSS has been widely within the business to business market for many years since companies have
had fast electronic communications for a long time and finance departments often find it better to lease
rather than own equipment and have large capital equipment overheads on their books. It is only with
the emergence of sophisticated methods of delivering electronic data to consumers that it has really
started to expand rapidly within the business to consumer market. There is still however considerable
resistance by consumers to leasing rather than owning a product, unless there are compelling reasons
for not owning. This is more a cultural attitude and could change slowly as systems get more complex.      Field Code Changed
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The main customers for all the PSS looked at in the study were consumers. Except for the pay-per-
use white goods, the consumer normally owns the hardware even if it is given away free.



Basic needs and drivers

The basic needs and drivers for the PSSs’ looked at fall into one or more of the following categories:
    Saves time and convenience: Downloading music and other media for instance avoids                    Formatted: Bulleted + Level: 1 + Aligned at:
       travelling to retail outlets and the media can be access almost immediately.                       0.25" + Tab after: 0.5" + Indent at: 0.5"
    Addresses a need not covered properly by other products. An example of this are navigation           Formatted: Bullets and Numbering
       systems that tells you exactly where you are, which a map can not do directly without some
       form of local landmark such as a street name.
    Access to products that a consumer can not normally afford. Pay-per-use white goods is an
       example of this. Another example is mobile phones, where the price is often subsidised or the
       phones are even given away free, and the provider gets his money back from charging more
       for the service.
    Is a fashion item and is the ‘cool’ thing to own. The Apple iPod is an example of this.

The following table gives a summary of the needs and drivers for each case looked at:
Product Service               Time &              Unique           Too expensive           Fashion        Formatted Table
System                    Convenience            Product               to buy               Item
                                                                                                          Formatted: Centered
Mobile Telephone                Yes                 No               Sometimes            Sometimes
                                                                                                          Formatted: Centered
Services
Downloadable                    Yes                 No                                    Sometimes       Formatted: Centered
music, films and
radio
Mobile Navigation               Yes                Yes                                                    Formatted: Centered
Systems
Pay-per-use White           Sometimes               No                  Yes                    No         Formatted: Centered
Goods
Online Games                                       Yes                                    Sometimes       Formatted: Centered
Remote Disease                  Yes                Yes                                       No           Formatted: Centered
Control
                                                                                                          Formatted: Centered
                                                                                                          Formatted: Centered


Initiator of the Product Service System

In almost all cases the initiator of the PSS is the provider of the service. However with hardware
starting to be used for more than one PSS there seems to be some movement towards the hardware
producer becoming one of the main initiators of a PSS. A good example is the mobile phone where
manufacturers are launching new services jointly with other companies such as Apple for iTunes. In
the future the integration of different PSS is likely to complicate this picture even more. The network
home for instance is being pushed by companies that historically have been producers of hardware.
Toshiba in fact has stated that with low margins on hardware they are purposely repositioning
themselves as solution providers, in a similar manner as Xerox has done in B2B.
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Financial flow through the product service system

One of the main differences between a hardware product and PSS is that the service element can
often provide a long term continuous income. Because of this the hardware is often used as the bait
by being subsidised or given away free, and the service element as the hook and is where the profits
are often made by the PSS provider. From this income flow the provider has to pay the producer of the
associated hardware and for any media content produced by third parties. This approach is likely to
increase in the future with for example electronic newspaper readers being provided free of charge
with a subscription; and houses/apartments being built with home networks and equipment included in
the property price and the income coming from the service element. Such developments are likely to
produce extremely complex financial flows between companies involved in the PSSs.



Sustainability of the business model

A common mistake with PSS is to assume that such a product is automatically more sustainable than
a non-PSS solution it may be replacing. Research by Digital Europe showed that downloading digital           Formatted: English (United Kingdom)
music can be more environmentally damaging than purchasing CDs. The important thing to
understand is the boundaries of the PSS and of the product it replaces before starting an analysis.          Formatted: English (United Kingdom)
With downloading music the following can have a large impact on its environmentally impact:
     Whether the link is modem or broadband                                                                 Formatted: Bullets and Numbering
     Whether the user burns the music on to a CD
     Number of times the same music is downloaded.
     Whether the PSS impacts the overall market size.                                                       Formatted: Bulleted + Level: 1 + Aligned at:
     Energy use of MP3 players compared with CD players.                                                    0.25" + Tab after: 0.5" + Indent at: 0.5"


In the case of pay-per-use the life of the product can be a crucial element. White goods for instance
normally have an average life of 10 to 12 years whereas most leases are for 5 years. It therefore
depends what the producer does with those machines after the 5 years what impact the PSS will have
on the environment.

Very little research has been done on the total environmental impact of different PSS. There is a real
need for life cycle analysis to be done, taking into account within the models all the major influences,
including projected market size and product life changes expected or resulting from these PSSs. Such
research would give a much clearer picture for governments so they can make sensible decisions on
whether to encourage particular PSSs.

If one looks at the complete sustainability model for a PSS things get even more complex. A mobile
phone service in developing countries helps those countries to develop business with the rest of the
world, since often land lines are unreliable or non-existent in many of these countries. It also increases
the environmental impact since energy use rises and the products could be produced in countries with
scant regards to the welfare of their employees.

One disturbing aspect of many of the PSSs looked at in this report is the impact they are having on
retail trade. Many town and city centres are already struggling to compete with out of town
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supermarkets and shopping centres. This is now being further aggravated by many PSSs that make it
less necessary to leave the house and this trend is going to increase dramatically over the next
decade. This together with increased home working will result in much less face to face interaction
within society and the impact of this is not really understood, but could result in increased anti-social
behaviour.



Collaborators within the product service system

It is unusual for the producer of the hardware and the service provider to be the same company, since
few companies have the business and technical skills to do both. There are some exceptions and
Apple with iTunes is one example. Where the service and hardware elements are handled by separate
companies, the service company usually is the lead company and the hardware company a supplier.


Marketing Tactics
                                                                                                            Formatted: Normal, Tab stops: Not at 0"
The examples looked at in this study showed that the following marketing strategies are common for
PSS.
    Traditional business models such as bait and hook, pay per use, and subscription, are used             Formatted: Normal, Bulleted + Level: 1 +
       along with the more recent bit vendor model.                                                         Aligned at: 0.25" + Tab after: 0.5" + Indent
    Use of modern communications channels such as the internet, satellite or mobile phone                  at: 0.5", Tab stops: Not at 0"
       network to deliver the PSS.                                                                          Formatted: Bullets and Numbering
    Exploitation of the global marketplace.
                                                                                                            Formatted: Normal, Tab stops: Not at 0"
There are no rules emerging from this study which can be used to ensure market success for any
specific business model. There are however some influences that are worth taking in to account:

       Reluctance of consumers to lease, since they like to own a product because of cultural              Formatted: Normal, Bulleted + Level: 1 +
        influences.                                                                                         Aligned at: 0.25" + Tab after: 0.5" + Indent
       The bait and hook business model has produced some very successful and profitable PSS               at: 0.5", Tab stops: Not at 0"
        businesses.                                                                                         Formatted: Bullets and Numbering
       Success is often tied as much to the availability of enabling technology as the PSS business
        model.
                                                                                                            Formatted: Normal, Tab stops: Not at 0"

                                                                                                            Formatted: Heading 1




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This study has shown that there should be substantial business
opportunities for ffunctional ssales in the future. In Business to
Business (B2B), and Business to Consumer (B2C) in the developed
world and also in the developing world both technology and
environmental product legislation is likely to have a large impact on
the growth of ffunctional ssales. However theire are major
difference ion how these willy influence them.




For Business to Business B2B this is more likely to be a
continuation in the current trend towards leasing equipment, with
more companies taking on the role of complete life cycle
stewardship as the the new European environmental legislation
starts to be implemented. The shiftmove towards the adoption of
thin client computing is likely to accelerate – with a moveing from
the multi-national companies to both medium and small
businesses. This will allow ffunctional ssales within ICT to become
much more environmentallly substainable with increased product
life, reduced energy and the opportunity for supplying remote
servers to industry. The latter will allow a vast range of software to
become available to companies with payment based on use e.g.
PPU.



For Business to Consumer B2C there is the possibility that
ffunctional ssales over the next 10 to 20 years will move from its
present niche market to become a major section of this market.
over the next 10 to 20 years. Much of this will depend on how new
technology especially in home networking is adopted within
countries. This technmology will allow a whole range of services
and product- services to be provided to the average household,
including remote machine monitoring for maintenaence, shopping,
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consumer advice, electronic newspapers and journals, remote
server for thin client computing, security, entertainment, heating
and energy control, telecommunications, and more. Because it is a
network, the most efficient method to introduce this is with the
ownership of the hardware retained by the service network
provider, and payment based on machine use e.g. PPU. This would
also allow the producer to retain control of their products for end-
of-life treatment. Resistance by the consumer to not owning the
hardware is likely to be less than with current products on the
market because it is a new technology and people accept changes
more easily with new product introductions. (e.g. sSatellite digital
programme recorders when introduced in the UK managed to
successfully charge a monthly use charge). Another factor that
could positively influence a shift towards positively ffunctional
ssales in B2C is if there is a large scale movement away from
creditborrowing as a result of the spiralling personal debt in many
countries. Leasing or rental rather than extended credit or
loansborrowing could then be a more attractive solution.


Within the developing world new technologies will allow many
areas to develop, which are currently hampered by not currently
having the communication infrastructure in place to allow
businesses to develop. One of the most promising is wireless LAN
which will allow business in areas with no land lines to use wireless
to connect to central hubs which are then connected to the web.
Since the individual buying power in the developing world is low,
ffunctional ssales will often be the only viable commercial way of
getting these systems established.


NED COMMENTS ON THE ENVIRONMENTAL IMPLICATIONS –
PLUSES + MINUSES

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snPPUPPUHowever, the questions about why it was not successful
are still unclear e.g. lack of research, targeting marketing maybe
key elements.
FScathode ray tubes ()



To implement functional sales models is likely to require an
adjustment to organisational and marketing models focused on
ownership by the customer. Electrolux’s Gotland project, illustrates
the need to bring together a range of business partners together to
offer a solution based on the payment for use, rather than outright
purchase. PPU models are likely to require new approaches to
objective setting, performance measurement, and partner selection
and development.A bit more discussion somewhere – may here or
somewhere else - of some of the organisational, marketing, etc
implications of shifting towards a functional sales model – perhaps
extract key extracts from the notes from Budapest




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References                                                                                            Formatted: English (United Kingdom)
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1
    SusProNet Website                                                                                 Field Code Changed
    http://www.suspronet.org/                                                                         Formatted: Font: Italic

2                                                                                                     Formatted: Indent: First line: 0.08"
    Fact-index.com: Business Models
    http://www.fact-index.com/b/bu/business_model.html                                                Field Code Changed
                                                                                                      Formatted: Superscript
3
    CfSD 2004: Maximising the Sustainable Value Supply Networks and Product/Service Systems (ICT).    Formatted: Left, Indent: Left: 0", Hanging:
    Graham Adams, Martin Charter.                                                                     0.1"

4                                                                                                     Formatted: Font: Italic
 TimesOnLine: The age of the hollow company
                                                                                                      Formatted                                      ...
http://business.timesonline.co.uk/article/0,,8209 -1086449,00.html
                                                                                                      Formatted: English (United Kingdom)
5
    BBC News – World Edition: Musicians go mobile to reach fans, Alfred Hermida                       Formatted: 0.0-BodyText, Left
    http://news.bbc.co.uk/2/hi/technology/4652463.stm
                                                                                                      Formatted: Indent: Left: 0.1"
6
    Erik Wilde (STH), Jacqueline Schwerzmann (SFDRS) 2004: When Business Models Go Bad: The           Field Code Changed
    Music Industry’s Future                                                                           Formatted: Font: Italic
    http://dret.net/netdret/docs/wilde-music-icete2004.pdf                                            Formatted: Indent: First line: 0.08"
7
    Sunday Times - Times Online. 28th September 2005: Will podcasts kill the radio ads?               Formatted: Indent: Left: 0", Hanging: 0.1"
    http://www.timesonline.co.uk/article/0,,2095-1723795_3,00.html                                    Formatted: Font: Italic

8
                                                                                                      Formatted: Indent: First line: 0.08"
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sustainable networked world
                                                                                                      Formatted: Font: Italic
9
    GALILEO: European Satellite Navigation System                                                     Formatted: Indent: Left: 0", Hanging: 0.1"

    http://europa.eu.int/comm/dgs/energy_transport/galileo/                                           Field Code Changed
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10
  Wuppertal Institute et al. 2000: Selling a Function Instead of a Product: Renting White Goods via
                                                                                                      Formatted: Font: Italic
Functional Service Contracts (FUNSERVE), SAVE Project Intermediate Report, Wuppertal, 2000.
Christiane Dudda and Stefan Thomas, Wuppertal Institut für Klima, Umwelt, Energie Kai Schuster.       Formatted: Indent: Left: 0", Hanging: 0.1"
                                                                                                      Formatted: English (United Kingdom)
11
     Raph Koster 2002: Online World Timeline                                                          Formatted: English (United Kingdom)
     http://www.legendmud.org/raph/gaming/mudtimeline.html                                            Formatted: Superscript
                                                                                                      Formatted                                      ...
12
     Gyricon, LLC SmartPaper™ Home Page
                                                                                                      Formatted: English (United Kingdom)
     http://www.gyriconmedia.com/
                                                                                                      Formatted: Indent: Left: 0", Hanging: 0.1"
13
     E Ink Home Page                                                                                  Formatted: English (United Kingdom)
     http://www.eink.com/
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14
     CfSD Research. Graham Adams, Martin Charter: Networked home appliances
     http://www.cfsd.org.uk/PSS/                                                           Formatted: Indent: Left: 0", Hanging: 0.1"
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1
 Xerox Corporation Booklet ‘reinvent, rethink, redefine’                                   Formatted: 0.0-BodyText
http://a1851.g.akamaitech.net/f/1851/2996/24h/cache.xerox.com/downloads/usa/en/ r/reinve
nt_rethink_redefine.pdf

2
    From Emmanuel Ackom, Chair of Industrial Sustainability, BTU Cottbus
     th
    9 February 2004-03-26

3
    News release on HP Superdome Servers
    http://www.hp.com/hpinfo/newsroom/press/2003/030311a.html

4
 Wuppertal Institute et al. 2000: Selling a Function Instead of a Product: Renting White
Goods via Functional Service Contracts (FUNSERVE), SAVE Project Intermediate Report,
Wuppertal, 2000
Christiane Dudda and Stefan Thomas, Wuppertal Institut für Klima, Umwelt, Energie Kai
Schuster.

5
    Serving the World’s Poor Profitably, September 2002
    C.K. Prahalad, Allen Hammond

6
 W EEE, RoHS, and EuP legislation. See legislation at:
http://www.cfsd.org.uk/seeba

7
    ExpressCard Home Page
    http://www.expresscard.org/

8
    Toshiba Feminity Products
    http://feminity.toshiba.co.jp/feminity/

9
    Electrolux Screen Fridge
    http://www.electrolux.com/screenfridge/start.htm

10
     Afghanistan Telekiosks
     http://mirror.undp.org/afghanistan/archive/2003/26-july03-telekiosks.htm

11
     Gyricon, LLC SmartPaper™ Home Page
     http://www.gyriconmedia.com/
                                                                                           Field Code Changed
              Co-ordinated by the Austrian Society for System Engineering and Automation
                        http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
              Co-ordinated by the Austrian Society for System Engineering and Automation
                        http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
                            Thematic Network ECOLIFE II
                                     N° G1RT-CT-2002-05066
                              Duration: April 1, 2002 – March 31, 2006

                      Thematic Network ECOLIFE II
                          N° G1RT-CT-2002-05066
                   Duration: April 1, 2005 – March 31, 2006
                                                                                          Formatted: Font: 8 pt


12
     E Ink Home Page
     http://www.eink.com/

13
     Philips invents technology for paintable displays
     http://www.extra.research.philips.com/pressmedia/releases/paintdisp.html

PERHAPS REFERENCE SUSPRONET + OUR PSS SITE




                                                                                          Field Code Changed
             Co-ordinated by the Austrian Society for System Engineering and Automation
                       http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm
             Co-ordinated by the Austrian Society for System Engineering and Automation
                       http://www.ihrt.tuwien.ac.at/sat/base/EcolifeII/index.htm

				
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