Growth Strategy in the Gaming Market
Eric Younkin
Presented to Microsoft Corporation by
Overview of the Gaming Market
•$30.9 Billion dollars in 2005
•$48.3 Billion dollars by 2010
•Industry includes:
• Console hardware and software
• Handheld hardware and software
• Broadband (internet)
• Interactive TV (TiVo, DirecTV)
• Mobile (cell phones)
Global Video Game MarketBy sector, in years 2000, 2003 and 2005, with projections of 2010. ($ in Millions)
2010
$5,771 $17,164
2005$3,894 $13,055
2003$6,047 $16,449
2000$4,791 $9,451
Global Game Market CategoryConsole Hardware Console Software
Global Video Game MarketBy sector, in years 2000, 2003 and 2005, with projections of 2010. ($ in Millions)
2010
$1,715 $3,113
2005$3,855 $4,829
2003$1,501 $2,238
2000$1,945 $2,872
Global Game Market CategoryHandheld Hardware Handheld Software
Global Video Game MarketBy sector, in years 2000, 2003 and 2005, with projections of 2010. ($ in Millions)
2010
$6,352 $3,037 $11,186
2005$1,944 $786 $2,572
2003$497 $249 $587
2000$70 $81 $65
Global Game Market CategoryBroadband Interactive TV Mobile
Mobile Gaming Overview
•Limited growth in Console hardware and software
•Stagnant growth in Traditional Handheld Gaming
•Strong growth in Broadband
•Decent growth in Interactive TV
•Strong growth in Mobile Gaming
Current Strategy
•Focused differentiation
•Found niche in crowded market with the XBOX
•Spent $8.2 billion dollars in R&D last year in Entertainment
and Devices division
•Devoted to 15%+ increase in R&D for 30 years
•Stay razor sharp through acquisitions of companies on the
edge of technological breakthroughs
•Compete in the global market with nearly all product lines
Microsoft Strengths
•Financial Position – Cash heavy, little debt
•Volume buyer power over suppliers
•Brand Strength – Market leader
•Socially responsible
•Advertising – Popular campaigns
•In House Game Studio
•Partnerships with leading software developers
•Heavy investments in R&D
Microsoft Strengths
•Partnership with LG cell phones
•User experience with your products
•Global Business presence
•Experienced workforce and managers
• Bill Gates respected chairman
• Steve Ballmer respected CEO
•First mover advantage with the 360
•Online game presence in XBOX Live
Microsoft Weaknesses
•XBOX lacks BluRay player
•Inferior graphics to the Playstation 3
•Little online sales presence
•Buyer confusion with Arcade, Pro and Elite XBOX’s
•No presence in the mobile gaming market
•Market leader – nobody to follow, everybody taking
aim at you.
Microsoft Opportunities
•Mobile Gaming Market
• Cell phone gaming market
•Online sales presence
•Surpass Sony’s technological advantage
•Bring Online gaming strength to the mobile market
•Leverage strong customer base to new product
Microsoft Threats•Shrinking Gaming Console market
•Adverse shifts in exchange rates and trade policies
globally
•Vulnerable to economic downturn more than competitors
•Fierce and constantly advancing competition
•New and cheaper rivals in the industry
Supplier Power -Outsourced Components-Small number of major suppliers-Suppliers prefer steady purchase stream
Threat of Substitutes
-Three major Competitors-Technology is shrinking-Newer, more powerful Smart Phones
Barriers to Entry
-Rivalry is already fierce-Extremely high R & D costs-Proprietary technology and patents-Products must have strong third party software offering
Buyer Power
-Retailers have very little power-Demand is very high-End User has most of the power
Rivalry-3 Major competitors
-High barriers of entry-Medium Supplier Power
-High Buyer Power-Low switching costs
-Overall, high level of rivalry
Porter’s 5 Forces
Key Success Factors•Constant product refresh cycle
• Nintendo decline at the hands of a Sony Playstation
•Differentiation from competition
• XBOX 360 vs. Wii vs. Playstation 3
•Quality of game selection
• Exclusive titles such as Halo, Gran Turismo, Mario
Financial Analysis
Microsoft 29.26%
Nintendo 15.38%
Sony 2.96%
Industry 3.79%
S&P 500 10.46%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
Net Profit Margin
Financial Analysis
Microsoft 80.80%
Nintendo 41.80%
Sony 21.12%
Industry 17.06%
S&P 500 40.30%
0.00%
10.00%
20.00%
30.00%
40.00%
50.00%
60.00%
70.00%
80.00%
90.00%
Gross Profit Margin
Financial Analysis
Microsoft 36.71%
Nintendo 28.49%
Sony 4.07% Industry 5.31%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
Operating Profit Margin
Financial Analysis
Microsoft 24.29%
Nintendo 14.27%
Sony 2.09%
Industry 3.38%
S&P 500 5.81%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Return on Assets
Financial Analysis
Microsoft 48.73%
Nintendo 20.92%
Sony 7.59%
Industry 6.46%
S&P 500 20.51%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
45.00%
50.00%
Return on Equity
Financial Analysis•Earnings per share
• $1.42 in 2007
• $1.87 in 2008
•Total Assets - $72,793,000
•Total Debt - $36,507,000
•Cash - $23,662,000
•Times-interest-earned: 13.93 times
•No long term debt or interest
Financial AnalysisStock Price
Global Video Game MarketOverview of Mobile Video Game units sold by competition
Nintendo Game Boy Advance
• June, 2001• 75.8 million
units sold• ASP - $100
dollars• Total
Revenue – $7.58 billion dollars
Nintendo DS / DS Lite
• November, 2004
• 21.3 million units sold
• ASP - $199 dollars
• Total Revenue – $4.24 billion dollars
Sony Playstation Portable
• March, 2005• 20 million
units sold• ASP - $249
dollars• Total Revenue
- $4.98 billion dollars
Apple iPhone and iPod Touch
• June, 2007• 30 million
units sold• ASP - $249
dollars• Total
Revenue -$7.47 billion dollars
A New Strategy
•Rapid growth from Sony PSP and Apple iPhone / iPod
•$11.8 billion dollar expected Mobile gaming market by 2010
•No current offering in the Mobile gaming sector to meet
these needs
•XBOX 360 dominated with first mover advantage
•XBOX 360 sustained dominance with a focused
differentiated strategy – “The Gamer’s Game System”
Microsoft Mobile Gaming Unit•Introduce a small, ultra portable gaming unit
• Cell phone capabilities
• Advanced Graphics (Atom processor, OLED screen)
• Extension of XBOX games (think Halo Mobile)
• XBOX Live compatibility – internet game play
• Email and Internet functionality
• Zune Marketplace access for photos, music and video
• Sync with Windows for access to home media
• Netflix streaming as in XBOX
• Leverage Game Studio for wide game selection
Necessary Changes
•Leverage highly skilled workers from across the globe
and assign them to new launch
•Develop deadlines for new project and assign bonuses
to those who meet the deadline
•Management oversee goals and milestones
Necessary Changes
•Frequently manage teams for progress and
performance
•Update eCommerce website to support added sales of
MGU’s by web savvy buyers
•Modest reduction in cost of Revenue
• Reduce by 15% over 2008
Financial Implications of Strategy
•Invest additional 5%+ in Entertainment and Devices
Division Research and Development costs
• $67.2 million dollar increase
•Plan for 5-8% added expenditure for Marketing promotions
• $58.1 - 93 million dollar increase
•Large capital investment for initial product launch
•Warranty costs will be high initially to avoid poor quality
reputation
Marketing Implications of Strategy
•Inevitable expenditure on Marketing campaign
• Leverage entire Entertainment Marketing Group
• Pre-release “teaser” promotions
• Possible promotion for free XBOX gear sponsored
on XBOX Live
• Diversify MGU from Nintendo DS and Apple iPhone
• Must reach and leverage XBOX Live community!
Human Resources Implications of Strategy
•Developing new compensations systems
•Develop job description for any new MGU specific jobs
•Recruit, select, train and compensate new personnel
•Retain current employees
•Succession planning
IT Implications of Strategy
•Update enterprise resource planning systems
•Update website for new product sales
•Train users on new programs needed due to MGU launch
•Fixing any problems due to new program installations
Production Implications of Strategy
•Arrange and schedule production of MGU
•Ensure MGU is produced efficiently and with the utmost
quality
•Determine locations for the production of the MGU
•Verify that capacity supports mass production of device
Measurable Milestones
•Competitor Mobile sales at the end of 2008:
• Nintendo DS – 21.3 million after 3 years
• Sony PSP – 20 million after 2 years
•Based on these numbers and our first mover advantage:
• We expect 5 million unit sales in year one
• Increasing to 15 million by end of year three
• Surpassing 30+ million by the end of year five
Measurable Milestones
•Payback Period:
• End of year three, or 15 million units sold
• Break even point:
• End of year five, or 30 million units sold
•Increase market share to 38% in total gaming market
•1% initial year sales to have warranty costs
•Reduced to .5% by year three and beyond
Discussion?