Paper - Single spaced, 12pt font in Word that outlines: Network Effects: Provide a break down of the 4 types of network effects as related to this case. Porter's Five Forces: Apply Porter's Five...

Paper - Single spaced, 12pt font in Word that outlines:








Wattpad 9-919-413 M A R C H 2 4 , 2 0 1 9 Emeritus Professor John Deighton and independent researcher Leora Kornfeld (Toronto, Canada) prepared this case. It was reviewed and approved before publication by a company designate. Funding for the development of this case was provided by Harvard Business School and not by the company. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2019 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. J O H N D E I G H T O N L E O R A K O R N F E L D Wattpad Founded in 2006 as a reading app for flip phones, by 2019 Wattpad was a platform on which writers posted chapters of novels and readers read them, commented, and created friendships around genres and novels that they liked. The platform was fed by 4 million writers, and reached 75 million people monthly, who spent 22 billion minutes a month reading its stories. It was estimated that half the young women in the US aged between 13 and 18 had visited it, and there were large followings in Indonesia, the Philippines, Vietnam, Turkey and Brazil (Exhibit 1). Mainstream book publishers had developed books from stories that started on Wattpad, Netflix and Hulu used it for film adaptations, and television producers, particularly in Indonesia and the Philippines, licensed content for broadcast. In total, nearly 1,000 stories from Wattpad had been turned into books, TV shows, and films. There were more than half a billion story uploads already on the platform, and close to half a million new chapters were uploaded every day. Reader behavior generated a billion data points daily, showing what the global Wattpad community was searching for, reading, and engaging with. To deal with this volume of data, Wattpad could not use the human-centric methods of traditional publishers. A team of data scientists ran queries on a relational database to identify trending themes, and another team developed algorithms to match new material to readers. Founder Allen Lau described what was distinctive about Wattpad's use of data: “The traditional approach to investing in a story requires a handful of people to buy in. Netflix has a better approach, a lot of data, but it’s all data about content already produced. For creating content, Netflix follows the linear process that’s been around for a century. Their data describes a completed piece of work. Our data describes responses to the work during its creation. We see which parts of a story generate the most intense reaction from the community and the specific genres that particular demographics prefer. With our data we can significantly improve the odds of success. What we are, essentially, is a probability company.” The process was working. In 2018 three New York Times’ best seller books originated on Wattpad. A Netflix film (The Kissing Booth), originally distributed as a free story on Wattpad written by a teenager, Beth Reekles, was described by Netflix’s creative head, Ted Sarandos, as “One of the most- watched movies in the country, and maybe in the world.1” For the exclusive use of A. Gupta, 2022. This document is authorized for use only by Anup Gupta in T510-Fall 2022 taught by James Kinser, Indiana University - Bloomington from Aug 2022 to Jan 2023. 919-413 Wattpad 2 Yet General Manager Jeanne Lam saw a problem. “We built this company on the tastes of teenage girls. Many of them wanted fan fiction and romance stories.” If Wattpad sought to apply its model to other categories of entertainment, it would have to deal with machine learning’s innate tendency to replicate the tastes and preferences of the community to which it was exposed, before Wattpad could broaden its community of readers and writers. History Wattpad was founded in Toronto in 2006 when two friends and co-workers, Allen Lau and Ivan Yuen, realized they were each building a similar product in their spare time, and combined their efforts. The product was a reading and writing app for mobile phones, which at that time were so-called feature phones with limited functionality and screen space (Exhibit 2 shows how a story looked on an early feature phone.) The plan was to generate revenue by selling ads through Google Ad Sense. In its first year, the Wattpad mobile reading app made $2.00 in ad revenue.2 The introduction of the iPhone in 2007 and the app store in 2008 were pivotal events in the evolution of the mobile user experience and a market for mobile content, and Lau and Yuen decided it was wise to soldier on with their pet project. “We knew that the paper format would become obsolete,” said Lau. “We knew people would read digitally, electronically [but] exactly how… it was kind of fuzzy.”3 Lau and Yuen bootstrapped the company for three years before seeking venture funding. In 2011 they hit the dual milestones of 1 million users and 5 million downloads, and raised $3.5 million4. Three years later there were 25 times as many users, enough to support advertising and branded content5. Several more funding rounds followed, and by 2019 total venture capital investment in Wattpad was $118 million, with investors including Omers Ventures, Union Square Ventures, Khosla Ventures, and Tencent Holdings. The appeal of Wattpad to investors appeared to lie in its ability to source stories from marginal and fringe communities overlooked by the established publishing industry and, armed with evidence that these communities were thriving but underserved, to attract interest from television, book publishers, and motion picture producers. Competition The fiction publishing industry was mature and intensely competitive. Demand for adult trade books had declined by 20% since 20106 without blunting the enthusiasm of writers. The industry's gatekeepers, literary agents, book editors, and publishing houses, were under siege from the imbalance of supply over demand. As publisher rejection rates climbed, self-publishing expanded. But self-publishers faced the same problem as traditional publishers: how to reach readers. An industry observer said, "Everyone in the potential audiences for a book already knows of hundreds of interesting and useful books to read but has little time to read any. Therefore people are reading only books that their communities make important or even mandatory to read.7” The largest U.S. self-publishers were CreateSpace (owned by Amazon, which distributed the books), and Lulu. Using such platforms, authors could upload writing and make their work available to readers worldwide while retaining ownership of copyright. Self-publishing tools were either free or offered at a nominal cost and platforms generally offered authors royalty rates of 70 percent to 80 percent8. The largest digital (eBook) self-publishing platform was Kindle Direct, also owned by Amazon. For the exclusive use of A. Gupta, 2022. This document is authorized for use only by Anup Gupta in T510-Fall 2022 taught by James Kinser, Indiana University - Bloomington from Aug 2022 to Jan 2023. Wattpad 919-413 3 Smaller competitors had built niche online reading communities. They included such sites as the Young Adult-focused Swoonreads (owned by book publisher Macmillan) the mobile fiction platform Radish, and Fanfiction.net. Some, such as Tablo, Reedsy, and Sweek, were starting to experiment with hard copy publishing but, as reported in Forbes in January of 2019, “…it’s unclear if they’ve seen success.”9 China was home to a number of self-publishing platforms, the largest of which, China Literature, claimed 200 million readers and 7 million writers. In the opinion of Allen Lau it was the only firm globally whose expertise in data and analytics compared to Wattpad’s. China Literature had a strong track record of adapting its stories to film, television, and games. Tencent Holdings, a leading Chinese multinational media and technology firm, was an investor in both China Literature and Wattpad. How Wattpad Made Money The company’s business model was a mix of what Lau called “attention and wallet”, earning revenue from advertising and reader payments. “It’s lazy to choose just pay or free”, he insisted. “Freemium is a lot harder. There really are 50 shades of monetization model.” Wattpad had a number of revenue sources: • Ads ran in the free version of the app (Exhibit 3). Cost per thousand exposures (CPMs) was generally low, in the range of $0.50 to $10.00, because no customer profile data were shared with advertisers. • It ran native advertising (campaigns that integrated brand content into stories an ostensibly organic way), brand-sponsored posts, and contests. For example Starbucks sponsored a story in which two baristas fell in love. In another instance the publisher National Geographic sponsored a writing contest on the global plastics crisis (Exhibit 4). In a third instance the SyFy cable channel’s show The Magicians invited writers to submit stories inspired by the show. • Readers could pay for a premium version of the app, priced at about $6 per month, which provided an ad-free experience and other feature upgrades. • A product called Paid Stories put certain stories behind paywalls. Readers could pay to access them chapter-by-chapter using a virtual currency known as Wattpad Coins. • A division called Wattpad Studios had been working with Hollywood for three years, offering and developing television shows and movies based on Wattpad stories. • A division titled Wattpad Books was launched in 2019 to publish Wattpad stories in physical book form. As of 2019 the casewriters estimated that the majority of Wattpad’s revenue came from advertising, likely sufficient to cover its cost of operations. The remainder came from Wattpad Studios, Premium subscriptions, and Paid Stories. The goal of the company was to reduce advertising’s share by growing the revenues of