GlobalVideoGameIndustry

IntroductiontotheVideoGameIndustry

• Porter’s5+1forces• Industry ValueChain(ModifiedPorter’sValueChain)

Threat ofPotentialEntrants:Low- HighCapitalrequirements- Highbarrierstoentry(Patents&Rights)- Highdifficultyofaccesstodistributionchannel

(exclusivepartnerships)- Highcostofdevelopingbrandequity- Highcompatibilityrequirement

BargainingPowerofSuppliers: Low- Productswithhighaddedvalue:Varies- EstablishedproductsonthemarketEvery supplier

wantstoproduceforbigbrands

Threat ofSubstitute:High- Smartphones andtablets(withHDMI)- Computers- Minigames/portableconsoles

BargainingPowerofBuyers:Low- Recency:deferpurchaseforincomingproduct- Frequency:onceeverymajorrelease- Monetaryvalueofproduct:high- Buyerinformation:high

Complement Goods:Low- Televisionandsoundsystems- Accessories(VRheadsets,genericcontrollers)

DegreeofExistingRivalry:High- Majorplayers:

Microsoft,Nintendo,&Sony- Competitivestrategy:dedicatedgamestothe

console

Firm- Sony- Microsoft- Nintendo- Atari

Customers- Ratingcategories(lifecycle):

Earlychildhood,Everyone,Everyone10+,Teens,Mature,&Adults

- Genre&theme:fantasy,strategic,sports,etc

Employees- Game developers(Game

engineers,graphicartists,conceptartists)

- Marketing&Sales- Consoleengineers

Stockholders- Public:anyonecanholdits

shares- Complementmechandises

Lenders- Publiccompanies: banksand

pledgers- Privatedevelopers:Venture

capitalandbanks

Rivals- Consoledevelopers- Substitute products

(minigames,computers,etc)

Suppliers- Electroniccomponents- Gamedevelopers

Government- Restrictionsonthemes

LocalCommunity- Otakus andconventions

StakeholdersoftheGlobalVideoGameIndustry

Gamedevelopers- DeveloperTools

publishers- Middlewarepublisher- VideoGame

Development

Publishers- Marketing- Packaging- PhysicalSales

Distributor- Majorretailers- Videogamestores

Infrastructure- Network:Internetbroadbandservices,andcloud-basedservices

- LocalandRegionalServicingcentres

Technology- InternalandExternalR&D

- Graphics&SoundCards,CPU,Harddisk,etc

Prim

aryactiv

ities

Supp

orta

ctivities

PlatformProvider- Consoledeveloper- Componentmanufacturer

Casestudy:Deploymenttactics

• A“generation”definedbythe‘X’-bitsystem• WhatisBit?• 2^(X)=“RAMSize”

• Impact• abletorun“bigger”games• abletorunthegamesfaster(lesserloadingtime/lag/crash)

• Highincentivedriveinnovationandtheindustry

Beginning:Atari’s“Pong”(1972)

• Atari(1972)• 1977VCSCX2600:PlayedontheTVthatisconnectedtoaAtariconsole• 1millioninrevenueinthefirstyear,and$3millby1984inUS• Problem:• notsecuredsystem–afloodofgame&consoledevelopers• Morethan60knockoffs• Tarnishthebrandandeatitsprofits• 1985- “endofvideogameindustry”

8-BitSystems:NewEntrants

• Entrantsfromjapan• 1985:Nintendo’s8-bitNintendoEntertainmentSystem(NES)• 1986:Sega’s8-bitMasterSystem

• Marketing• Atari- fewhundredthousand• NintendoandSega=$15mil

8-BitSystems:Comparison

• Nintendo:Qualitygamesandcharacters,andmoregametitles• Mostmoney

• 1millinfirstyearand19milby1990• Lowpricedconsole• Earnedfromgames

• Mostplayers• Dominated⅓ofhouseholdsinUSandJapan

• Mosthype• MTV

8-BitSystems:Problem

• RestrictivepoliciesmadeNintendoprofitable• DistributorshipwereregulatedbyNintendotopreventpriceslashing• Madegamesinhouse• Strictlicensingfor3rdpartydevelopers

1. Limitednumberoftitles:sotheyhaveincentivetomakegoodqualitygames2. Minimumcartridgespreordered3. Notallowedtoreplicategameinotherconsoles

• Alienateddistributorsanddevelopers• FederalTradeCommissionimposedsanctions

16-BitSystem:Players• 1989:Sega’s16-bitGenesis• Betterperformancethan8-bitsystem• Leverageonpopulararcadegames• Backwardcompatibility• 20gametitlesbyendof1989,130by1991• FY:600,000consolesintheUnitedStates,2millbyendof1991

• 1989fall:NES:TurboGrafx-16• 12gametitlesbyendof1989,80by1991• EnteredUSlatetoavoidcannibalising its8-bitsystem• FY:200,000consolesintheUnitedStates,1millbyendof1991

16-BitSystem:Problem• NES’sProblem:

• Reliedonexternalgamedevelopersthatfounditssystemtobeaminorimprovementfrom8-bit.Hencetheyabandonedit

• NESexitedby1991• 1991:SuperNintendoEntertainmentSystem(SNES)

• ToolatetocompetewithSega- marketleader• 80%ofvideogamemarket(8+16bitsales)

16-BitSystem:DifferentTactics• Genesis:• lessrestrictivelicensingtoluredeveloperstomakeSegagametitles• Backwardintegration:130titles

• SNES:• focusonunitsalestodrivegamesalesandsoftwaredeveloperroyalties• Nobackwardintegration:25titles

• Nintendotoolateandofferedtoolittlevaluetocompete(difference)

WhatfactorsdoyouthinkenabledSegatobreakNintendo’snearmonopolyoftheU.S.videogameconsolemarketinthelate1980s?• Nintendo’sfolly• Restrictivepoliciesdroveawaygamedevelopers• FTCsanctionwascostly• BadentrytimingwithNESandSNES

• Sega’sfocuson:• Branding• Gameexperience

32/64-BitSystem:New(butfailedplayers)

• Philips’32bitCompactDiscInteractive(CD-i)• Gameplayer,teachingtoolandmusicsystem• Toocomplexandexpensive• Didnotdisclosetechnicalspecs• lessthan2%marketshare

• TurboTechnologiesDuo• Tooexpensive

• 3DO’sInteractiveMultiplayer• Tooexpensive:highlicensingfeeforhardwareanddevelopment• Wantedtomaintainamargin• Failedtosellwell• Close in1993

• Atari:Jaguar• Technologicallyadvanced• Developersanddistributorsweren’tconfidentofit

32/64-BitSystem:MainPlayers

• 1995:Sony’sPlayStation• Marketing

• Focusbrandimageonconsumerelectronics• Leverageondistribution channels inelectronicandmedia• Toyindustry

• Exclusivegamesbybiggamedevelopers(EA)• 50titlesby1995,and800by2000• Installedbase:2.9millunits

• 1995:Sega’sSaturn• Enteredmonthslater• onlyshippedto4retailers• AggravatedBestbuy andWalmart,itslongsupporters• Difficulttoprogram• Installedbase:1.2milunits

• 1996:Nintendo64• 2titles:• Super Mariorapidly accepted

WhatstrengthsandweaknessesdidSonyhavewhenitenteredthevideogamemarketin1995?…Strength:

- Brandimage- Exclusivepartnership

Weaknessess:- Hardwareissues- FlawsofCD-itechnology

32/64-BitSystem:Conclusion

• Nooneplayermanagedtosecuremonopoly• Sonyhadthesuccessfulcombinationofaproductwithatechnologicaladvantage,strategies,andresourcesthatenabledittorapidlybuildinstalledbaseandavailabilityofcomplementarygoods,andareputationthatsignaledthemarketthatthiswasafightitcouldwin.

WhydidNintendochoosenottomakeitsearlyvideogameconsolesbackwardcompatible?Whatweretheadvantagesanddisadvantagesofthisstrategy?• Reason:• SystemArchitecture&cost• MovingfromCartridgestoCD-I

• Advantages:• Nintendoensuredqualityofgames– performanceandcompatibility

• Disadvantages:• Unabletobringoverpreviousinstalledbase

128-BitSystem- Round1:TurnoftheCentury

WhatstrengthsandweaknessesdidMicrosofthavewhenitenteredthevideogamemarketin2001?

SegaDreamcast(Sept 1999)

SonyPlayStation 2(March2000)

NintendoGameCube (Early2001)

MicrosoftXbox (Late2001)

$199 $299 $199 $299Feature:Internet AccessibilityFreewith2-yearcontactforSegaNet

Feature:Technologically AdvancedBackwardCompatible

Feature:Not backwardcompatible

Feature:FasterprocessorMorememory

Initialsales:514,000 in2weeks5millionbyOctober2000

Initial sales:100,000 hitsinaminute1millionsalesinfirstweekend

Initial sales:(Global)April toSept:510,000units

Initial sales:550,000units infirstweek

Madeaseries ofpricecutwitheachcontender

October:Entered USGamesfocusedon16-24300gametitlesbyend2001

Gamesandgameplayfocusedon8-18

- Leverageonexistingdistribution channels- $500milliononmarketinganddevelopment- Gaveout$10,000indevelopmentkits- $100-125lossperunit- 30-40%ofgamesmadeinhouse

2001:Ceasetomakeconsoles, andrefocusongamedevelopment forotherconsoles

Dec2001:2million Byend of 2001:1.3million By:end of2001:1.5million

128-BitSystem- Round2

1.InwhatwaysdidNintendo’sWiibreakwiththenormsofcompetition inthevideogameindustry?Howdefensiblewasitsposition?

2.Comparing thedeploymentstrategiesusedbythefirms ineachofthegenerations, canyouidentifyanytiming, licensing,pricing, marketing, ordistribution strategiesthatappeartohaveinfluenced firms’ successandfailureinthevideogameindustry?

MicrosoftXbox360 (Late2005)

SonyPlayStation3(November2006)

NintendoWii(Late2007)

Basic: $299;Premium:$399 20GB:$499 ; 60GB:$599 $250

Feature:3 powerPCprocessoronasinglechipCustomgraphicsprocessorfromATIHDgraphicsBackwardcompatible

Feature:IBMcellprocessorBlu-raydiscplayer

Feature:Wirelessmotion-sensing remote

Initial sales:100,000 hitsinaminute1millionsalesinfirstweekend

Initial sales:Sold outwithinminutesoflaunch

Initial sales:550,000units infirstweek

Multi-functionality:Onlinestore:music,movie,TVHD-DVD driveSlashedpriceinfallof2008to$199

Lost$200perunitNotbackwardcompatibleforallgames

- LowcostconsoleoffsetbylowcosttodevelopWiigames($5mill)

- Unexpectedattractionbyallages- Made$50fromeachunit- Selling twiceasfastasXbox360- Sold fourtimesasfastasPS3

Dec2005:600,000unitsEarly2006:3.2milliongloballyBy:end of2010:45millionsoldworldwide

2007:$3.5millionBy:end of2010:42million soldworldwide

By:end of2010:75millionsoldworldwide

128-BitSystem- Round2

• In2010,SonyandMicrosoftlaunchedtheirownmotionbasedcontrollers,whichweresoldasadd-ons(at$150).

DiscussionQuestions

• WhatfactorsdoyouthinkenabledSegatobreakNintendo’snearmonopolyoftheU.S.videogameconsolemarketinthelate1980s?• WhydidNintendochoosenottomakeitsearlyvideogameconsolesbackwardcompatible?Whatweretheadvantagesanddisadvantagesofthisstrategy?• WhatstrengthsandweaknessesdidSonyhavewhenitenteredthevideogamemarketin1995?WhatstrengthsandweaknessesdidMicrosofthavewhenitenteredthevideogamemarketin2001?• InwhatwaysdidNintendo’sWiibreakwiththenormsofcompetitioninthevideogameindustry?Howdefensiblewasitsposition?• Comparingthedeploymentstrategiesusedbythefirmsineachofthegenerations,canyouidentifyanytiming,licensing,pricing,marketing,ordistributionstrategiesthatappeartohaveinfluencedfirms’successandfailureinthevideogameindustry?

WorksCited• CaseStudy

• Schilling,MelissaA.2012. StrategicManagementofTechnologicalInnovation.FourthEdition.McGraw-Hill Irwin.• ValueChain

• http://www.galanoe.eu/repository/Documents/GALA_DEL_4.1_WP4_Market_And_Value_Chain_Analysis.pdf

• Porter’s5forces• https://www.mindmeister.com/291731392/porter-5-forces-analysis-video-game-sector

• Stakeholders• https://www.esrb.org/ratings/ratings_guide.aspx

• AtariKnockoff games• http://www.techeblog.com/index.php/tech-gadget/top-20-funniest-video-game-console-knockoffs

• SegavsNintendovideo• http://www.bbc.com/news/technology-27373587

• Salesstatistics• http://vgsales.wikia.com/wiki/Nintendo_GameCube• http://vgsales.wikia.com/wiki/Xbox• http://www.theesa.com/wp-content/uploads/2015/04/ESA-Essential-Facts-2015.pdf