Global Games Software Market - col.ent.sirsidynix.net.uk

Global Games Software Market: Value Chain Analysis- ML00027-035

Global Games Software Market

Value Chain Analysis

ML00027-035


Table of Contents

2

Complete Value Chain: Overview

Complete Value Chain: Overview (cont’d)

Developers: Overview

Developers: Analysis

Developers: Burning Issue – Crunch Time

Publishers: Overview

Publishers: Analysis

Publishers: Burning Issue – Games as a Service

Distribution: Overview

Distribution: Analysis

Distribution: Burning Issue – Downward Price Pressure

Retail: Overview

Retail: Analysis

Retail: Burning Issue – e-commerce

End-users: Overview

End-users: Analysis

End-users: Burning Issue – Increasing costs

Appendix


Complete Value Chain: Overview

3

The global games software market’s value chain can be divided into five distinct stages: developers, publishers, distribution, retail, and end-users.

Developers

Content creation

Software design

Programming

Console exclusives

Third party developers

Publishers

Manufacturing

Internal developers

Marketing

Large publishers

Distribution

Mobile platforms/ app stores

Games consoles

PC distribution software

Wholesalers

Retail

Mass-market

Specialist retailers

E-commerce

End-users

Consumers

Individuals


Complete Value Chain: Overview(cont’d)

4

The global games software market’s value chain can be divided into five distinct stages: developers, publishers, distribution, retail, and end-users. There is a high degree of vertical integration throughout the chain, with some companies even extending into retail.

Developers

Activision Blizzard

Electronic Arts

Tencent

Microsoft Studios

Ubisoft

Publishers

Activision Blizzard

Electronic Arts

Tencent

Microsoft Studios

Ubisoft

Distribution

Sony

Microsoft

Nintendo

Apple

Google

Retail

Amazon

Carrefour

GameStop

Wal-Mart

Valve

End-users

Individual players


Developers: Overview

5

Developers in this market are predominantly part of the large publishers, although opportunities exist for independent developers looking to bypass traditional funding methods.

Developers

Content Creators

Large companies

In-house from publishers

Individuals SMEs

Developer Studios

First Party Second Party

Third Party Independent/

Indie


Developers: Analysis

6

Developers are generally prone to backwards integration due to financial support from publishers, although new channels help support independents.

• A video game developer is a software developer that specializes in video game development . A game developer can range

from one person who undertakes all tasks to a large business with employee responsibilities split between individual

disciplines, such as programming, design, or testing among others.

• First party-developers are backwards integrated- the most common example is Nintendo, which rarely permits third party

access to its platforms. They can also be independent studios which were acquired by companies such as Sony or

Microsoft. Third party tend to produce for multiple consoles.

• Second party developers tend to develop on behalf, or act as a subsidiary of big developers. They also include developers

which take on development contracts for the larger publishers, although they tend not to own the intellectual property (IP)

and just carry out development.

• There is a high degree of backwards integration, as developers are reliant on revenues from the publishers, and many take

them in-house. Electronic Arts has acquired 39 companies to date, mostly developers. Electronic Arts' largest acquisition is

the purchase of VG Holding in October 2007, the then-owner of video game developers BioWare ,and Pandemic Studios, for

$775m.

• For smaller developers, ways to bypass the larger companies include crowdfunding. This can be a way for developers to

revive previous IP after acquisition by a big player or create smaller, indie games.


Developers: Burning Issue

7

“Crunch Time” and corporatization of video games leads to burnout of employees.

In 2004, game designer Erin Hoffman wrote an exposé about practices at video game publisher Electronic Arts. "Crunch

time" is the point at which the team is thought to be failing to achieve milestones needed to launch a game on schedule.

The complexity of work flow and the intangibles of artistic and aesthetic demands in video-game creation create difficulty in

predicting milestones. This often means employees work endless overtime and sacrifice free time and strain relationships in

order to deliver on the deadline.

Because most game developers work on salaries, it’s almost

always unpaid. EA announced reforms in 2005 following the blog

post, causing widespread outrage and triggering a series of

class-action lawsuits that led EA to settle for tens of millions.

A 2014 survey by the International Game Developers Association

found that 81% of polled game developers had crunched at some

point over the previous two years. However, there are signs that

conditions are improving, with the 2019 edition of the

International Game Developers Association’s Developer

Satisfaction Survey 41% of respondents stated that their job

involves crunch, while 35% stated that they work “long or

extended hours not classified as crunch.”


Publishers: Overview

8

There’s been increasing consolidation in the publishers market as costs of development lead to large or mid sized firms. Independent publishers can also exist.

Refers to size of development

team and budget- AAA is the largest.

Publishers

Major Publishers

AAA AA

Independent


Publishers: Analysis

9

Publishers tend to be large concerns increasingly integrated throughout the value chain due to financial risks in games publishing.

• Small development studios compete through creative designs and by partnering with large publishers. Large companies

publish a portfolio of titles and have the advantage of economies of scale in manufacturing, marketing, distribution and

selling. Some of these companies, e.g. Electronic Arts and Ubisoft are large multinational companies with a long

established presence within the global market and strong brand recognition.

• Possibilities of forward integration for suppliers exist in the form of developing their own online distribution centers, or

focusing on online gaming, an area that is increasing in popularity as more and more people have access to fast

broadband internet connections. Likewise, it’s possible for publishers to backwards integrate into development, by

acquiring studios.

• However, there are many software publishers operating within the market, and the product they offer is characterized by

short life cycles and frequent introductions of new products, which again need to achieve significant market acceptance

to appear on retailers’ shelves. Even the most successful titles remain popular only for a limited period of time. There is

possibility of longevity in the PC market, where modifications to the game (known colloquially as "mods") are available to

offer unofficial content and prolong a game's lifespan.

• Mobile publishing has also drawn the attraction of publishers, with Activision Blizzard acquiring King in a $5.9bn deal in

2016. Tencent is one of the largest publishers in China, focusing on such games.


Publishers: Burning Issue

10

Games as a service model offers benefits for publishers, but consumers are beginning to push back.

The inclusion of microtransactions is an extension of the games as a service model, where developers offer fewer games

but extend the product's lifespan through additional purchasable in-game content, and microtransactions, where users can

purchase virtual goods via micropayments. The logic behind the micropayments is to promote stable all year round

revenues, combating rising costs (in-game service content also has much lower operating costs than product revenue

costs), and generally to maintain longevity and accrue more revenue from consumers.

While the cost of games production is rising, it is

primarily the biggest developers introducing

microtransactions, and revenue' growth generally

outstrips the cost increases. This model has limitations,

with consumers snubbing EA’s Star Wars: Battlefront 2

after its microtransaction system attracted widespread

ire. The company missed its sales targets and also

revenue targets as it had to temporarily remove the

microtransactions system in order to entice sales,

although this may have proved not enough for

consumers.


Distribution: Overview

11

Wholesalers are present, but many larger electronics players bypass them.

Microsoft, Nintendo, and Sony effectively form an oligopoly and so are large enough to bypass the wholesale stage

and sell to retailers. This aids price control.

Distribution

Wholesalers

Specialized Distributors

Console Manufacturers

Online Platforms

Mobile- Apple or Google App stores

Publisher own brand

Console own brand


Distribution: Analysis

12

Bypassing wholesalers is common as many retailers are large enough to deal with directly.

• Wholesalers can act as the link between games developers and the retailers at the end of the value chain. They

import and export the goods as typically, manufacturing locations are in different countries.

• Wholesalers buy and store goods in large quantities and then sell smaller quantities to retailers, which in turn sell to

the general public. In this market, it is a straight forward on-selling operation, as there is little scope for value-adding

activities before the retail stage.

• A small number of specialist wholesalers, such as Click Entertainment and WholesGame, do exist and are also active

in the games software market.

• Some large-scale retailers skip this stage by establishing strong relationships with Microsoft, Nintendo, and Sony.

Retailers like Amazon, Metro AG, Tesco, and Wal-Mart are able to buy sufficient volumes to secure good prices

without the need for a wholesaler to help. This arrangement also helps the developers as they can set the prices at

which the goods are sold in to the retailer, thus avoiding unwanted discounting.

• There are online platforms which can bypass wholesale, typically carried out by the largest publishers. Electronic Arts,

Ubisoft, and Activision Blizzard all have their own store platform. Should the company be publishing a mobile game, it

will probably have to go to either Apple’s App Store, or Google, or both.


Distribution: Burning Issue

13

Large retailers driving prices down due to price sensitive consumers.

Many retailers bypass the wholesale stage, which should spell good

news for the developers. However, in many cases, the retailers are

far bigger than the wholesalers would be and this is why they bypass

the stage in the first place. No wholesaler is as large as Amazon or

Metro AG and as a result, developers are dealing directly with

retailers who enjoy a great deal of buyer power. These retailers are

under pressure from price conscious consumers to keep costs down

and often engage in price wars as a result. Consequently, they need

to ensure the best price possible and this is driving prices down.

While games software publishers are facing increasing costs, the

churn in the industry leads to rapidly decreasing prices. For games

such as the FIFA series with annual updates, developers have a year

to extract as much value before the game essentially becomes

worthless. Even a few months after release, all but the best-selling

games will see downward pressure on prices. This is also true in PC

gaming.


Retail: Overview

14

Retailers exist in a variety of forms, but the market is dominated by large-scale players.

Retail

Speciality Stores

GAME

GameStop

MediaMarkt

Online Retail

Amazon

Multichannel

Rakuten

Mass Merchandise

Chains

Carrefour

Target

Wal-Mart

Specialist platforms

Publisher in house store

Console in-house network

store

Steam


Retail: Analysis

15

Specialty and online retailers remain the dominant distribution channels.

• Specialty retailers remain a key channel, but have come under increasing threat in recent years from online players,

leading to the disappearance or near collapse of major chains.

• Supermarket chains like Tesco and Wal-Mart do not rely entirely on games and consoles sales but they do form a

valuable revenue stream as they offer the possibility of reaching large numbers of buyers. Their bargaining power also

often means they can negotiate better prices which in turn allows them to be more price competitive.

• Online specialists like Amazon are increasingly important. Video games buyers are primarily driven by price, so the e-

commerce benefits will draw increasing number of customers.

• There are also specialist online platforms dedicated to gaming, some of which are publishers forward integrating. EA’s

Origin, and Ubisoft’s Uplay are examples of this. Console manufacturers also offer online purchases, with Sony’s

PlayStation store and Microsoft’s Xbox store.

• While PC gaming remains relatively niche, Valve’s steam software acts as a wholesale and retail front. It is an effective

monopoly on the platform, able to offer low distribution costs for developers and also offer significant discounts on titles.

Any PC publisher will likely have to engage with the platform to see significant success, unless the game’s IP and

brand is powerful enough to negate the platform- such as Activision Blizzard’s Starcraft series, popular in esports.


Retail: Burning Issue

16

Online retail booming, retailers with physical stores must adapt.

e-commerce has surged in recent years, with online pureplay accounting for 28%

of the games software market in 2018. In some countries, most notably the UK,

that percentage is much higher (over 55%). Games are different to, say, clothes.

They do not need to be tried for size and so are an easy online purchase. Online

prices are often cheaper and so stores are losing out on sales. This has forced

many small, independent games consoles and software retailers out of business

and in the UK, rivalry is so intense that GAME was forced into administration in

2012, before OpCapita bought the company out of it. While the retailer is still in

operation, it is not without its issues. At the beginning of 2020 the company

announced that it would be closing 40 UK stores.

Physical store operators must adapt to this trend or risk going out of business and

one avenue they are exploring is the offering of additional services that online

players cannot offer. In the UK, GAME for example is known for its large stocks of

high-quality second hand games, while Grainger Games offers tech

support/repairs in 40 of its stores, something which it calls Smartfix. Major players

(both online and physical store operators), notably GameStop and Amazon, have

been successful at negotiating exclusive content, particularly for customers pre-

ordering titles.


Retail: Overview

17

Retailers exist in a variety of forms, but the market is dominated by large-scale players

Retail

Speciality Stores

GAME

GameStop

MediaMarkt

Online Retail

Amazon

Multichannel

Rakuten

Mass Merchandise

Chains

Carrefour

Target

Wal-Mart


Retail: Analysis

18

Specialty and online retailers remain the dominant distribution channels.

• Retailers of games consoles exist in a multitude of forms and sizes. The most obvious category is specialty retailers

and these remain a key channel. These sell games hardware and software , and often serve as a focal point for avid

gamers. They have come under increasing threat in recent years from online players, leading to the disappearance or

near collapse or major chains like GAME in the UK. Examples of specialty retailers include GAME in the UK and

GameStop, which is present in several countries.

• Supermarket chains like Tesco and Wal-Mart do not rely entirely on games consoles sales but they do form a valuable

revenue stream as they offer the possibility of reaching large numbers of buyers. Their bargaining power also often

means they can negotiate better prices than smaller players, which in turn allows them to be more price competitive in

the eyes of consumers. They therefore represent a significant part of this stage.

• Online retailers have grown in significance in recent years and they now pose a major threat to traditional brick and

mortar players. Online specialists like Amazon will go from strength to strength and put pressure on specialists

operating brick and mortar stores for the foreseeable future.

• Consoles are a specification driven product so buyers do not need to necessarily see and touch the product. They will

therefore shop based on price. As long as online players make sure that the product information displayed on their

sites is accurate and thorough, they will attract customers. Amazon sells consoles as a part of a bundle, including

games for examples. This has proven popular.


Retail: Burning Issue

19

Online retail is booming, and retailers with physical stores must adapt.

E-commerce has surged in recent years, with online pureplay accounting

for over 20.1% of the global consumer electronics market in 2019. In

some countries, most notably the UK, that percentage is much higher.

Games consoles are different to, say, clothes. They do not need to be

tried for size and so are an easy online purchase. Online prices are often

cheaper and so stores are losing out on sales. This has forced many

small, independent games consoles and software retailers out of business

and in the UK, rivalry is so intense that GAME was forced into

administration in 2012, before OpCapita bought the company out of it.

Physical store operators must adapt to this trend or risk going out of

business and one avenue they are exploring is the offering of additional

services that online players cannot offer. In the UK, GAME for example is

known for its large stocks of high-quality second hand games, while

Grainger Games offers tech support/repairs in 40 of its stores, something

which it calls Smartfix. Major players (both online and physical store

operators), notably GameStop and Amazon, have been successful at

negotiating exclusive content, particularly for customers pre-ordering titles.


End-users: Overview

20

End-users in this market are generally households or individuals.

Consumers

Individuals


End-users: Analysis

21

Consumers are end-users with little influence in the market.

• The games software market has an abundance of buyers with limited financial power. In 2019, the Entertainment

Software Association (ESA) estimated that over 164 million adults in the US play video games and three quarters of all

households have at least one gamer in the household. This shows how popular a pastime gaming has become.

• There is some composite cost in video games software, with individuals required to purchase a console, PC,

smartphone, or tablet to play the games. However, consoles increasingly operate as a hub of entertainment, accessing

streaming services such as Netflix in order to broaden appeal.

• While consoles are popular in Europe and North America, the dominant platform for Chinese gaming is PC, with

MMORPGs and mobile gaming also popular. The console ban was lifted in 2015, although the next generation of

consoles has fared tepidly so far in the Chinese market, demonstrating a preference for PC gaming that will take a long

time to overcome.

• Exclusivity deals are negotiated for only a handful of franchises, meaning consumers are also unlikely to miss out.

These are also becoming increasingly rare, as studios seek to compensate for increased production costs by spreading

the product's reach.

• Brand loyalty is relatively low within this market and although leading companies achieve a degree of brand recognition

and success through established game lines, the success of individual titles is highly dependent upon critical review.

However, some game franchises and even software studios foster a dedicated following.


End-users: Burning Issue

22

Consumers are facing increasing costs as big developers adopt the games as a service model.

Consumers are facing increasing costs as big titles come

with additional downloadable content and in-game

microtransactions. In particular, elements of freemium

gaming that were popularized in mobile gaming are coming

to AAA titles. Developers are importing lessons from

freemium games into games, with introductions of virtual

currencies and costing time in order to make them pay to

progress.

While the lesson is not wholesale transferrable, implementing virtual currencies into tried and tested gaming loops is

something the companies are exploring. Star Wars Battlefront 2 attracted ire and negative publicity due to its loot crate

system, causing the company to suspend the microtransaction system, and ultimately miss its sales targets. EA sold about

9 million copies of Battlefront 2 during the three-month period from October-December 2017, the third quarter of EA’s 2018

fiscal year, according to the Wall Street Journal. That was about 1 million fewer than the 10 million copies that EA had

expected to sell, compared to 14 million units of the original Star Wars battlefront game in fiscal 2016.


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Global Games Software Market - col.ent.sirsidynix.net.uk