9x6 b3754   Managing Digital Open Innovation

Chapter 2
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Innovation in Digital
Business Models*
Dagfinn Wåge and Gunnar E. Crawford
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Abstract.  We are bombarded with buzzwords such as disruption,

digitalization and the sharing economy, and the trending technolo-
gies that fuel them — the Internet of Things, big data, and artificial
intelligence. Simultaneously, we see whole industries being shaken
to the core and rearranged into new patterns by new players. In
this chapter, we posit that a new business model, the disruptive
ecosystem, is at the core of this movement.
The disruptive ecosystem is a paradigm that is capable of absorb-
ing the power of digital technologies and combining them with the
business model and innovation theory. We believe this new busi-
ness model is the common denominator between companies like
Apple, Facebook, Samsung, Uber, Google, Tesla, and Amazon. We
will present how a disruptive ecosystem looks like, and how and
where disruptive, open and combinatorial innovation happens in
these two-sided business models and ecosystems. This chapter also
includes practical examples from industry.

* This paper was presented at The XXVIII ISPIM Innovation Conference — Composing
the Innovation Symphony, Vienna, Austria, on 18–21, June 2017. The publication is
available to ISPIM members at www.ispim.org.

35

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36    D. Wåge & G.E. Crawford

Keywords.  Digital business models, open innovation, disruptive

innovation, business ecosystems, digital technologies, Internet of
Things, value networks, platform-based business models, music
industry, Uber, Tesla.
by Brenda Moreno on 05/02/23. Re-use and distribution is strictly not permitted, except for Open Access articles.

1. What Makes New Business Models Take

Over the Existing Ones?
Our entrance into the world of business models were made by the
fact that traditional companies having high revenues and dividend
yields got a lower valuation than the new Internet giants having no
dividend yield and low profits.
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Further analysis led to the following conclusion; it is not the use

of technologies alone that strengthens these new giants, it is their
new business model and how this business model is able to absorb
the new digital exponential technologies.
So, what happens when the new business model takes over from
the old ones? In our findings, overtaking takes place when compo-
nents in the business models are removed, changed or added, and
when the flow in the business model is changed.
Let us illustrate this with a few examples. In the case of Tesla,
they change the component car to become an Internet of Things
object. This means that the component looks like a car, but it is
changed to become an always connected car stuffed with software
like algorithms and artificial intelligence. For a company like Netflix,
they remove an existing component. This time the component is dis-
tribution cost, as they exploit Internet distribution (often referred to
as Over The Top/OTT) that has negligible cost compared to tradi-
tional distribution. Google’s Page rank and AdWords algorithm is an
example of adding of a new component, an addition that has changed
the business models in both the advertisement and media industry.
However, the most profound change we have discovered is the
change in flows in the business models. It might seem as an obvious
observation, but the clearest indicator of a digital disruptive business
model is the fact that the new compulsory flow is a bi-directional
flow of data through the business model, all the way to the

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Innovation in Digital Business Models   37

end-customers. We have seen this happening in a number of indus-

tries. For example, this change of flow is what changed the retail
banking industry as well as our postal services. However, we will
illustrate this using the music industry.
Music was digitized as early as late 1980s when the compact disks
(CDs) appeared on the market. But making the content digital (digitiz-
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ing) did not result in a disruptive change for the music industry. On
the contrary, they experienced a tremendous growth after digitization.
However, in June 1999, something dramatic happened to the indus-
try, and that was the introduction of bi-directional flow of data to
end-customers (digitalization), or otherwise known as Napster,
uploading and downloading (and illegally sharing) of mp3 music files.
This dramatic fall in revenues, illustrated in Figure 1, was later
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slowed down by the introduction of Apple’s iTunes, the first disrup-

tive ecosystem that made the digital flow of music legal. Later,
Spotify’s leasing model further slowed down the fall, but despite

CONSUMER SPEND ON RECORDED MUSIC

Napster –71%
$ 20B
$ 18B Digital (Streaming)
Digital Download
CDs
$ 16B Cassettes apple
Vinyl
$ 14B 8 Track

$ 12B
$ 10B
spotify
$ 8B
$ 6B
$ 4B
$ 2B
$ 0B
1974 1979 1984 1989 1994 1999 2004 2009 2014

Figure 1:   The digitalization effect of bi-directional flow of data to end customers
in the music industry (digitalization).
Source: Mathew Ball at redef.com.

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38    D. Wåge & G.E. Crawford

these new legal platforms, the revenue reduction was as high as 71%
in less than a decade.
Other clear indicators of a disruptive ecosystem, is that the stra-
tegic framework is a value network (Stabell and Fjeldstad, 1998),
and you will not find value chains or value shops in this business
model. Another compulsory component is data analytics.
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2. The Disruptive Ecosystem Business Model

So how did we design this business model? When we started to make
our model, we did not understand that this was a business model,
because it looked more like a technical architecture than a simple
role model. The simple reason is that technology itself, like devices,
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interfaces, algorithms, multi-device OS and IoT-machines, is itself

becoming a component in the business model. The actors controlling
these digitalized components will gain tremendous momentum and
power in the new digital ecosystems. Figure 2 shows our first draft
of the disruptive ecosystem.
Much of the power in the disruptive ecosystems lies in the con-
trol of end-user interfaces and devices, and the first examples of such

Figure 2:   The first version of the disruptive ecosystem business model (2011).
Source: “Creating Disruptive Ecosystems” (Wåge and Crawford, 2016).

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Innovation in Digital Business Models   39

by Brenda Moreno on 05/02/23. Re-use and distribution is strictly not permitted, except for Open Access articles.

Figure 3:   The revised version of the disruptive ecosystem business model (2016).
Downloaded from www.worldscientific.com

Source: “Creating Disruptive Ecosystems” (Wåge and Crawford, 2016).

disruptive ecosystems are Apple and Samsung. Later, we found that

disruptive ecosystems could also be virtual, meaning that they are
enabled by the end-customers themselves on their own devices. But
to do so, you will need a very attractive service. Facebook, Spotify,
and Airbnb are three examples of this category.
The last couple of years has introduced Internet of Things, which
means that it is not only smartphones, Tablets and PCs that are con-
nected in our home or on our body, devices like the Nest thermostat,
the Fitbit wristband, connected cameras, self-driving cars represent a
new category of devices that expands these disruptive ecosystems.
This has resulted in a revised version of the disruptive ecosystem
model shown in Figure 3.
It is worth noting that there are several names describing this
business model, and they all emphasize different features. Examples
are platform-based business model and multi-sided business model.

3. Is the Disruptive Ecosystem More

Disruptive Than a Disruptive Product?
The simple answer to this question is yes. Let us use Apple as an
example. They developed the iPhone, a highly disruptive product

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that effectively crushed the strongest competitor on mobile phones

in the market, Nokia. However, Apple’s new business model (the
disruptive ecosystem) did not just crush a strong competitor, it
crushed the whole music industry, and along with that the entire
existing value chain-based business model. Since then, their disrup-
tive ecosystem has also affected other industries like the telecom and
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media industry. This is a natural move, as disruptive ecosystems pos-

sess the inherent capability of doing industrial shifts. Another exam-
ple of this is Uber, which moved very fast from the taxi-industry to
the food-delivery industry, and Tesla that now moves from the car
industry towards the energy industry.
So, anyone can see the symptoms a disruptive ecosystem can
have in existing industries and business models, but how can we
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explain these massive effects, and what are the root causes of this
massive disruption going on?
The short version of our answer lies in the strength of exponential
digital growth mechanisms and can be summarized in the following
quote: “The higher number of digital exponential growth mechanisms
a business model can absorb, the more disruptive it will become.”

4. Innovation in Disruptive Ecosystems

There are four kinds of innovations in disruptive ecosystems, shown
in Figure 4, and we will describe them briefly in the following sec-
tion. Which kind of innovation you can perform will depend on your
relative position and understanding, this is crucial if you want to
succeed in these new digital business models.

4.1.  Open innovation

As disruptive ecosystems are by default value networks, you must as
an ecosystem manager use open innovation. If not, your ecosystem
will die. So open innovation is an inherent part of disruptive ecosys-
tems. However, open innovation can happen both in the down-
stream and the upstream part of the business model.

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Innovation in Digital Business Models   41

by Brenda Moreno on 05/02/23. Re-use and distribution is strictly not permitted, except for Open Access articles.
Downloaded from www.worldscientific.com

Figure 4:   The different forms of innovation found in disruptive ecosystems.

4.1.1.  Open innovation downstream

Open innovation downstream enables the ecosystem manager to
expand his product and service portfolio towards the end customer.
Sometimes the ecosystem manager takes care of this himself, but the
most common approach is to integrate towards third-party develop-
ers of devices using APIs (application programming interface).
A good example of this is Google Nest, where they themselves have
the gateway, in the form of a smart thermostat, and add other
devices and services via API integration. And the third-party’s device
will be labeled “Works with nest.” An example of open innovation
downstream is shown in Figure 5.

4.2.  Open innovation upstream

Open innovation also happens in the upstream part of the business
model and can be categorized in two main categories: the upstream
aggregators and the upstream innovators.

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Figure 5:   Open innovation downstream — the Nest example.

The upstream aggregator is a company that enables open innova-

tion for third parties towards the global ecosystems. We find this in
several industries like music and publishing, and what they do is to
simplify the process of distributing your content towards many
global ecosystems. Moreover, they do so for a very reasonable price
for individuals. However, the challenge of being discovered in a vast
jungle of content remains.
In Figure 6, we have shown an example from the music industry,
Ditto, which gives a musician access to many global music platforms.
The upstream innovator can be different entities. It could be an
individual app developer, it could be a new company delivering a
new service or content, or it could be an existing company adopting
to the new ecosystems. The latter do this to maintain customer sat-
isfaction. Examples of upstream innovators are shown on the right-
hand side of Figure 6.

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Innovation in Digital Business Models   43

by Brenda Moreno on 05/02/23. Re-use and distribution is strictly not permitted, except for Open Access articles.
Downloaded from www.worldscientific.com

Figure 6:   Examples of open innovation upstream.

5. Combinatorial Innovation
Whereas open innovation in disruptive ecosystems represents a way
in for external companies, the disruptive ecosystem manager does
combinatorial innovation. In many ways, this kind of innovation can
be described as the magic that differentiates the ecosystem. These
innovations will increase in number as the number of service
domains and their respective device portfolios increase.
Just to do the collection of services that used to be separated is
helpful for end customers, but an ecosystem manager is capable of
far more advanced combinatorial innovation.
In Figure 7, we show some of our earliest prototypes of combi-
natorial services. Both examples come from a demonstration project
started in 2011 within the field of welfare technology. The goal of
the project was to empower elderly people living at home, divided
into three categories: cognitive impairment, mobility impairment,
and healthy elderly people. The average age of the users was 78.5
years at project start.
The first example describes a combinatorial service innovation
where one touch on the wireless night (natt) switch would activate
scenarios in three different service domains. Firstly, it would turn off

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44    D. Wåge & G.E. Crawford

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Figure 7:   Examples of combinatorial service innovation prototypes.

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all the lights in the house but keep specific lights on, i.e. in the stairs
and outside the house. Secondly, the same touch would activate the
night saving mode on the heaters in the house, again allowing for
exceptions, i.e. keeping the temperature in the bathroom. Thirdly,
the one touch would activate the burglar alarms shell security, mean-
ing that you could move around the house, and only breeches
through doors and windows would trigger the alarm.
So, the combinatorial innovation in this case was how one touch
on one switch resulted in a cascade of actions simplifying how to live
in a big and old house, lowering the energy bill and improving the
feeling of being safe, a feeling that strongly influences on the quality
of life.
The second example shows how the entertainment services and
smart home services were combined in the same user interface on an
iPad. This combinatorial innovation was only delivered to the users
in the mobility impairment group, as we did not want to make the
elderly users passive. So, they could control anything from control-
ling the selection of TV channels, adjust the TV volume, to adjusting
the blinds, see who rang on the video-doorbell, and unlock it if they
decided to do so. They could also control lights and temperature, all
from one single user interface.

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Innovation in Digital Business Models   45

6.  Disruptive Innovation

You could of course argue that we can find disruptive innovations
(Christensen and Raynor, 2003) in products in a disruptive ecosys-
tem. And you would be right. However, in our studies of these eco-
systems, we have found that the major impacts come from the
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ecosystem itself, hence the name “disruptive ecosystem.” So, the

word of Aristotle, “The whole is more than the sum of its parts”,
truly comes to life here, and the impact is devastating to conven-
tional industries.
This is how disruptive ecosystems from Apple and Spotify have
dramatically changed the music industry. This is how companies like
Google, Facebook, and Baidu have totally changed the advertise-
ment and media industry, and how Tesla has changed the car indus-
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try. And it will not stop here, as these ecosystems are made for
industrial shifts in an ever more digitalized future, absorbing the
strengths of digital exponential growth mechanisms.

References
Christensen, C. M. and Raynor, M. E. (2003). The Innovator’s Solution — Creating
and Sustaining Successful Growth, Harvard Business School Press, Boston,
USA.
Stabell, C. and Fjeldstad, Ø. D. (1998). Configuring value for competitive advan-
tage: On chains, shops and networks. Strategic Management Journal, 19(5),
413–437.
Wåge, D. and Crawford, G. E. (2016). Creating Disruptive Ecosystems, Disrupt SA,
Stavanger, Norway.

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