How to develop sustainable and scalable business models in the creative industries

Professor Feng Li, Bayes Business School, City, University of London

The creative industries in the UK are worth £115 billion, employing 2 million people and are growing twice as fast as the rest of the economy, with an annual service export value of over £21 billion. From arts, architecture, publishing and advertising to film, TV, music, fashion and design, to video games and crafts, these industries represent some of the sectors where the UK possesses genuine global competitiveness. The creative industries are not only a significant engine of economic growth, job creation and social cohesion, but also a hub of managerial innovation and experimentation and new organisational and business practice which stimulate innovation and entrepreneurship in other sectors of the economy.

However, some sectors of the creative industries have been seriously damaged by the lack of sustainable government support during the Covid pandemic, which exacerbated some long-standing problems the industries faced.  Although the creative industries in the UK are highly adept at developing new ideas, and many creative businesses have achieved enviable commercial successes both in the UK and internationally, the creative industries as a whole are still far from as effective as they could be. This particularly applies to exploiting and capturing the full commercial and cultural values of their creations and rapidly scaling up their operations internationally. It is also clearly reflected in the large number of small and micro businesses in these sectors; and the financial struggles experienced by a large number of highly skilled people in creative professions, even before the pandemic.

Identifying and adopting new business models that are financially sustainable and operationally scalable, particularly those enabled by digital technologies, can help creative businesses to scale up their successes and capture a larger share of the value they create, further increasing their contributions to the British economy and society.

The success of any commercial venture depends critically on the underpinning business models to take them to market, without which the economic and social impacts of these ventures – even those based on the most creative ideas or advanced technologies – cannot be realised. While the Creative Industries Sector Deal was a step in the right direction, government support could be more effectively focused, particularly in supporting creative industries to adopt new business models enabled by digital technologies. The £50 million of government investment announced on 1 February 2022 for creative businesses across the UK suggests that the British Government is recognising some of the challenges and opportunities the industries are facing.

Digital transformation of business models in the creative industries

The creative industries provide an ideal setting for a systematic examination of business model innovations. They cover the full range of organisational characteristics and activities, from large multinationals, national and regional businesses to micro-businesses; and from digital native sectors (such as digital games), where many new business models are developed, and traditional sectors that have been transformed by digital technologies (e.g. publishing, advertising, design and music), to areas where the full impacts of digital technologies are still to emerge (e.g. fine art, craft, museums and cultural heritage). Furthermore, understanding the digital transformation of business models in the creative industries is not only important for the future growth of the sector, it can also shed light on the future directions of digital transformation in the wider economy.

The gap between rhetoric and reality

Based on empirical evidence from a comprehensive study, my research identified a number of significant emerging trends in the digital transformation of business models in some leading creative businesses around the world, and explored the extent to which these trends have been adopted by the creative industries in the UK.  The research comprised of 50 main case studies selected from different sectors of the creative industries, using semi-structured interviews supplemented by background research from private and published resources. In addition, 30 mini case studies were selected globally for their perceived novelty in using digital technologies to support new business models.

The case studies analysis showed that a business model can be new in at least three different senses. First, a business model can be new because the idea is unprecedented, which is very rare as most ideas have been used somewhere before. Second, in most cases business model innovation is about borrowing an idea from one domain and adapting it for another domain. Third, in some sectors, digital technologies enable the scaling up of a traditional business model by removing conventional barriers, resulting in unprecedented impact. Business model innovations are rarely about creating new business models based on unprecedented ideas. In most cases, digital technologies allow firms to deploy a wider range of business models than previously available to them. This is reflected in the increasing adoption of the ‘portfolio models’ by some case studies.

Although some creative businesses are at the forefront of adopting new business models enabled by digital technologies, such new business models are only slowly adopted by the creative industries more generally and the gap is considerable. Most businesses in the creative industries are still at relative early stages of adopting new business models enabled by digital technologies, which is true even in some digitally native sectors. However, a small number of creative businesses are actively experimenting with new ways of creating and capturing values through digital innovations, and some of these cases can potentially serve as exemplars for others in the creative industries and the wider creative economy.

The portfolio business model

The study identified at least four distinctive variants of the ‘portfolio models’ used to maximise revenue generation.

First, the market portfolio, when some firms simultaneously deploy two or more business models to tackle different market segments. Each of the business models might not be new, and the financial returns in some market segments are often financially modest, but by sharing costs, the combined revenues often make the ‘portfolio’ financially lucrative, thereby making each market niche viable. Digital technologies play a key enabling role by reducing costs and making the management of the portfolio administratively and financially viable. For example, a digital printing firm worked with freelance writers to produce personalised children’s books, which are ordered online and then printed and distributed at premium prices, by sharing the digital infrastructure with commercial volume printing. This activity generated additional revenues for the printing firm to supplement its volume printing business; and created new income for freelance writers. However, the personalised children’s book business is not commercially viable as a stand-alone business due to its limited volume. Digital technologies were used to enable the provision of a new product and manage the relations with writers and customers at low costs. In doing so, a new value proposition, value architecture and functional architecture were added to the existing one, which enhanced overall financial sustainability.

Another example involves a video game firm that historically worked exclusively with major game publishers. The publisher made an upfront payment to fund the development of a new game. Once completed, the game was transferred to the publisher, and the firm then received a small royalty for each copy sold. Even though the firm produced several chart-topping games, most profit went to the publishers. With rapid increase in broadband connectivity, the firm decided to use its own cash reserves to fund the development of a new game. The new game was played online rather than distributed by publishers via retail outlets. Through a pay-as-you-play model, the firm bypassed the publishers and retailers, generating significantly more revenue for itself than through the traditional business model. The new business model also enabled the firm to retain the IP it created; and made use of live-stream advertising to online gamers to generate new income. Changes in the business model were extensive – the product offering was transformed from video game as a product distributed by publishers and retailers, to a service based on pay as you play.

Secondly, since many creative products can be consumed at different levels of value-added, or re-combined as new products, this creates opportunities to develop a wide range of new niche products by monetising different stages of work-in-progress. This is called the product portfolio. For example, an oil painting by a famous artist is sold as the final product, but the images of different stages of producing the painting are digitally captured and consumed either as new products, or as supplements to the final product. One frame of an unfinished painting can be consumed digitally or printed out as a new piece of artwork. Similar examples were found in films, music, publishing and media. In several cases, firms used loss leaders to attract customers, and then generated revenues from associated products and services. In a major music label, the firm gave away music through free downloading in order to sell merchandise and live performances for selected artists, essentially changing its product offering from selling music tracks to selling live events, merchandise and advertising. It also experimented with the ‘pay what you can’ model for selected artists, allowing customers to decide how much to pay by capitalising on the strong emotional bond between artists and fans. This enabled the firm to maximise revenues while expanding the fan base. This creates a range of niche markets that supplement the traditional core market. By extracting values from such niches as well as the final product, the revenues and impacts are maximised and the resilience of the business is enhanced.

Thirdly, the multi-sided business models, which have been widely adopted by large digital firms – Google, Facebook, Alibaba and Tencent – in the USA and China, where value is created through interactions with multiple stakeholders upstream, downstream and horizontally. However, some creative businesses in the UK are experimenting with similar business models where the digital platform enables the management of multi-sided relations efficiently. In the music industry, for example, revenues are increasingly extracted through ‘360 degree contracts’, not only from music sales, but also from advertising, live concerts, merchandise and appearances. Similar examples are found in films and performing arts.

Fourthly, some firms adopt a portfolio of different business models sequentially over time to maximise revenues. For example, a digital artist first charged a live audience an entrance fee to experience the process of art creation in his digital studio with 360-degree screens (similar to going to the theatre). The completed digital art is then licensed to clients for a fee. Eventually, the artworks and bespoke products (e.g. a signed print) are sold to collectors.

The level of integration between the business models within a portfolio depends on the nature of the products, services and markets, which can range from a loose collection of discrete business models, to hybrid models where some key components are shared, to the full integration of multiple business models as a new business model.

By capitalising on core capabilities to maximise revenues from different markets, products and stakeholders over time, the portfolio models can significantly enhance a company’s financial sustainability, reduce risks, and increase resilience.

Conclusions and future research

One priority for the creative industries is scale, particularly in helping SMEs and entrepreneurs to grow. In addition to basic business training, leadership development should focus explicitly on helping creative businesses and entrepreneurs identify and adopt new business models to scale up their businesses and capture the values they create. This calls for a targeted approach to help creative businesses to address long term business growth alongside the creation of new ideas. It is essential for creative businesses to work with leading business schools at the forefront of research in understanding digital transformation and identifying sustainable and scalable business models, and in particular, adopting effective approaches to manage the transition to new technologies, new business models and new organisational forms, as argued elsewhere.

More systematic research is urgently needed to conceptualize emerging trends in the digital transformation of business models and develop robust theoretical frameworks to guide practice and maximize impact. Three types of research are particularly relevant. Firstly, qualitative research based on case studies and ethnographic approaches is needed to identify and illustrate international best practice in both developed and emerging economies. Secondly, through large-scale quantitative research both locally and internationally, new research is needed to identify, measure, validate and compare the complex relations between the key factors, processes, mechanisms and contexts for digital transformation. New insights from such studies can inform the development of new theories and be used to guide practice and policy making.

Further research should also quantitatively examine the profitability of firms using the portfolio models compared to those using a single business model and whether the portfolio models can increase a firm’s financial sustainability over time, and what types of firms should and should not adopt them.

The rapid pace of change calls for the development of new research methods, as our existing methods are often too slow, too rigid and take too long to make sense of emerging phenomena and offer practical guidance in a timely fashion. Technologies continue to develop extremely rapidly, and when published studies in mainstream academic journals are often based on data that are 5–10 years old, the “new insights” are essentially derived from technologies that are two or three generations old. New methods are urgently required to identify, conceptualize and validate emerging trends with limited empirical presence long before they become quantitatively significant in the real world.

February 2022

Li, F. (2020). Leading digital transformation: three emerging approaches for managing the transition. International Journal of Operations & Production Management40(6), pp. 809–817. doi:10.1108/ijopm-04-2020-0202

Li, F. (2020). The Digital Transformation of Business Models in the Creative Industries: A Holistic Framework and Emerging Trends. Technovation2020(92-93), pp. 102012–102012. doi:10.1016/j.technovation.2017.12.004