1. 1
The global video game industry is
expected to grow from $67 billion in
2012 to $82 billion by 2017. This was
the result of the data compiled in a
series of reports published in 2012
by DFC Intelligence. According to this
report, video games have a bright
future in front of them. However,
the end of 2012 was marked by the
bankruptcy of THQ, one of the large
historical publishers of the industry.
If this sector growing so rapidly, why
was one of the main actors of the
industry driven out of business?
C. Magarshack
Games are growing, but not in a way that
can benefit a large publishing company. The
observation this article is based on is that
video games are being disrupted, which is
causing a lot of confusion among incumbent
firms such as THQ. Disruptive innovation
was theorized by Harvard professor of
business administration Clayton M.
Christensen in his book The Innovator’s
Dilemma, first published in 1997. In his
theory, market disruptions are caused by
disruptive technologies. These technologies
are cheaper and have lower performance
than existing technologies. They are
typically simpler and more convenient than
their older counterparts. As their
performance improves it eventually meets
the needs of the mass market and threatens
to topple the leading companies.
This article draws a parallel between this
theory and what is currently happening to
the gaming industry. Post-PC era devices
such as tablets and smart phones are
becoming increasingly popular as gaming
platforms, at the expense of PCs and
consoles. These technologies fit
Christensen’s description of disruptive
technologies very well; they have lower
performances than existing gaming devices,
they are simpler and more convenient. It can
be said that they are both literally and
figuratively a ‘game changer’.
Disruptive technologies are typically the
cause of market disruption. Clayton
Christensen was the first to theorize this,
however many authors have contributed to
his work since, adding valuable insight. As
we’ll show, the theory of disruption applies
to the gaming industry in several ways. This
phenomenon also causes a lot of confusion
in companies, often leading to the failure of
incumbent firms. There are many examples
in the past of large companies either losing
their leadership or facing bankruptcy
because of disruptive technologies, the most
famous one being Kodak. We’ll attempt to
make educated assumptions about the
consequences of this disruption in the video
game industry, and to propose a few
guidelines for managers to follow in this
situation.
THE THEORY OF DISRUPTION
In his book The Innovator’s Dilemma,
Christensen argues that disruptive
innovation typically starts as cheaper and
lower performance technologies. As their
performance increases and begins to meet
the needs of the mainstream market, it may
drive the incumbent firm out of business. 1
Gordon Wyner (2010), a member of the
American Marketing Association, explains it
this way:
“The most prominent theory, “disruptive
technology” posits that disruption occurs
when a technology that is superior on a new
dimension that appeals to a niche (e.g.,
computing power to sophisticated users), but

2. 2
inferior on a dimension that appeals to the
mass market (e.g., user-friendliness for the
typical user), improves on the latter
dimension to meet the needs of the mass
market.” 2
Christensen (1997) suggests that incumbent
firms fail because they listen to the needs of
their current users and shareholders, when
the disruption is coming from elsewhere.
Indeed, according to his work, “the
processes (budgeting) and values (financial
performances) that incumbent firms have in
place tend to be biased toward sustaining
innovations”. He highlights that since
incumbent firms do not need something as
extreme as disruption to succeed, their
processes drive them
toward continuity (after
all, their business model
has proven to be
successful, why change
it?). Unfortunately, this
model of analysis, based
on what has worked so
far, is rendered inefficient
when facing disruption,
which is different from
the past. Christensen
argues that this is one of
the main reasons for incumbent failure
because of market disruption.
Other authors provide insight relevant to this
topic; for Daneel (2004), “a disruptive
technology is a technology that changes the
bases of competition by changing the
performance metrics along which firms
compete.” 3
For example, the main selling
point of Nokia phones used to be battery
longevity. Apple changed that with the first
iPhone, making parameters such as UI and
connectivity more important.
Wyner’s remarks (2010) are also important
to keep in mind. According to him, most
disruptions come from dominant firms with
a leading position on a market; very rarely
does it come from small new entrants, as
Christensen argues. 2
Often, disrupted
technology does not disappear but finds a
niche market.
HOW DISRUPTION APPLIES TO
GAMING
What is happening in the video game
industry right now blends all that was
described earlier. The disruption is mostly
coming from big, established companies
(Apple with the success of its tablets and
phones, Google with Android, Nintendo) as
Wyner (2010) describes. These companies
have created opportunities for a plethora of
tiny companies thanks to their respective
app stores, who are
accentuating this
disruption. This view fits
Christensen’s theory
(1997). The current state
of gaming points to his
theory of disruptive
innovation in several
ways. For instance, lower
performance devices
(smart phones, tablets) are
threatening to topple the
traditionally high-
performance PC/console business. Another
example is the Nintendo Wii; a lower cost
product, it performed worse than the
existing hardware and effectively disrupted
the market, enabling new trends to pick up
(motion detection, gaming with family, etc.)
It can also be argued that the PC is very
unlikely to disappear, but likely to become
instead a niche market, as Christensen noted.
Daneel’s view that a disruptive technology
changes the metrics along which firms
compete is also verified in the video game
industry. For decades, a competitive
hardware was a hardware that delivered high
performance. Firms such as Nintendo or
Apple have changed this, making metrics
Christensen (1997) suggests
that incumbent firms fail
because they listen to the
needs of their current users
and shareholders, when the
disruption is coming from
elsewhere.

3. 3
such as accessibility, a sleek UI and mobility
just as important, if not more.
THE DECLINE OF TRADITIONAL
CONSOLES?
Kevin Chou is the CEO of Kabam, an
interactive entertainment company that
develops and publishes massively
multiplayer social games. He is the author of
a guest post for Forbes, which was published
by Eric Savitz in 2012. He believes that the
traditional console business is “on the eve of
decline. [...] ” Chou predicts that the sales of
the eighth generation of consoles (PS4,
Xbox One and Wii U)
will be 32% lower than
the seventh generation
(PS3, Xbox360 and Wii).
He also predicts that “of
the three console makers
(Microsoft, Nintendo and
Sony), only two will
survive this console
generation and still they
will be forced to make a
strategic shift away from
gaming to become an
entertainment hub in the
home.” 4
He may be onto
something here; indeed
since he wrote the article, Nintendo’s Wii U
was released in November 2012. As the first
console of the new generation to be released,
the Wii U is a very interesting case. It
illustrates the changes that have taken place
in the industry since the release of the
previous generation, in 2005. In 2012, Jamin
Warren was writing in Fast Company that it
would “shed light on whether traditional
consoles have a future in an era of
multifunction devices.”5
Although the Wii U sold about 3 million
units worldwide by the end of December
2012, a very decent launch, sales have
plummeted since. According to NPD data,
the Wii U sold just 57,000 units in January
2013, and 64,000 in February. IGN points
out that “this is worse than any recorded
week for the current generation consoles.” 6
The main cause cited for the poor sales is
the near-total absence of new releases for
the Wii U in these months. The ever-
shrinking retail market is also to blame, with
US sales of video-game hardware and
software (console, handheld and PC) for
February 2013 down 36% and 27%
respectively from what they were in
February 2012. 7
It is worth pointing out
however, that the NPD study this data comes
from does not count
digital sales, DLC or in-
game purchases. These
figures raise the question
of the future of gaming-
dedicated devices such as
traditional consoles.
Before the release of the
Wii U, Nintendo of
America president Reggie
Fils-Aimé stated that “to
buy a console, consumers
need a very clear,
understandable and
persuasive reason. We
believe it’s games.” 5
According to him, “what
gamers desire is games, and games alone.”
In the light of this comment, it is interesting
to note that the present state of Wii U sales
is partly due to a lack of games for the
machine.
6
http://www.ign.com/articles/2013/03/15/2013-
wii-u-sales-look-dismal (3/26/2013)
7
http://www.gamasutra.com/view/news/188567/
Wii_U_still_struggles_in_February_sales_charts
.php (3/26/2013)
“What travel agents learned
from Expedia, Borders
learned from Amazon, Tower
Records learned from Apple
iTunes and Blockbuster
learned from Netflix, the
traditional game makers are
about to learn from free-to-
play online video game
companies: their business is
about to fall off a cliff.”

4. 4
Sony and Microsoft aren’t as definite, as is
illustrated by the acquisition by Sony of the
cloud-based company Gaikai to expand their
online social games. Microsoft is also
pushing the use of apps by Xbox Live Gold
members, with success (an average of 84
hours per month of usage of apps in 2011,
and still growing). 5
AN EXAMPLE OF DISRUPTION: THE
OUYA
“The entertainment-device-that-plays-
games”, the idea mentioned by Kevin Chou,
“also underpins the $99 Ouya. The so-called
console killer is taking as much from the
entertainment space as it is gaming, with
apps for Vevo, iHeartradio and TuneIn.
Ouya is hardly a sure thing.” The company
Ouya Inc. was founded in 2012. The
console’s March 2013 release was delayed
until June 2013, “and the existing Android
library of games is underwhelming. But the
approach points to what consoles are rapidly
becoming: all-purpose living-room devices.”
5
Many actors of the industry share this
view. Alex Seropian, a co-founder of
Bungie, the studio that created the Xbox
mega-franchise Halo, recently founded
Industrial Toys, a mobile games company.
He admitted that “The $60 console game is
going to disappear.” It has recently reached
a point where the investment to develop,
market and sell AAA titles has become too
risky. With development costs of several
tens of millions of dollars, publishers stick
to pleasing the mass market and are
reluctant to risk launching new franchises.
This business model is likely to be replaced
by an ecosystem teeming with games of all
sizes, scopes and prices, mostly available
outside of the confines of a console. 5
The Ouya is a good example of a disruptive
technology. It is significantly smaller, less
powerful and simpler than other consoles.
Its goal is no less than to disrupt the console
paradigm.
In October 2012, PC Magazine writer
Angela Moscaritolo interviewed gaming
industry veteran Julie Uhrman, the creator of
the Ouya project. She claimed that Ouya is
indeed “an audacious plan to disrupt the
console industry”. When Angela
Moscaritolo asked her how she realized that
this idea resonated with people, Uhrman
answered “we took the idea to developers
and received overwhelmingly positive
response. When we took the idea to
Kickstarter, we were overwhelmed by the
level of support.” 8
The Ouya project raised
$8 million in eight hours on Kickstarter,
becoming the website’s second highest-
earning project in its history.9
Such levels of
support both from professionals and
consumers seem to indicate that the market
is eager for something new.
58,000 consoles were ordered through
Kickstarter, but Ouya Inc. hasn’t released
the number of units sold in retail. Sales
figures for the games are available however,
and one month after release they are
underwhelming. The Ouya’s best selling
app, TowerFall, has sold 2,000 copies at $15
each (not counting the free demo). Although
it’s a very decent achievement for a one-
man team, 2,000 copies would be considered
a monumental failure on a mainstream
console.10
So far the Ouya seems to be
somewhat ahead of its time; the release of
devices such as Nvidia’s Shield will shed
more light on the potential of Android
consoles.
9
http://en.wikipedia.org/wiki/Ouya (4/4/2013)
10
http://www.extremetech.com/gaming/162077-
ouya-game-sales-figures-released-it-doesnt-
look-good-for-android-console-gaming
(8/7/2013)

5. 5
The theory of disruption is relevant to the
current state of the video game industry.
Time has also showed how much confusion
disruptive technologies can bring to a
market. By interviewing professionals from
this industry, we’ve attempted to give an
accurate overview of the consequences of
this disruption. Six major trends have been
isolated and developed.
YES, VIDEO GAMES ARE BEING
DISRUPTED
All interviewees agreed that gaming is being
disrupted today, on an unprecedented scale.
Either this disruption has already happened,
or is in the process of
happening. They also
pointed out several things
about this disruption.
These elements are all
inter-related and disrupted
simultaneously, which is
causing a lot of confusion.
Today, most big
companies are struggling,
particularly the ones on
the hardware side: the
console makers. These
firms are likely to be
forced into a niche.
Mobile is now so important that some
interviewees believe that every company in
the video game industry needs to have a
mobile strategy, even though it is not their
main focus. What is so disruptive about
mobile is its accessibility, and the staggering
volumes involved; billions of games for
mobile, of games downloaded by users and a
market of a billion devices. Another
disruptive element is the growth of online
content. In 2011, one third of the industry’s
revenue came from digital purchases (apps,
in-app purchases, downloadable games,
downloadable content, etc). This proportion
is very likely to grow for 2012 and 2013.
Consumers expect more and more mobile
play, which is happening on post-PC
devices.
MOBILE GAMING
The interviewees regularly mentioned two
reasons why mobile is so important. The
first one is the audience. Indeed, companies
focus on mobile today because the audience
is there. Mobile is where consumer’s time is
being spent, and inevitably, content goes
where the audience is. The sales of mobile
devices are growing faster than PC and
console sales, with already 19.5 million
iPads sold in Q1 2013. Today, mobile fits
people’s lifestyle in a way
PCs and consoles cannot
achieve. It makes gaming
accessible to an enormous
demographic of people
who previously didn’t
have time to sit down and
play for an hour or two, or
for whom a sixteen-button
controller is too
complicated. One
example is middle-age
females, who are now one
of the biggest
demographics of gamers.
Games are mostly played in ten to fifteen-
minute sessions, or even less, when
consumers have time to kill during their day.
The other reason why so many companies
are attracted to mobile is the small barrier to
entry, and the opportunity to be extremely
successful with a very simple game. Thanks
to the app stores, businesses have the ability
to bring a very large crowd to their game on
a smaller budget than with a physical
product. The famous success-stories of a
few companies such as Rovio, HalfBrick or
Supercell have made mobile seem very
attractive for many young start-ups, who are
eager to try their luck. An advantage of
This disruption has changed
what is means to be a
consumer of games today. It
is happening on five different
levels: the devices, the
business models, the
distribution channels, the way
games are marketed and the
audience.

6. 6
mobile is also simplicity. Mobile games are
often very simple, and require smaller teams
and a smaller budget. Despite this, these
games still have the opportunity to make a
lot of money on the app stores. Today, if an
individual wants to make a game and make a
profit, he or she can, which is unprecedented
in gaming.
Smart phones and tablets also greatly
increase the speed to the play experience.
On a PC, there is a lag of about ten minutes
between the intention to play, and the actual
play (a little bit less on console). In addition,
the player has to be at home. Phones and
tablets however are instantly on, and can be
used anywhere for many things besides
gaming. They have become the preferred
devices for browsing the Internet. Today,
many office tasks are
executed online, such as
sending emails. Post-PC
devices are more
convenient for such tasks,
which is one of the
reasons why they are also
disrupting the PC.
HIGH BUDGET HIGH
QUALITY GAMES
ARE BEING PUSHED INTO A NICHE
There is still a strong demand for high
quality and immersive experiences and it is
unlikely to disappear. However, this market
will certainly become a niche compared to
the mass market mobile and casual is
turning into. There will be fewer high
quality games, and we will see less and less
innovation coming from this segment. These
games will continue with tried and proven
brands and genres as they change their
business model. Indeed, with the rise of
free-to-play, fewer consumers are ready to
pay $60 upfront for a game. High quality
games will probably have to abandon the
physical distribution channel and go digital,
scalable and free-to-play. In other words, the
triple A quality will always be consumed,
but the way it is delivered to the players will
be different. As technology improves,
mobile may eventually be able to deliver
these immersive experience. It is likely that
tablets will become one of the preferred
devices for hardcore games. The devices
these games are played on will change along
with their business model, but the games
themselves will stay.
NEW KEY PERFORMANCE
INDICATORS
The KPIs depend on the company and the
type of business model. However, all the
interviewees agreed that they have greatly
changed from 2005, and
are more complex today.
In 2005, selling a video
game was very similar to
selling a movie. The
commercial success of a
game depended heavily
on first-day sales.
Companies looked at pre-
marketing budget against
the release day, predicted
revenue for that day, predicted revenue
when they did cost-reduction three to six
months after the release. These indicators
are relevant for the companies still in the
physical product market. However, this
market is becoming less attractive as
consumers turn their attention to more
convenient ways to purchase games, such as
digital and free-to-play. As more and more
games are distributed online only, the KPIs
become very similar to the ones used by
online games. Furthermore, businesses are
now able to measure their KPIs in real time.
Today, important indicators are total daily
active users, conversion rate, retention rate,
engagement, sentiment, virality, etc. One of
the most common formats for games has
Today, important indicators
are total daily active users,
conversion rate, retention
rate, engagement, sentiment,
virality

7. 7
become apps. These indicators allow
companies to monitor their user base and the
number of people who downloaded their
apps. Businesses look at, out of the number
of downloads, how many people open the
app once a day or once a month, how many
people make an in-app purchase, how many
people uninstall the app, how many people
talk about it on social networks and what
they say about it. The online format also
makes it easy for companies to frequently
update their game with additional content to
maintain interest. Because an online game
has the potential to stay relevant for several
years, it is also very important for
companies to have a long-term growth
strategy around their game.
THE RISE OF THE FREE-TO-PLAY
MODEL
Freemiums are the most common type of
free-to-play games. These video games are
monetized by selling in-games items for
incremental amounts of money, such as
clothes and accessories for the player’s
avatar. Examples of popular freemium
games are World of Tanks, League of
Legends or Clash of Clans. Freemium is
rapidly becoming the most popular business
model in the video game industry.
Most users spend nothing or very little, and
a very small number spends a lot. The
conversion rate is usually very small, but
surprisingly constant. Most paying users
appear to purchase items not because they
are inexpensive, but because they are
valuable to them. The revenue incurred by
freemiums varies greatly from one game to
the other but overall, it seems to be fairly
reliable. However, implementing an item
shop is a science. The dilemma here is how
to optimize the game and the in-game store
to capture both paying and non-paying
users. Indeed, the main challenge for
freemiums is that they rely on a very small
percentage of their user base to monetize
their product. It exposes the company if for
some reason they lose this user base.
Nevertheless, a freemium game is usually
very successful at obtaining new audiences,
as there is no upfront payment required to
play it.
The retail business model is based on market
research, gut feeling and the attempt to
measure the expectations of the target
audience. Freemiums are a lot more flexible
because they can be adjusted over time. A
freemium game is a live operation model
that allows developers to do sales and events
and to juice revenue in real time. The most
successful freemium games today appear to
be MMORPGs (Massively Multiplayer
Online Role Playing Game). Existing,
popular MMOs are changing their business
model from subscription to freemium. The
most famous example is World of Warcraft,
which went partially free-to-play in 2011.
An interviewee raised an interesting point
about freemiums. These games are
exclusively online. All the money raised
goes to the creator, as there are almost no
intermediaries. In the case of a boxed game,
there are many intermediaries between the
developer and the end user. As a result, the
creator only acquires a small percentage of
the sales price. Out of $60, about $10 goes
to the developer assuming the game is
commercially successful. This is another
reason why freemiums are booming today. It
is probably justified however to wonder if
freemiums will turn out to be a bubble, like
Facebook games were.
THE MOVE OF CONTENT TO THE
CLOUD
Another important trend is the shift to the
cloud; the quantity of online-only content is
increasing at the expense of boxed content.
More and more processing tasks are being
executed server-side, slowly reducing the

8. 8
strain on the user’s device. Cross-platform
will also become better defined and more
significant. Gaming experiences and online
worlds will become accessible from a large
range of devices (console, PC and mobile
devices). Everything will be more linked
and move towards ubiquitous gaming.
The idea of ubiquity was mentioned several
times during the interviews. The current
evolution towards ubiquitous platforms and
ubiquitous gaming has led to an explosion of
possibilities. More experimentation and
innovation is taking place in video games
than ever, and as technology improves, the
pace of change is certainly going to
accelerate.
Most of this innovation is happening in free-
to-play games, as it is the most flexible
business model. The quantity of free-to-play
games will keep going up. Many of them
will fail and natural
selection will happen. The
market will mature and
segment, and games will
have to become very
targeted to succeed.
Video games are now incredibly mobile and
interconnected. This trend is going to be
reinforced as the price of smart phones and
tablets drops and more consumers have
access to them, particularly in developing
countries.
Thanks to their new mobility, video games
now capture a time they did not previously
have access to: the in-between time when
consumers are on the go and have five to
fifteen minutes to kill. Games can be
consumed as small, bite-size chunks of
entertainment, which makes them accessible
to a large audience of consumers who before
did not consider themselves gamers. Post-
PC devices have changed what it means to
be a consumer of games.
Despite the continuing rise of what is called
‘casual gaming’, high budget high quality
games are not dead. Although the current
audience on PC and console is staying, it
will become a niche compared to the mass-
market casual is becoming. The free-to-play
model is flexible and friendly to developers,
so the quantity of free-to-play content is
likely to keep rising. As a result, the number
of gamers ready to pay $60 upfront for a
game is falling. It is very likely that high-
budget high-quality content will have to find
a way to fit free-to-play to stay relevant to a
wider audience. Moreover, as the specs of
mobile devices and tablets in particular
increase, more high-quality games will
move to this platform. As for PCs and
consoles, it is likely they will be driven into
a niche. With the Xbox One, Microsoft is
already moving away from console as a
gaming-dedicated device, and towards
console as the go-to entertainment hub of
the house.
IF WE’RE A GAMING
COMPANY, WHAT
SHOULD WE DO?
Interviewees had different
advice depending on the type of company. A
big publisher should not try to be everything
to everyone. It needs to evaluate what games
are the best return on investment and start
killing the rest to reduce costs. In order to
survive in the video game industry today,
publishers absolutely need to refocus their
resources and be willing to ‘eat their
children’. Funds should also be invested in
small studios, as this is where innovation
now comes from. Publishers need to start
acquiring talents before these people start
making money on their own. Furthermore,
they should withdraw from the traditional
games business model unless they have
profitable franchises that justify this
investment.
The main advice for small companies was to
simply be lucky. Try new things, even
High quality will always be
consumed; what is changing is
how it is consumed.

9. 9
things that have been tried and failed before,
and be willing to fail many times. They
should consider every opportunity, and not
be afraid of being a second or third mover.
Furthermore, resources should be allocated
to building scalability into their products and
toolset, and investing in core competencies
like user acquisition and live operations
management. Small start-ups need to stay
focused on their metrics and to know how
their users are playing their games. They
shouldn’t get too attached to their game
because it has a good chance to fail and they
might have to move on quickly to minimize
losses.
An interviewee answered this question from
an investor point of view. Investors should
place many small bets on many different
teams. The bets should be made
internationally, as there are pockets of
creativity everywhere throughout the world,
on both creative teams and developers who
create analytics. Analytics development is
another form of game development.
Developers put something out, see how the
audience responds and make adjustments.
The discoverability problem was mentioned
several times. Because it has become so easy
to make games available to the public, the
quantity of games out there has exploded.
Most video games today are mobile apps,
which are mainly sold through two channels:
Apple and Google’s app stores. However,
the layout of app stores makes it difficult for
developers to make their game stand out
against the crowd, and for users to discover
games they might like. Companies are
desperate for a solution and whoever finds it
stands to make a lot of money.
With the current rate of innovation, every
company should take the time to consider
carefully every new technology that comes
before them, and make the effort of being
well informed. Study the changes in
consumers’ lifestyle and acknowledge them.
Every company needs to know its audience
and stay true to them. At the end, it’s about
the gamer, as it’s always been.
1
Christensen Clayton M. (2003), The
Innovator’s Dilemma, Harper Paperbacks,
286p.
2
Wyner Gordon, Innovation and Growth,
Marketing Management, issue of fall 2010,
p46-49.
3
Daneels E. (2004), Disruptive Technology
Reconsidered, Journal of Product Innovation
Management 21, p246-258.
4
Savitz E. and Chou K. (2012), Mobile
Gizmos Hastening The Demise Of Video
Game Consoles, Forbes.com, p35-35.
5
Warren J. (2012), Not Your Childhood’s
Video-Game System, Fast Company, issue
170, p70-72.
8
Moscaritolo A. (2012), Ouya Wants to
Shake Up Gaming, PC Magazine, p27-23.