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Industry Analysis

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Peter Zhang
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of 1 45 !       The Video Game Console Industry in the US ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! January 13, 2014 Peter (Yi Nan) Zhang !
of 2 45 Executive Summary ! The video game industry is projected to become the leading entertainment segment, and it has generated $38 billion in 2013 worldwide, more than the revenues of the movie and music industry combined. Video game consoles have a household penetration rate of 42% in the US, indicating a wide recognition and acceptance by consumers. Moreover, the U.S. consumers are spending more income on video games and consoles, from $4 billion in 1990 to $16 billion in 2012. ! The video game market is segmented into: consoles, physical games and software, online games and software, and accessories. Physical games and software lead the market with 41% market share ($16 billion), and consoles represent 33% of the industry revenue, generating $13 billion. In this industry analysis, the game console segment will be the main focus, while the entire video game industry is discussed to provide background knowledge in order to understand the nuance in the game console industry. ! Barriers of entry for the game console industry are high due to intensive initial capital investment and the need for technical expertise, and only three companies occupy the entire console market. Supplier power is high since there are only few manufacturers for the tech-intensive chips required to build consoles. These components directly affect the graphic capability of the console, which is a major selling point of a console. ! The video game retailers represent 90% of the purchasing activity of video game consoles, and therefore has immense buyers power. However, since video game consoles provide a decent profit margin for the retailers, and there are only few substitute products, bargaining power is equal between the retailers and manufacturers. The threat of substitutes is low due to console’s cost advantage over PC, and better profit margin over mobile platforms. Console makers derive majority of their profit from royalty fees collected from game publishers, which means market share is a key industry driver. This relationship between market share and profit leads to intense competition between console manufacturers. ! Nintendo was the market leader in the 7th generation console era with 100 million units sold, and its revenue reached $7,500 million in 2008. Nintendo’s success lies in Wii’s appeal to unconventional consumers such as females and the elderlies. However, sales declined drastically from 2008 to 2012, from 20 million yearly units sold to 3 million respectively. ! Sony deploys completely different strategies in making and marketing their consoles. Sony focuses on the hardcore gamer market where graphic capabilities and AAA game titles are the driving forces of sales. Despite of the initial financial strain caused by PlayStation 3’s high unit cost, Sony’s computer entertainment division became profitable in 2009 with an operating income of $75 million. ! !
of 3 45 Table of Content Executive Summary! 2! Table of Content ! 3! Introduction! 4! Industry Definition! 5! Key Industry Characteristics! 7! History! 7! Industry Revenue and Forecast ! 8! Market Segmentation! 9! Value Chain! 10! Industry Life Cycle ! 11! Changing Environment ! 11! External Analysis! 12! PEST Analysis! 12! Political! 12! Economics! 13! Socio-cultural Demographic! 13! Technological ! 14! Competitive Analysis! 16! Industry Rivalry — High! 16! Barriers to Entry — High! 16! Suppliers Power — High! 17! Buyer Power — Moderate ! 17! Threat of Substitutes — Low! 18! Key Industry Drivers! 19! RD Capability! 19! First-to-market Advantage ! 19! Expanding Consumer Base! 19! Additional Revenue Models ! 20! Company Analysis! 22! Nintendo Overview! 23! Nintendo’s Vision Mission Objectives! 23! Financial Analysis! 23! Market Saturation! 25!
of 4 45 Introduction Demand Elasticity! 25! Strategic Approach! 26! Hardware: 7th Generation! 26! Hardware: 8th Generation! 26! Software! 28! SWOT Analysis! 29! Strengths! 29! Weaknesses! 30! Opportunities! 30! Threats! 30! VRIN Analysis! 31! Vertical Integration ! 31! Experienced Software Division! 32! Global Presence! 32! Sony Overview! 33! Sony Computer Entertainment’s Vision Mission Objective! 33! Financial Analysis! 33! Strategic Approach! 35! Hardware: 7th Generation! 35! Hardware: 8th Generation ! 35! Software! 36! SWOT Analysis! 37! Strengths! 37! Weaknesses! 37! Opportunities! 38! Threats! 38! VRIN Analysis! 39! Technological Resources! 39! Cross-divisional Synergy! 39! Conclusion! 40! Reference! 41! Bibliography ! 45
of 5 45 ! The advent of the video game industry is seen by many to be a recent development in the entertainment industry (Allen Kim, 2005). As an entertainment medium, video games can appear unfamiliar to some audience in comparison with the more traditional media such as TV or radio. However, video game is a mature industry with its own life cycle, value chains, and market leaders. The video game industry is ill defined by current industry classification system. In addition, the relationship between software developers and hardware manufactures is complex due to overlaps of their revenue streams and the interconnections between the industry value chains. Such ambiguous definition exists in other computing related industries. The video game console industry will be the main focus in this report, while the entire video game industry will be discussed so that the readers can understand the nuance in the overall video game industry. ! Industry definition and key characteristics are introduced first, and this section provides required background knowledge. Three analytical frameworks are used in the external analysis: PEST, Porter’s 5 Forces, and Industry Key Drivers. Finally, company analyses of two of the three video game console incumbents Sony and Nintendo are presented. In the company analyses, company history, and mission statements are provided. Financial, strategic, SWOT, and VRIN analysis are conducted. ! Industry Definition ! Under the International Standard Industry Classification, the video game industry overlaps 7 different and distinct sectors from “software publishing” to “retail sales of games and toys”. Similar blur of industry definition exists under the North America Industry Classification System as well (Beinisch, Paunov, Vickery Wunsch-Vincent, 2005). In addition, there are components of the video game industry that are not coded at all, such as “online computer game industry” (Schmidt, 2013). One way of describing the industry is to look at a simplified value chain. Figure 1 separates the video game industry into: video game consoles, games, services, and peripheries. Figure 1: Video game industry definition by value chain ! ! Consumer Consoles Games Services Peripheries
of 6 45 However, the video game industry is best defined by its revenue sources: software (games), hardwares (game consoles), online gaming subscription, development, manufacturing and distribution of games, and hardware related accessories (Figure 2) (Schmidt, 2013). ! Figure 2: Video game industry definition by revenue source ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Online Gaming SubscriptionSoftware Development Manufature and Distribution Related Accessories Hardware
of 7 45 Key Industry Characteristics ! History ! Ralph Baer, the “Father of Video Games”, built the first video game console in 1966, and the console was later licensed under the trade name Magnavox Odyssey. At the time, video game consoles had not gained wide public recognition and ownership until the game PONG was published in 1972 (Wikipedia, 2014). Console and game sales have been increasing ever since. Figure 3 charts the total industry revenue from 1990 to 2011, and distinct cycles can be observed in this graph (in-between red arrows). These cyclical changes mark the end of one generation of consoles. Figure 3: US consumer expenditure on video games and consoles ($ billion) ! ! ! ! ! ! ! ! ! ! ! Source: Grant, R.M. (2013). Contemporary Strategy Analysis. ! The video game industry timeline is segmented based on video game console generations, and game software is also labeled on this generational timeline (Grant, 2012). Each generation lasts for about five years, and the 8th generation just jump-started with the release of Sony PlayStation 4, and Microsoft Xbox One in 2013 (Figure 4) (Wikipedia, 2014). Figure 4: Video Game Console Generation Timeline !!!! ! ! ! ! Source: Wikipedia (2014). Video Game Consoles. 2nd Gen.! 1978-1985:! Leader— Atari 3rd Gen.! 1985-1990:! Nintendo 4th Gen.! 1991-1995:! Nintendo 5th Gen.! 1995-1998:! Nintendo 6th Gen.! 1999-2005:! Sony 7th Gen.! 2006-2012:! Nintendo 8th Gen.! 2012-:! Sony
of 8 45 Industry Revenue and Forecast ! The global revenue of the video game industry is $38 billion in the US, and the annual decline between 2008 to 2013 averages 2% (figure 5). This is largely attributed to the 2008 recession, and as personal disposable income and consumer confidence drop, video game industry experience synchronous decrease in revenue (Schmidt, 2013). However, due to a steady recovery of the economy, along with an increase in personal disposable income and consumer confidence shown in figure 6, IBIS (2013) expects an average annual growth of 4% from 2013 to 2018. Figure 5: Global percentage change and forecast in video game industry revenue ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !! Source: Schmidt, D. (2013). IBISWorld industry report: NN003 video games in the US. Figure 6: Global percentage change and forecast in per capita disposable income ! ! ! ! ! ! ! ! !!!!!!! Source: Schmidt, D. (2013). IBISWorld industry report: NN003 video games in the US.! oming five years, the Video dustry is expected to grow at a pace. More specifically, 2014 is expected to be 7.0%, the release of pent-up s consumers’ disposable mprove. In addition, new leases (expected year-end uld help reinvigorate the albeit at cost to hardware anticipated to reach $46.4 presenting an average annual e of 3.9% over the coming period. e gaming space is expected by stry analysts to grow y over the next few years, with mobile gaming revenue to reach $11.4 billion by 2014. However, IBISWorld because 60.0% to 70.0% of downloaded p profitable games. These then put on the Apple App oogle Android Market for ownload, providing s with revenue through a ee or in-game ments. The low barriers to n compared with console and developers, have caused the video game publishing s to explode over the past five wing an estimated annualized total industry employment has risen at an annualized rate of 6.6% over the same period to reach 156,539. However, due to the low retail price of these games (most through in-game ads, while the rest retail for less than $5), smartphone games have industry revenue. %change 15 −10 −5 0 5 10 1905 07 09 11 13 15 17Year Industry revenue SOURCE: WWW.IBISWORLD.COM Video Games in the US August 2013 6 mance d Internet connections. These nclude multiplayer modes, dable content and in-game chat , which can be free or provided r subscription basis. Consumers asingly use these online The percentage of services d online is expected to increase 013, representing a potential ity for the industry. Consumer Confidence Index how consumers view the current economy (i.e. positively or negatively) and their expectations over the next several months. When consumers generally have a positive view of the economy, they are more likely to purchase discretionary goods, like video games. This driver is expected to increase during 2013. %change 5.0 −5.0 −2.5 0.0 2.5 1806 08 10 12 14 16Year Per capita disposable income SOURCE: WWW.IBISWORLD.COM 1804 06 08 10 12 14 16 ent on leisure and sports
of 9 45 Market Segmentation ! In 2013, the video game industry is segmented into: “physical games and software” (41.%), “consoles” (33%), “online games and software” (17%), and “accessories” (9%) (Figure 3). Figure 7: Market share by revenue of different segments ! ! ! ! ! ! ! ! ! Source: Schmidt, D. (2013). IBISWorld industry report: NN003 video games in the US. While console sale represent the second largest segment, it is not the centre of the industry, and this is partially the result from high production cost. The console industry deploys a “razor model”, where products are sold at a loss, but complementary products are sold to make up the the lost revenue (Grant, 2013). Video game softwares sold on a particular console are charged a royalty fee, at this fee constitutes the profit-making device for the console industry. Piracy issues become highly relevant to the health of video game console industry, and the major console manufactures are reluctant to enter certain market due to a lack of intellectual property protection policies (Beinisch, Paunov, Vickery Wunsch-Vincent, 2005). Retailing of games generate the largest share of revenue in the game industry, IBIS (2013) estimates that the sales of console games, PC games and used games will generate 16 billion by the end of 2013. Development fees charged to publishers are rising as well, due to industry expansion, and console makers are realizing that new console systems drive up demand for quality games, and not providing such content could have devastating effects on the new platform (Schmidt, 2013). Some console makers such as Microsoft even paid the game developer for console exclusive content. Among publishers, such trend of competing for game developers also exists. IBIS (2013) estimated that development revenue to grow at a annual rate of 12.8% as a result of this shift in buyer/supplier power. AAA titles is a strong driver for revenue, for instance, established franchise such as Call of Duty Ghost had generated revenue of $1 billion in the first day of its release (VGC, 2013). The growth 41.4%Physical games and software 32.6% Consoles 17.2% Online games and software 8.8% Accessories
of 10 45 of AAA games are estimated at an annualized rate of 9.8% from 2008 to 2013 (Schmidt, 2013). Other than franchises, publishers attempt to create niche market for different genre of games. Existing genres include first-person shooters (FPS), real-time strategy (RTS), and simulation (Sims). These genres are sometimes platform dependent, for example, RTS is almost exclusive to the PC platform due to a superior input systems, since it is difficult to select different game characters using a console controller compare to mouse and keyboard. 35% of PC games are RTS games, while only 3% of console games are designed this way (Schmidt, 2013). Even some of the AAA franchise cannot surpass this hardware barrier. Halo, a major title on Xbox 360, had tried to introduce RTS play on the console platform and received only lukewarm response (VGC, 2012).! Value Chain ! There are 6 key players in the value chain of video game industry: hardware manufactures, developers, middlewares, publishers, distributor, and retailer (Beinisch, Paunov, Vickery Wunsch-Vincent, 2005) (Figure 8). Despite console manufacturers being the largest participants, console itself is not the focus of the market, it is just a vehicle to deliver contents (much alike theatres being the conduit, and movies being the content). Games are the focus of the industry. Figure 8: Value chain of video game industry ! ! ! ! ! ! ! ! ! ! Source: Adapted from Beinisch, Y., Paunov, C., Vickery, G. Wunsch-Vincent, S. (2004).Working Party on the Information Economy Developers first have to find publishing companies to fund the game project, then they use game- making softwares made by middleware companies to produce games, and finally, the publishers find distributors such as GameStop, Toys “R” Us, or Walmart. Distributors sometimes buyback
of 11 45 used games, and then selling second hand games for a very high margin, even higher than margins for the developers and publishers (Schmidt, 2013). Video game publishing is similar to book publishing, in that the more popular and profitable the developer (author) is, the more power the developer exert on the publisher. Then, the publisher can charge more for the successful games’ distribution, and retailer pass that on to the consumer (Schmidt, 2013). Successful game titles plus the releases of new console system drive the growth of retail (9.8% annual increase) (Schmidt, 2013). It is important to note that, just as diagram 2 shows, developers are the value creators and drivers for the entire value chain, but they cannot exist without any other components.! Industry Life Cycle ! Video game industry’s industry life cycle high resembles that of the video game console product life cycle. Figure 9 has consumer expenditure on video games side-by-side to product life cycle of console market leaders through different generations. Figure 9: Industry life cycle compared to console product life cycle ! ! ! ! ! ! ! ! ! Source: Adapted from Marchand, A. Hennig-Thurau, T. (2013-07-19). Value Creation in the Video Game Industry: Industry Economics, Consumer Benefits, and Research Opportunities. ! Changing Environment ! Many of the industry norms and conditions are starting to change due to technological and demographical shifts. For instance, in 2006, the introduction of motion sensing technology by the Nintendo Wii had catapulted the console to market supremacy, but later economic recession, and competition by other platforms had pushed Nintendo to the corner (VCG, 2013). !
of 12 45 External Analysis ! This external analysis will look on three levels of the video game console industry: macro- environmental factors, competitive landscape, and specific key industry drivers. The structure is shaped so that there could be a reverse pyramid structure from the broad to the specific topics. Figure 10 summarizes the frameworks that will be used in the external analysis. Figure 10: Structure of the external analysis! ! PEST Analysis ! Macro-environmental factors shape the backdrop of the video game industry, and general trends of these factors inform companies of their strategic decisions. For example, Nintendo Wii’s commercial success correlates strongly with the rise of casual gamers. PEST analysis provide a framework for users to categorize macro-environmental factors into: political, economics social- cultural, and technological. Political ! Public debates on the relationship between video games and violence has been persistent, and the fundamental disagreement revolves around the balance between freedom of expression and public interest. Several mass-shootings in the US are blamed on influences of violent video games, with prominent example of the Columbine Massacre (Gaudiosi, 2011). There are laws in many European countries that outlaw or censor racist or there defamatory content. In the US, the Communications Decency Act puts restrictions on the content of games, but up-to-date, only a handful of games have been pull off the shelf due to violence or indecency (Clark, 2014). In addition, the Entertainment Software Rating Board (ESRB), a self-regulatory organization, assigns and enforces appropriate age rating to video games. Most video game retailers do not carry any games without ESRB ratings, and console manufactures will not licence games for their system unless they carry ESRB ratings (ESRB, 2014). PEST Analysis! ! ! Porter’s 5 Forces Analysis! ! ! Key Industry Drivers Analysis Macro-environmental ! ! ! Competitive! ! ! ! ! Industry Specific
of 13 45 Economics ! It is hard to separate the video game industry into distinct components, since the industry is often described by economists as a two-sided market, where the operation and revenue model of market A (hardware) is dependent on market B (software), and vice versa (Michaud, 2011). For example, console makers will sell their hardwares often at a loss, but will want to increase “installation base” in order to attract software developers to produce game titles for their platforms. On the other hand, when a game becomes successful, the resulted increased “installation base” will further provide incentives for other game developers to adopt certain platform. Socio-cultural Demographic ! As video game is increasingly becoming an important leisure activity, socio-cultural and demographic became important external factors that determines the nature of the video game industry. i) Socio-cultural Language matters in both the production and consumption of video game contents. All the major software coding languages are in English, and countries without trainings in English will find difficulties development game contents. Moreover, translated video games are only available for countries with enough customer base (Beinisch et. al., 2005). The cultural aspects between different consoles and the game contents are important as well. Microsoft has better console sales figure in North America and Europe, and its sales in Japan is only 1.5 million units up to date (VGC, 2013). This muted reception in Japan is attributable to a “lack of content aimed at Japanese gamers” (BBC, 2008). For example, there are more first personal shooters games that feature Western protagonists from Western game developers, with titles such as Call of Duty, Grand Theft Auto, and L.A. Noire. On the Japanese end, consumers favour games that feature emotionally vulnerable Eastern protagonist, such as Final Fantasy XIII and Metal Gear Solid. Moreover, there are striking dissimilarities in terms of art style, cultural reference and character development between two regions. Sony definitely has the software advantage in Asian countries, the top 10 selling games in Japan in 2013 are all developed by Japanese studios (VGC, 2013). ii) Demographic In the US, younger male gamers have traditionally been the lifeline of the video game industry, However, some publishers are already eyeing the untapped market of female gamers and aging gamers (Figure 11). Despite the shifted attention towards female gamers, the vast majority of gamers (55%) are still young male younger than 45 years old (Schmidt, 2013). This demographic is likely to remain the major consumers for video games indefinitely. The highest grossed video game titles between
of 14 45 2008 and 2012 are Grand Theft Auto V, Call of Duty Ghost, and Halo: Reach, which are all targeted towards male gamers (VGC, 2013). Figure 11: Consumer demographics by consumption ! ! ! ! ! ! ! ! Source: Schmidt, D. (2013). IBIS World industry report: NN003 video games in the US. ! Technological i) Moore’s Law ! Moore’s law observes that for computing hardware, the number of transistors on integrated circuits doubles approximately every two years (Wikipedia, 2014). The same can be predicted for the capabilities of many electronic devices, such as processing speed, and memory capacity. The consoles industry follows this general trend, producing evermore powerful machines as new generation of consoles emerges (Orland, 2013). For illustrative purpose, figure 12 shows the average polygons per second of different generation of games. Polygons per second is representative of the graphical capability of consoles. Figure 12: Average polygons per second generated by different generations of consoles ! ! ! ! ! ! Source: Oralnd, K. (2013). Does the power of today’s consoles keep up with historical trends?
of 15 45 ii) Broadband Access ! 70% of American adults aged 18 and older have high-speed board band access at home, this covers 80% of the video game consumer demographic (The Pew Research Center, 2012). Broadband access allows console makers and software developers to deliver data-heavy content and services. As information storage and processing are moving to the “cloud”, new business model and revenue model will soon emerge. iii) Mobile Platforms ! Mobile gaming has become more prevalent thanks to the rise of smartphones and tablets, and there was an explosion of developers for mobile games (Schmidt, 2013). These games have a simpler design complexity compared to console games or PC games, therefore a small group of developers can make profitable games and act as their own publishers. Mobile games are placed in virtual market place such as Apple App Store or Google Android Market, and they are generally sold for a small fee (Schmidt, 2013). Moreover, additional revenue is generated through the downloadable contents or in-game advertisement. Due to a low barrier of entry resulted from having smaller development team, the mobile gaming market is highly competitive, and has attracted many new entrants over the past five years, growing an estimated annualized 38% in 2013 (Schmidt, 2013). However, due to a over saturation of games and relatively low retail price, mobile gaming remains only a small portion of the game industry, with an estimated revenue of 12 billion in 2014 (Schmidt, 2013). The expansion of mobile devices would increase the accessibility of mobile games in other underserved markets, but piracy issues remain strong in those markets. Many smartphones are “jail-broken” or “rooted”, meaning that manufactures and wireless providers cannot monitor the legality of software running on those smartphones (Beinisch, Paunov, Vickery Wunsch- Vincent, 2005). ! ! ! ! ! ! ! ! !
of 16 45 Competitive Analysis ! Porter’s 5 Forces is used to conduct a competitive analysis for the video game console industry. Industry rivalry, barriers to entry, and supplier power are high. Buyer power is moderate, and threat of substitute is low. A graphical representation is provided in figure 13. Figure 13: Porter’s 5 Forces ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Industry Rivalry — High ! Competition in the video game console industry is high and the trend is steady. Microsoft, Sony, and Nintendo are the only players in the industry, and by 2013 market share has equalized among the three (VGC, 2013). Competition is intense due to the acknowledgement that for every purchase of a console a near-guaranteed games sales will be made, and royalty of the games will be collected from publishers. Since the console manufactures maintain the “razor model”, attaining market dominance is crucial for their survival. Barriers to Entry — High ! Barriers to entry in the console industry are high and increasing. New ventures into producing video game consoles will be ill-advised. The barriers preventing new entrants to this market is prohibitive, and these barriers are attributed to RD cost, and manufacturing cost (Zackariasson Wilson, 2008). The most recent entrant into the video game market was Microsoft, and its Xbox console was able to capture 31% of market share in 2013. This is largely due to Microsoft’s extensive financial backing (VGC, 2011). Entering the video game market is not only unaffordable for most startup companies, but also the cost associated with fully exploit economy of scale is enormous. Incumbents have extensive brand power that commend considerable loyalty amongst gamers, so called “console wars” Industry Rivalry: High Barriers to Entry: High Supplier Power: High Buyer Power: Moderate Substitue: High
of 17 45 between fractions of different console supporters had been a constant headline topic on internet forums (VGC, 2013). In terms of costs of RD and manufacturing, Microsoft’s Entertainment and Devices division had an operating costs of nearly $ 7.6 billion in 2011 (Microsoft, 2011). Given the time it takes a console to reach its profit generating phase, entry to this market without extensive financial backing is unlikely. Moreover, the talents and skills required in this industry are highly specific, ranging from electric engineering, assembly line manufacturing to financial planning. Acquiring these talents would be impossible for new entrants whom have limited human-resource connection and industry recognition. Since the beginning of the video game industry in 1980s, only five console manufactures achieved noteworthy marketshare. These companies are Atari, Sega, Nintendo, Sony and Microsoft. Atari and Sega are long driven out of the market, leaving Nintendo, Sony, and Microsoft dominating the market for the past 13 years (Wikipedia, 2012). Any new entrants will face intense retaliation by the incumbents. New entrants would face the problem of accessing distribution channels. Most of consoles are sold via electronic and gaming-specific retailers, and incumbents have long-established connection with these retailers (Zackariasson Wilson, 2008). Also, due to large volumes of existing consoles moving through the retailers, console manufactures have relative high bargaining power, which new entrants cannot achieve in a short time. Online retailing exists as a plausible distribution channel for new entrant. However, this method does not have the reach retail stores have, and the extra cost of shipping will pass down to the customers which has negative consequences to the initial introduction of a new console. Suppliers Power — High ! Two major components of a video game console are central-processing unit (CPU), and graphic- processing unit (GPU). AMD (market share of 20%) and Intel (market share of 70%) are the only two major CPU producers in the world, and dominant manufacturers for GPU are Nvidia and AMD (PassMark, 2013). The supplier market is dominated by three large suppliers, and they have great supplier power. There are no substitutes for these two critical components, since alternative CPUs and GPUs are either targeted to mainframe computers and mobile devices (Subramaniam, 2013). Furthermore, graphics quality is one of the differentiating factor for the console industry, and none of the incumbents wants to “cheap out” on the CPU and GPU they place in their console. One exception is the Nintendo Wii and WiiU, since Nintendo focuses on non-graphic intensive game market. Buyer Power — Moderate ! Electronic and gaming-specific retailers are the major customers for console manufactures, and the customer market is dominated by few large customers. Even though both Sony (approx. 70
of 18 45 stores) and Microsoft (approx. 80 stores) have their own retail stores in North America, but that figure pales compared to BestBuy (800 stores) and GameStops (4,500 stores) (Schmidt, 2013). 90% of consoles are sold via retailers (Schmidt, 2013), and the retailers have a significant share of purchasing activity. This leads to the retailers having large customer power. However, console sales provide 15% margin for retailers and there are only few alternative forms of video game platforms, balancing out customer power (Schmidt, 2013). Threat of Substitutes — Low ! Only the PC and mobile platforms stand to compete with the console industry. However, piracy issues and low profitability plague the two possible substitutes, resulting in game publishers reluctant to produce for these platforms. Moreover, retailers are not focused on gaming-PC market which boast comparable graphic capability as game consoles (PCMagazine, 2013). The price point for a PC that has acceptable graphics quality is around $1,000 (excluding monitor and other accessories), yet the most recent generation of game consoles sell around $400 (PCMagazine, 2013). This discrepancy exists because PC has piecemeal assemblage, with many components selected from various manufactures, and this does not take advantage of economy of scales achieved by game consoles which have standardized components. Secondly, a PC can handle more tasks than a game console, resulting in much CPU and GPU power diverted to theses tasks. While a game console is solely constructed to play video games, ensuring a maximization of hardware utilization. A lack of publishers and a higher price range for the PC and mobile platforms brought about a low threat of substitutes for the game console industry. ! ! ! ! ! ! ! ! ! ! !
of 19 45 Key Industry Drivers ! Four key industry drivers are situated in the value chain of the video game console industry: a) RD capacity, b) First-to-market advantage, c) Expanding consumer base, d) Additional revenue models. Each of these factors creates value for the video game console industry and helps ushering new generations of products and services. Figure 14 illustrates the key industry drivers in the context of product, delivery process, and consumers. Figure 14: Key industry drivers arranged in segments of value chains ! ! ! RD Capability ! RD of new console technology stands to be the key winning ingredient to attract customers. However, abstract specifications are rarely the deciding factors on customers’ purchasing behaviours (Schmidt, 2013). Customers often compare the availability of AAA games between consoles before making a purchase, and most contemporary AAA game titles are build on impressive graphics, and RD efforts translate into the capabilities of consoles in supporting these AAA games (Schmidt, 2013). First-to-market Advantage ! First-to-market advantage is equally important as console technology, since once a customer already purchased a console, he/she will be unlikely to purchase a second (Schmidt, 2013). Even so, a balance has to be reached between spending time to refine console technology and releasing the console earlier than competitors. A cautionary tale can be found of Nintendo WiiU. WiiU was released a year earlier than its competitors, and it reached North American sales of 1.7 million units in 2013, however this figure is much lower than what Nintendo had projected. Both PlayStation 4 and Xbox One, which have better graphic, reached 1 million unit sales within the first day of their release (VGC, 2013). Expanding Consumer Base ! From 1990 to 2000, the number of female gamers had remained stable, and they were satisfied with playing games designed for male gamers. In 2013, female gamers represent 40% of game Video Game Consoles:! ! RD Capability First-to-market Advantage Consumers:! ! Expanding Consumer Base Delivery: Additional Revenue Models
of 20 45 players, 48% of game buyers and 39% of total revenue generated by the video game industry (Schmidt, 2013). Recent change in marketing and game design philosophy have opened a path for publishers to exploit this customer segment. Criticisms arise in existing video game industry, citing sexist comments in game and on game forums, and sexist game character designs (Myers, 2012). Such observations are related to the percentage of male developers in the industry, and there are calls for female developers to counter-balance the sexist elements in video game designs (Myers, 2012). ! The video game industry started from 1980s, and the primary consumers from that era are approaching their mid- to late 40s. In order to capture/recapture this market, some publishers resort to nostalgia, bringing back older game titles such as Pokemon and Pong on to the mobile platform and consoles’ arcade market (VGC, 2012). Another trend is to claim health benefits of gaming towards the aging population, with Nintendo’s Brain Age games that supposedly improve memory retention. Nintendo Wii has also been widely adopted in retirement homes, and there are reported case that states sports simulation decreases fall risks in elderly residents (Clark Kraemer, 2009). ! Additional Revenue Models ! i) Accessories and Input Devices ! Approximately $3 billion is generated from accessories sales in 2013, and with improved and innovative technology such as motion control, this category of revenue is projected to increase (Schmidt, 2013). Sony had fully integrated touch-interface and gyroscope into PlayStation 4’s controller, while Microsoft bundled its Kinect motion sensing camera to its Xbox One (Microsoft, 2013 Sony, 2013). ii) Used Games ! Used games is a contentious issue in the video games industry, while movie retailers are prohibited from selling second-hand copies of films in the same retail space as new copies, no such protection exists within the game industry (Schmidt, 2013). Game and publishers are against the used-games industry, stating that more reluctant gamers would wait until a game is on the second-hand market instead of buying first-hand copies. Revenues generated this way would not involved developers and publishers, all the proceeds would go directly to the used-games retailers (Beinisch, Paunov, Vickery Wunsch-Vincent, 2005). Used games have a typical 46% margin compare to 20% for new games, and this creates further tension between used-games retailers and publishers (Schmidt, 2013). However, some used-games retailers argues that being able to sale used-games actually generate more disposable income for consumers to purchase new releases (Schmidt, 2013).
of 21 45 Publishers have to depend on used-games retailers, since most of the retailers are also new-game retailers. For instance, GameStop Corporation, which is both retailer and reseller of used games, takes up 14% of market share, and has immense bargaining power over publishers (Schmidt, 2013). As a compromise, there are informal restrictions on when a game can be traded in— normally not within the first month of a new game’s release (Michaud, 2011). However, some publishers are already creating their own digital retail platforms, in order to circumvent physical retailers thus avoiding used-games issues. iii) Subscription Model and Online Content ! Other than conventional video games retailing, online subscription model had gained popularity due to its profitability and an ease of digital rights management (Schmidt, 2013). This model can provide a video game company steady streams of revenue, instead of the conventional single-sale model where purchases are only made once and the residual values go to used-game retailers. The PC games segment used to face intense software piracy issues, and this threat has been ever escalating due to an increased broad-band internet users and un-paid hackers whom are willing to “crack” a game and share it with the internet community (Michaud, 2011). As a result, most developers prefer to develop for the consoles platform where such piracy issues are less prevalent (Michaud, 2011). Games with heavy reliance on the internet can successfully overcome piracy issue, since the game is either hosted in servers owned by the game company, or anti-piracy softwares can detect and reject illegal copies (Michaud, 2011). Blizzard Entertainment’s World of Warcraft (WOW) is an massively multiplayer online game (MMOG), and it retained an active user base of more than 10 million, generating $100 million per month (Blizzard, 2013). Many other companies tried to imitate WOW’s business model by offering monthly subscription games (subscription-based software as a service), however the financial performance of these games are mixed. The failure to capture market by these companies are twofold: a) Much time-commitments have to be made when playing MMOG, since users already paid “rents” for playing the game, and the game is inaccessible when the renting term elapses. This condition restricts users willingness to purchase multiple MMOG subscriptions all at once. b) In order to retain existing customers and attracting new ones, MMOG has to develop updates and new in-game contents at a frequent pace. Companies with limited internal and external resource simply cannot keep up with this pace. Variations of subscription-based software as a service (SaaS) exist, and these normally involve downloadable contents (DLC). AAA game titles commend enough follower base to warrant the sales of DLC for a fraction of the original price. These are virtual contents that build on existing game, such as maps, additional missions that adds to the original storyline, or multiplayer modes. This model has the two advantages of SaaS, meanwhile does not put time-commitment pressure on consumers discussed in a). Lastly, selling DLC bypasses retailers, and giving more economic values to the game publisher.
of 22 45 Company Analysis ! Three dominant players contest in the 7th generation video game console industry: Sony, Microsoft, and Nintendo. They each represent 31%, 30%, and 39% of the 7th generation console market share by units shipped (VCG, 2013). However, market share doesn’t reflect true profitability due to margin differences between consoles and tied-in software royalties. Figure 15: Market share of 7th generation video game console (by units shipped) ! ! ! ! ! ! Source: Adapted from data retrieved from: http://www.vgchartz.com Sony and Microsoft both have products and operations outside of the video game industry. For example, Sony has major stake in audio and video equipment, and Microsoft occupies the personal computer operating system industry. Nintendo, on the other hand, only deal with video games related products such as video game consoles, software, and peripheries (Nintendo, 2013). Sony and Microsoft are similar in their approach to the video game console industry. In terms of hardware specifications, consoles produced by both companies feature intensive graphic capabilities (Wikipedia, 2014). In the current 8th generation consoles, both companies used the same supplier (i.e. AMD) for their CPU and GPU, indicating further alignment and competition of their consumers (i.e. graphical-intensive hardcore gamers) (Sony, 2013 Microsoft, 2013). The genera of games available on both consoles are also alike, ranging from Role-Playing Games (RPG) to First-Person Shooters (FPS) (VGC, 2013). In addition, Sony and Microsoft rely less on their internal game software developers to produce blockbuster games compared to Nintendo (VGC, 2013). In comparison, Nintendo focuses only on the video game industry, and all top-selling games ever published on Nintendo platforms are developed internally (VGC, 2013). Due to the similarity of Sony and Microsoft’s market positioning in the video game console industry, only Sony’s company analysis will be presented to contrast with Nintendo. ! ! PS3! 31% Xbox 360! 31% Wii! 39%
of 23 45 ! Nintendo Overview ! Nintendo has been the market leader in the video game console industry from 1980s to 1990s with the release of Nintendo Entertainment System (NES), and Nintendo 64 (Grant, 2013). Other than dominating the hardware industry, Nintendo has also introduced few of the best-known video game franchises: Super Mario, Tetris, and Pokémon. These games all broke sales record, and each game had more than 30 million units sold. In 2006, with the introduction of Nintendo Wii, Nintendo captured 70% of the market share within three years (VCG, 2013). However, after the 2008 recession, Nintendo’s ran into some trouble. Their Wii sales declined dramatically, and their 8th generation console Wii U had only obtained 1 million sales compared to its predecessor, which obtained 100 million sales (VCG, 2013). By 2011, Nintendo’s revenue declined by 100% and they are running an operating loss of $165 million (Nintendo, 2013). ! Nintendo’s Vision Mission Objectives ! Vision ! • Quality products is only one facet of Nintendo, customers are the centre of attention. • Commitment and enthusiasm are crucial to the high quality of Nintendo’s products and support services. • Customers should be treated with attention, consideration and respect (Nintendo, 2013). ! Mission ! ! • Nintendo listens to their customers, and wants to constantly improve its products and services. • Nintendo aims to treat its employees with the same consideration and respect as Nintendo treats their customers. • Nintendo values its 5000 employees and puts equal amount of commitment towards employees as it did customers (Nintendo, 2013). ! Objective ! • Produce and market the best products and support services available (Nintendo, 2013). ! Financial Analysis ! Nintendo Wii had sold 100 million units up-to-date, and Wii’s commercial success had rocketed Nintendo’s revenue from $2.7 billion in 2006 to $7.3 billion in 2008 (Schmidt, 2013). Operating income also grow proportionally with revenue from $104 million in 2006 to $400 million in 2008, these data are shown in figure 16 . The rosy financial performance was maintained for 3 years until 2009 when operating income dropped by almost 50%, and in 2011, Nintendo suffered an unprecedented loss of $35 billion (Nintendo, 2013). Up to this point, Nintendo had never suffered an annual loss since it entered the video game industry (Jones Castaneda, 2011).
of 24 45 Nintendo’s dire financial situation is attributed to Wii’s becoming outdated as 8th generation console looms, and initial RD cost for the new generation console WiiU. RD cost is recovered as console sales grow (Schmidt, 2013). ! Figure 16: Revenue Operating income trend of Nintendo from 2006-2012 ($ millions) ! ! ! ! ! ! ! ! ! ! ! ! ! Source: Adapted from Nintendo’s Financial Reports 2006 – 2012. ! Toward the shift into a new generation of consoles, it is expected that a company’s console sales will begin to decline, leaving a revenue gap between the generations. (Schmidt, 2013). However, figure 17 shows that, Nintendo’s sales declined faster than its competitors and corresponds to the drop in revenue in 2008. Market saturation, and demand elasticity are the most crucial factors that affected Nintendo’s profitability post 2008. Figure 17 : Nintendo Wii’s yearly units sold superposed on Nintendo’s yearly revenue ! ! ! ! ! ! ! ! ! ! ! ! ! ! Source: Adapted from Nintendo’s Financial Reports 2006 – 2012 data retrieved from: http:// www.vgchartz.com
of 25 45 Market Saturation ! Nintendo’s amazing sales record after its initial launch was attributed to Wii reaching out for a broader consumer base (i.e. casual gamers) (Grant, 2013). Casual games generally have simple rules and ease of game-play, these features attract gamers who have less experience playing video games and also gamers from any age group or skill levels (Surette, 2013). Almost all of Nintendo’s games have the attributes of casual games, with prominent titles such as Super Mario, Wii Sport, and Tetris (VGC, 2013). ! However, the casual games market traditionally dominated by Nintendo has been under assault from both Sony and Microsoft, as both companies had opened up their consoles to independent game (indie-games) developers (Wikipedia, 2013). Indie-games are video games produced by individuals or small teams. Due to the limited size of the development team and a lack of financial-backing from publishers, most independent developers aim for the casual games market where the demand for complexity and graphics are lower than mainstream games (Surette, 2013). ! Mobile platform is challenging Nintendo’s incumbent position as a causal gaming platform. Thanks to the portability and accessibility of mobile devices, many independent developers were able to extend their casual games to a wide audience. Both leading mobile operating systems (iPhone Android) have mature market places, which elevated the distribution of games to an unprecedented scale in contrast with other gaming platforms. For instance, Angry Bird, produced by independent developer Rivio, has reached a staggering 1.7 billion downloads in 2012 (Lunden, 2013). ! Demand Elasticity ! In figure 18, yearly hardware comparison between the three 7th generation console shows that demand elasticity is high for Nintendo’s Wii. This trend suggests that casual gaming market is sensitive to general economic conditions compare to the traditional hardcore gaming demographics. Figure 18: Nintendo Wii’s yearly units sold !!!! Source: Adapted from data retrieved from: http://www.vgchartz.com ! !!
of 26 45 Economists think the entertainment industry as “recession proof” (Bijli, 2008). However, Wii’s sales decline coincides precisely with the 2008 recession, as indicated by the red arrow in figure , while PS3 and Xbox 360 are going through a regular product life cycle. This is a good indication that casual gaming is not recession proof. Several other casual explanations could be given to account for Wii users’ sensitivity to economic recession. First, Wii was priced and marketed to casual gamers and non-gamers, and they are more price conscious and sensitive compared to hardcore gamers (Marchand Hennig- Thurau, 2008). When the price sensitive customers have less disposable income due to recession, gaming would be the first thing they remove from their shopping list. Secondly, there are demographic attributes that make hardcore gamers’ purchasing behaviour less affected by a recession. Microsoft Advertising (2011) surveys that showed male UK Xbox Live users between ages 25-34 reported high personal income, indicating that male gamers are likely to have more purchasing power compared to female cohort. Lastly, consumer loyalty can affect how soon people will stop buying games for the console when recession hits. Attach rate is often used to measure consumer loyalty, it is simply the number of software sold over number of console, and Wii, despite its large installation base, rank the lowest (Xbox 360 9.93, PS3 8.9, Wii 8.59) (VGC, 2013).! Strategic Approach ! Hardware: 7th Generation ! Nintendo’s 6th generation console GameCube has been behind its competitors in terms of sales, and Nintendo neither had the financial resource as Microsoft, nor the technological expertise as Sony (VGC, 2013). Nintendo Wii is the last to join the 7th generation of console arena, its release was overshadowed by the existing two competitors Sony and Microsoft (Grant, 2012). Furthermore, Nintendo’s Wii console has inferior technical specifications compared to Xbox 360 and PS3 (Grant, 2012). However, Wii was innovative in terms of its controller and motion sensor technology (Schmidt, 2013). The wand like controller was able to bring new ways of game design for developers and interaction with the game for the users. Moreover, Nintendo has strong franchise lineups that were able to utilize this new controller at launch instead of waiting for third-party developers to adopt the new game interface (Wikipedia, 2013). The Wii was able to capture the market of “casual gamers” which included a broad range of demographic such as females and elderlies (Schmidt, 2013). The surprising success of Wii lead Nintendo into the leading market share position. Hardware: 8th Generation ! Wii U was launched in November 2012, it featured similar design and hardware capability as its predecessor, but with a slight adjustment to its control interface. Wii U comes with very basic internet features such as paid TV services, Internet browser, social interaction softwares and an
of 27 45 rudimentary e-market (Nintendo, 2013). This is disappointing given that Nintendo had three generations of time to develop its internet presence. Expansion into more online features should not be a relatively capital intensive venture compared to developing new hardware technologies, however obtaining appropriate internal capacity might prove to be difficult. This is especially the case versus Microsoft whom has extensive experience with internet product development (Marchand Hennig-Thurau, 2008). This missed opportunity could be detrimental for Wii U, since both Microsoft and Sony aligned their strategy to “providing software and service at the same time”, and much of the differentiating force will come not only from games provided but also the type of service tethered to the console (Schmidt, 2013). In terms of control interface, Wii had already lost some of its original customer attraction due to Sony and Microsoft’s own version of motion sensing control interfaces (Kinect and Playstation Move) . To make matter worse, Microsoft’s Xbox One will ship pre-packaged with Kinect, thus reducing Wii U’s ability to leverage its unique selling point. A new touch-screen based GamePad controller is included with Wii U, where video image are streamed wirelessly to the GamePad, thus creating a new interface with the games. The GamePad could have been made into a stand-alone portable gaming device, such in the case of PlayStation 4 and PlayStation Vita. This shows that Nintendo is afraid of its existing portable game console market being cannibalized. However, cannibalization is already happening between Wii and Wii U. Figure 19 compares Wii U and Wii sales combined in 2013 and Wii sales , in its already lowest point, at 2012. Figure 19: WiiU plus Wii’s sales combined in 2013 compared with Wii sales in 2012 ! ! ! ! ! Source: Adapted from data retrieved from: http://www.vgchartz.com ! 0 175 350 525 700 Jan Feb Mar Apr May Jun Jul Aug WiiU+Wii sales combined in 2013 Wii Sale in 2012
of 28 45 On the software front, Wii U is trying to recruit some cross-platform franchise such as Assassin's Creed and Call of Duty, in order to attract hardcore gamers (Nintendo, 2013). However, in-house developed games still contribute a large percent of current Wii U game sales (VGC, 2013). In addition, Nintendo’ games are known to be non-graphic intensive, and it will be difficult to capture hardcore gamers whom have high demand for graphic intensity. Software ! Nintendo has in-house game development teams that deliver game titles with initial console launch (Nintendo, 2013). Nintendo stands out in contrast with its competitors as it was able to be profitable relying only in-house developers, while other two consoles rely heavily on third-party developers (Hicks, 2008). All the Wii titles with over 10 million sales consist exclusively of Nintendo in-house games (VGC, 2013). This disgruntled many third-party developers, and is likely to affect the willingness of future game titles to come on a Nintendo console. Nintendo’s strong software sales depends on backward compatibility, a feature that allows current generation console owners to play games from previous generation consoles (Nintendo, 2012). This can been seen as added value to consumers, but also it boosts revenue for companies by relaunching old game titles which initial investment that already have been recouped. Sony and Microsoft did employ similar strategy, however their consoles had always featured graphic capability as a unique selling point (Marchand Hennig-Thurau, 2008). Since older generation games do not match up graphically with current generation games, therefore, customers are less inclined to purchase older games. Currently, both Sony and Microsoft have removed backward compatibility from their consoles (VGC, 2013). Alarmingly, Nintendo kept recycling its old franchise without creating any new titles (Gamespot, 2013). There are 13 versions of Super Mario Bros games on different Nintendo platforms. This underlines Nintendo’s reluctancy to extend its software product range, and may lead to consumer apathy. Independent developers such as the makers of Angry Bird are threatening Nintendo’s market position in casual games. Casual game developers on the mobile platform have low barrier of entry, and can effectively create substitute games (Schmidt, 2013). Moreover, casual gamers on the console platform are being depleted due to competition from Sony and Microsoft, whom offer arcade and independent games in order to captures the casual audience (Microsoft, 2013 Sony, 2013). Regionality is another factor to consider with software distribution. Many games are protected and only launched in certain regions, Nintendo will only release certain games in Japan (VGC, 2012). Furthermore, Nintendo’s games launched in one region will not work with machine purchased in another region (Wikipedia, 2013). This inconsistency and excessive control had lead to much frustration among the Nintendo customers. !
of 29 45 SWOT Analysis ! Nintendo faces unique weaknesses and industry wide threats, meanwhile it also possesses identifiable strengths and market opportunities. Strength, Weakness, Opportunity and Threat of Nintendo will be presented in SWOT analysis. Table 1 summarizes salient findings of SWOT analysis. ! Table 1: SWOT analysis ! ! ! Strengths ! • Identifiable brand image due to Nintendo’s long established market position. Nintendo entered the video game market in 1983, and its first product Nintendo Entertainment System (NES) had been a well-known household product (Nintendo, 2014). ! • Focus on family units to advertise, thereby providing future customer base. ! • Brand name synonymous with gaming. Unlike Sony and Microsoft whom have major stakes in other industry, Nintendo deal exclusively with the gaming industry. This generate brand exclusivity. ! • Innovative technology compare to competitors. Nintendo Wii’s success is derived partially from its motion control technology. Motion control was able to reduce the unfamiliarity of video game interface and allows a wider range of audience to enjoy video games. ! • Affordable pricing compare to Nintendo’s competitors. From the 5th generation to the 8th generation of game consoles, Nintendo always sales for less than its competitors. This price advantage is a result of Nintendo not targeting the graphically intensive video game software, thus saving on video game console components such as GPU and CPU (Wikipedia, 2013). ! ! ! Strengths: ! ! • Brand image! • Innovative technology ! • Affordable pricing Weaknesses:! ! • Dependence on exclusive software! • Over-reliance on casual games! • Deflating currency (Japanese yen) Opportunities: ! ! • Maturing digital distribution system! • Increasing independent developers! • Expanding consumer base Threats:! ! • Threat of substitution ! • Lack of diversification
of 30 45 Weaknesses!• Dependence on console exclusive titles and in-house developed titles. Limited games may result in poor console sales. ! • Over-reliance on the casual gaming market. Nintendo may suffer from market saturation and highly elastic demand curve. ! • Nintendo’s brand image is targeted towards family units, and this might limit the appeal of Nintendo’s consoles to certain gamers. ! • Nintendo’s 7th and 8th generation consoles do not have similar graphical capability as its competitors. The firm’s internal resource and capability to develop graphically intensive hardwares are restricted. ! • Geographical and cultural references may not reach Western audience. Most of Nintendo’s software studio are located in Japan, and the games produced may not appeal to certain demographic (Nintendo, 2013). ! • Japanese yen’s deflation will impact Nintendo’s margin. Exchange rate between US dollar and Japanese Yen had reached a 4 year high, and 40% Nintendo’s sales are made in North America (Google Finance, 2014 Nintendo 2013). ! Opportunities ! • Digital distribution systems are in its maturity phase, and Nintendo can expand their business by offering more content and services through this platform. This also remove physical distribution channel from the value chain, thus allowing Nintendo to obtain additional value. ! • Expanding number of independent game developers greatly increase the potential third party developers for Nintendo. Nintendo can consolidate its market position in casual gaming. ! • The gaming community is expanding, and many non-traditional customers start to experiment with video games. In addition, house-hold penetration of video game consoles have reached 71% (Surette, 2006). Nintendo can further capitalize their experience on developing new consumer base. ! • Globalization of video game industry will lead Nintendo to discover new profitable regional consumer base. ! Threats ! • High threat of substitution, with other platforms such as mobile and online. ! • Lack of diversification. This threats is less so with Nintendo’s competitors, since they have other source of revenue other than from video game console. !
of 31 45 VRIN Analysis ! Nintendo’s competitive advantages lie in its existing vertical integration, experienced software division, and global presence. However, with changing industry environment and consumer preference, Nintendo has to secure the continuation of these competitive advantages. VRIN (valuable, rare, imitability, substitutability) framework identifies the sustainability of these three core competencies. ! Vertical Integration ! Figure 20 illustrates the value chain of the video game industry, and Nintendo vertically integrated all the components other than retailing (bordered in red). Vertical integration had allowed Nintendo to control the interaction and logistics between the different chains. Developers feedback and request on the hardware capability greatly inferences design choices and cost for the console makers (Wikipedia, 2014). Because Nintendo is vertically integrated, it was able to control the hardware manufacturing cost of Wii at $150 while Sony’s PS3 cost $800 per unit and sales for only $499 at lunch (Shilov, 2009 Murph, 2006). Figure 20: Video game industry value chain ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Source:Beinisch, Y., Paunov, C., Vickery, G. Wunsch-Vincent, S. (2004).Working Party on the Information Economy Nintendo’s ability to vertically integrate is highly valuable, and it allows Nintendo to control cost, and establish coherent strategy (e.g. targeting certain segments of customers). Such feat is also rare in the industry, since Microsoft and Sony was unable to create a fully integrated platform. It is difficult to imitate this core competency since barrier of entry for the console
of 32 45 industry is high and it takes years to create the capability to develop and publish blockbuster games on consoles. Nintendo’s brand image and 50 years experience in the video game industry are hard to be substituted. Nintendo’s vertical integration core competency provide a sustainable competitive advantage. ! Experienced Software Division ! Nintendo’s Software Planning Development (SPD) division is responsible for many major hits developed and published by Nintendo, with titles such as Wii Sport (80 million sales) and Super Mario Bros. (40 million sales) (VGC, 2014). The SPD division had created commercial success ever since 1989, and this division had retained several of the original development officers from the old software divisions (Nintendo, 2013). The SPD is headed by video game veterans that’s been involved in the video game since its conception (Yahoo Finance, 2014). This internal capability in human resource marks a core competency of Nintendo. ! Video game software is the driving force of the entire industry, therefore Nintendo’s SPD division is an inseparable and valuable part of the company. Only few software developers remained from the start of the industry until present day (VGC, 2013). Nintendo’s ability to survive and generate constant profit is rare, un-substitutable and in-imitable in the video game industry. ! Global Presence ! Nintendo has four major international divisions in Europe, Asia, North America, and Australia. They are responsible for regional distribution, marketing, and advertising (Yahoo Finance, 2014). This large global reach ensures timely product launch and economy of scale. Global presence is certainly valuable for Nintendo as a Japanese based company to reach out for a wider customer base, but both Sony and Microsoft have similar global presence (Yahoo Finance, 2014). ! Out of the three resources and capabilities, only vertical integration and experienced software division provide Nintendo with sustainable competitive advantage. Table 2 summarizes Nintendo’s VRIN analysis. Table 2: VRIN analysis ! Resource or Capability Valuable Rare In- Imitability Non- Substitutability Does this resource or capability provide a sustainable competitive advantage? Vertical Intergration Yes Yes Yes Yes Yes Experienced Software Division Yes Yes Yes Yes Yes Global Presence Yes No No No No
of 33 45 ! Sony Overview ! Sony Computer Entertainment (SCE) is the subsidiary of Sony that is responsible for the video games related products and development (Sony, 2014). SCE was established in 1993, prior to the launch of the PlayStation — Sony’s original video game console. Other than research and development of the consoles, SCE is also a developer and publisher of video game software (Sony, 2014). However, the the sales of Sony published games have less sales compared to third- party developed games (VGC, 2014). The first PlayStation was released in the US in 1995, and Sony has since established itself as a leader in the console market. PlayStation reached global sales of 105 million units, 150 million for PlayStation 2, and 77 million for PlayStation 3 (Schmidt, 2013). PlayStation 3’s current market share is 31% despite its slow sales after launch (VGC, 2013). Sony has also gain revenue through publishing AAA game titles such as Grand Theft Auto and Final Fantasy. Sony Computer Entertainment’s Vision Mission Objective ! Vision ! • Create exciting new digital entertainment experiences for consumers. • Bring cutting-edge products with latest generation content and services. (Sony, 2014). ! Mission ! • Develop broad range of innovative products and multimedia services. • Challenge the way consumers access and enjoy digital entertainment (Sony, 2014). ! Objective ! • Ensure synergy between business within the organization • Create new worlds of entertainment that can be experienced on a variety of different products (Sony, 2014). ! Financial Analysis ! Sony’s launched PlayStation 3 in 2006, however the sales was only 1.2 million due to the console’s high premium ($ 499) and a lack of games (Zackariasson, 2008). This lack of sales and costs associated with launching the console lead Sony to announce an operating lose of $225 million in 2006. In 2007, sales increased 8 folds and revenue jumped two times to $3 billion, as shown in figure 21. PlayStation 3’s sales was able to reach a peak in 2010 at 15 million units (VGC, 2013). However, Sony’s sales-growth comes at a cost of profit margin, as production cost came closet to $800 while retail price is only at $500 (Murph, 2006). The video games segment
of 34 45 of Sony was able to turn an operating loss of $144 million in 2008 into a profit of $110 million in 2009, as unit cost decreased as a result of economy of scale and cost reduction effort. By 2010, Sony was able to break-even on its PlayStation 3 instead of running a $300 lose per sale at launch (Hesseldahl, 2013). Figure 21: Revenue Operating income trend of SCE from 2006-2012 ($ millions) ! ! ! ! ! ! ! Source: Adapted from Sony’s Financial Reports 2006 – 2012. ! Sony’s operating income in 2012 is only at meagre $9 million, and this is attributed to research and development cost of the new generation console PlayStation 4 (Sony, 2012). Figure 22 shows that units sold of PlayStation 3 did not correspond to revenue trend in contrast with Nintendo’s unit-revenue comparison. This is due to PlayStation 3’s high unit cost, for Nintendo was able to have consistent margin since launch compared to Sony’s break-even margin in 2010 (Brightman, 2007). Figure 22: PS3’s yearly units sold superposed on SCE’s yearly revenue ! ! ! ! ! !! ! ! ! Source: Adapted from Sony’s Financial Reports 2006 – 2012 data retrieved from: http:// www.vgchartz.com 0 700 1400 2100 2800 2006 2007 2008 2009 2010 2011 2012 Revenue ($ million) -300 -225 -150 -75 0 75 150 2006 2007 2008 2009 2010 2011 2012 Operating Income ($ million)
of 35 45 Strategic Approach ! Hardware: 7th Generation ! Sony had a much delayed launch of PS3 on November 2006. PS3 had a similar strategy as PS2 in terms of redefining the media storage standard. PS2 had a DVD drive, which normally sold separately for around $100, and this provides added value for a machine that sells for $299 (Wikipedia, 2013). PS3 wanted to use the same strategy by bundling the PS3 with a Blue Ray DVD drive. PlayStation 3’s $500 price tag was most daunting for consumers, especially in comparison with Xbox 360 ($400) and Nintendo Wii ($250). Blue Ray technology increased the data capacity of a single disk, however this has little impact on game graphic quality. However, including Blue Ray as the disc drive substantially increased production cost, in addition, PS3 has multicored-cell processor which puts the production cost through the roof. It is estimated that Sony loses $300 for every PS3 they sell (Grant, 2013). Moreover, the added hardware complexity of the platform made it hard for developers to fully exploit the capacity of PS3, and the standard developer kit offered by PS3 provides a daunting task for developers to produce cross-platform games efficiently (Wikipedia, 2013). As a result, Sony had to cut royalty rate in order to encourage developers to make games for it (Grant, 2012). However, later on through downgraded hardware and increased marketing, PS3 had caught up with Xbox 360 to a market share around 30% (VGC, 2013). Ever since the 6th generation, connectivity and online component had became a industry norm, but this is pursued with different strategies. PlayStation Network (PSN) was instituted as a free online network that provides downloadable contents (DLC), and multiplayer mode. As user based was well established, PSN transitioned from free version into subscription based. The subsequent PlayStation Plus generated $1.2 billion, more than the console segments in 2013 (Schmidt, 2013). Hardware: 8th Generation ! Other than being a powerhouse console (judging on tech specs), there are three points worth mentioning about the PlayStation 4. First, the PlayStation 4 has a “second screen” function, where Sony’s existing portable gaming device PS Vita is used. Similarly to the Wii U GamePad, PS Vita acts as controller but it also functions independent gaming system. This feature effectively achieved “killing two birds with one stone”. On one hand, it reduces the unique two screens system offered by Wii U, on the other hand, Sony could boost the sales of PS Vita. Second, Sony acquired a game streaming company Gaikai in 2012. PlayStation Store will allow users to access stream games and demos, without the need to wait for lengthy downloads. This allows Sony to bypass game retailers, also provide more expedient access to customers preference.
of 36 45 Lastly, Sony has broken away from the traditional “razor model”, and PlayStation 4’s production cost is $18 lower than its retail price (Hesseldahl, 2013). Moreover, PlayStation 4 is priced $100 below Microsoft’s Xbox One, a reverse situation in the 7th generation. This cost advantage and price advantage have already proven to work, with PS4’s first day sale arriving at 1 million units in the US (VGC, 2013). Software ! Sony’s software strategy is aligned with industry standard of building installation base to attract third-party developers. There are few in-house developed games that made it to the top-sells chart such as Gran Turismo. In addition, platform exclusive games are sought after by PlayStation supporters, and are a driving factor for console sales. IBIS (2013) estimates that platform exclusive games drive 20% of console sales. Sony’s future software strategy is unlikely to change (Schmidt, 2013). ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !
of 37 45 SWOT Analysis ! Sony has significant brand recognition in Asia and PlayStation 4’s sales has 4 million within 4 months of its launch (VGC, 2014). Under these optimistic conditions, slim operating income and decreasing bargaining power still threaten Sony’s prospect. SWOT analysis will address these factors. Table 3 summarizes the findings of SWOT analysis. Table 3: SWOT analysis Strengths ! • Effective cost control in the 8th generation console market. Sony was able to reach unit cost break-even at the launch phase compare to $300 deficit in the 7th generation consoles. • Brand recognition as leading electronic manufacturer. Sony’s brand commands respect especially in Asian countries (Grant, 2012). • Well-established and profitable online platform. PlayStation Plus has reached revenue equitable to that of market leader Microsoft in online services (Ivan, 2013). Weaknesses ! • Games on the PlayStation may only appeal to certain audience, as majority of the console exclusive software are developed by Japanese studios (VGC, 2013). • Slim operating income. Sony needs to increase its profit margin per unit in order to avoid similar financial performance during the 7th generation consoles. ! ! ! ! Strengths: ! ! • Effective cost control! • Brand recognition ! • Profitable online platform Weaknesses:! ! • Limited appeal to consumers! • Slim operating income Opportunities: ! ! • Synergies with existing products and divisions! • Lifting of video game bans in China! • Lowering computing hardware cost Threats:! ! • Competition! • Decrease bargaining power
of 38 45 Opportunities ! • Synergies with existing Sony divisions and products. Sony’s entertainment division has music labels and films that are currently being distributed on the PlayStation Plus, and Sony’s portable system PlayStation Vita can act as secondary controllers for PlayStation 4. • Liberalization of video games in China. The Chinese government bans video games consoles and software’s official sales, and most of the consoles within the country are smuggled in. In 2014, the Chinese government has temporarily lifted this ban (Webster, 2014). This new segment of the Asian market should provide fertile ground for Sony to profit. • Reduced cost of computing hardwares overtime. The Bureau of Labor Statistics reported in 2009 that from 1998 to 2009, the price index of computing hardwares dropped 20% every year. If this trend continues, the production cost of consoles will likely to be reduce. Threats ! • Increased bargaining power of software developers. Alternative platforms are available for publishers which reduces the bargaining power of incumbent platforms. • Competition from new entrants. Such new entrants include Valve Corp. whom has just announced the Steam Machine, a direct competitor for the PlayStation 4, and Ouya whom provides video game streaming services. ! ! ! ! ! ! ! ! ! ! !
of 39 45 VRIN Analysis ! Sony, as a conglomerate, performs many functional activities such as logistics, but these capabilities are easily imitated by Sony’s competitors. However, the core competencies of the Sony Computer Entertainment division lies in its technological resources and cross-divisional synergy. Technological Resources ! Sony technical capability was featured in many of its earlier innovations. Sony along with other companies introduced many industry standards such as Compact Disc, Digital Versatile Disc, and the most recent Blue-Ray Disc. In terms of hardwares, Walkman, MiniDisc and the first PlayStation was revolutionary and created completely new markets (Marcus, 2010). Technologically, Sony produced more advanced consumer-electronic products than its competitors (Marcus, 2010). For example, the first PlayStation introduced the new concept of 3- dimensional games while Nintendo and Atari still focused on traditional 2-dimensional games. The technology behind 3-D game play was preambled by the development of CD which can hold more data. PlatStation was the first video game console that broke the 100 unit sold record (Wikipedia, 2014). From this example, we can see that Sony was able to leverage its internal divisions’ technical resources, and get ahead of its competitors. Sony’s experience and expertise in research and development are supported by the number of patents it owns. From 1997 to 2012, Sony has be consistently on the top 10 companies the United States Patent and Trademark Office (USPTO) issues patents to. In 2012, the USPTO issued 3017 patents to Sony. Cross-divisional Synergy ! As mentioned in the last section, Sony’s many break-through products are results from cross- divisional efforts. Sony has a multidivisional organizational structure, with many strategic business units (SBU) within each division. SBU relates to each others in terms of shared products or markets (Marcus, 2010). SBU allows individual units to be responsible for its own profitability and targets, and this provides certain level of autonomy for each SBU. Meanwhile, each SBU can share experiences and expertise with one another (Gretz, 2010). The evaluation of Sony’s resource and capability is appended in Table 4. Table 4: VRIN analysis Resource or Capability Valuable Rare In- Imitability Non- Substitutability Does this resource or capability provide a sustainable competitive advantage? Technological Resources Yes Yes Yes Yes Yes Cross- divisional Synergy Yes Yes Yes Yes Yes
of 40 45 Conclusion ! The video game console industry was able to recover from the 2008 financial crisis, and with the release of the 8th generation consoles, the momentum the industry accumulated in the earlier decades is making a comeback. In such as technologically advanced industry, the reliance on boasting the highest quality hardware and software is perhaps the most important selling point. Both Sony and Microsoft responded to the market call and are reaping record-breaking level of sales on their respective release date. On top of advanced technology, having a quality console first to market can deliver a major competitive advantage, but the market failure of Wii U remains a cautionary tale for hasty deployment of products. Data processing, storage and sales are moving to the cloud, and console manufacturers are shifting their focus towards online integration of their products. Revenue conflict against the used-game industry can be resolved this way. However, hard-copy retailing of games are not likely to become passé in the distant future. The value chain within the overall game industry is large and complex, with many co-dependent players. Regardless, one should be reminded that game softwares are still the fountainhead of revenue generated in the industry. Due to recent shift of “razor model” pricing practice, and ever more innovative gaming accessories, the hardware market might proven to be profitable after all. ! ! ! ! ! ! ! ! ! ! ! ! ! !
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Industry Analysis

  • 1. of 1 45 !       The Video Game Console Industry in the US ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! January 13, 2014 Peter (Yi Nan) Zhang !
  • 2. of 2 45 Executive Summary ! The video game industry is projected to become the leading entertainment segment, and it has generated $38 billion in 2013 worldwide, more than the revenues of the movie and music industry combined. Video game consoles have a household penetration rate of 42% in the US, indicating a wide recognition and acceptance by consumers. Moreover, the U.S. consumers are spending more income on video games and consoles, from $4 billion in 1990 to $16 billion in 2012. ! The video game market is segmented into: consoles, physical games and software, online games and software, and accessories. Physical games and software lead the market with 41% market share ($16 billion), and consoles represent 33% of the industry revenue, generating $13 billion. In this industry analysis, the game console segment will be the main focus, while the entire video game industry is discussed to provide background knowledge in order to understand the nuance in the game console industry. ! Barriers of entry for the game console industry are high due to intensive initial capital investment and the need for technical expertise, and only three companies occupy the entire console market. Supplier power is high since there are only few manufacturers for the tech-intensive chips required to build consoles. These components directly affect the graphic capability of the console, which is a major selling point of a console. ! The video game retailers represent 90% of the purchasing activity of video game consoles, and therefore has immense buyers power. However, since video game consoles provide a decent profit margin for the retailers, and there are only few substitute products, bargaining power is equal between the retailers and manufacturers. The threat of substitutes is low due to console’s cost advantage over PC, and better profit margin over mobile platforms. Console makers derive majority of their profit from royalty fees collected from game publishers, which means market share is a key industry driver. This relationship between market share and profit leads to intense competition between console manufacturers. ! Nintendo was the market leader in the 7th generation console era with 100 million units sold, and its revenue reached $7,500 million in 2008. Nintendo’s success lies in Wii’s appeal to unconventional consumers such as females and the elderlies. However, sales declined drastically from 2008 to 2012, from 20 million yearly units sold to 3 million respectively. ! Sony deploys completely different strategies in making and marketing their consoles. Sony focuses on the hardcore gamer market where graphic capabilities and AAA game titles are the driving forces of sales. Despite of the initial financial strain caused by PlayStation 3’s high unit cost, Sony’s computer entertainment division became profitable in 2009 with an operating income of $75 million. ! !
  • 3. of 3 45 Table of Content Executive Summary! 2! Table of Content ! 3! Introduction! 4! Industry Definition! 5! Key Industry Characteristics! 7! History! 7! Industry Revenue and Forecast ! 8! Market Segmentation! 9! Value Chain! 10! Industry Life Cycle ! 11! Changing Environment ! 11! External Analysis! 12! PEST Analysis! 12! Political! 12! Economics! 13! Socio-cultural Demographic! 13! Technological ! 14! Competitive Analysis! 16! Industry Rivalry — High! 16! Barriers to Entry — High! 16! Suppliers Power — High! 17! Buyer Power — Moderate ! 17! Threat of Substitutes — Low! 18! Key Industry Drivers! 19! RD Capability! 19! First-to-market Advantage ! 19! Expanding Consumer Base! 19! Additional Revenue Models ! 20! Company Analysis! 22! Nintendo Overview! 23! Nintendo’s Vision Mission Objectives! 23! Financial Analysis! 23! Market Saturation! 25!
  • 4. of 4 45 Introduction Demand Elasticity! 25! Strategic Approach! 26! Hardware: 7th Generation! 26! Hardware: 8th Generation! 26! Software! 28! SWOT Analysis! 29! Strengths! 29! Weaknesses! 30! Opportunities! 30! Threats! 30! VRIN Analysis! 31! Vertical Integration ! 31! Experienced Software Division! 32! Global Presence! 32! Sony Overview! 33! Sony Computer Entertainment’s Vision Mission Objective! 33! Financial Analysis! 33! Strategic Approach! 35! Hardware: 7th Generation! 35! Hardware: 8th Generation ! 35! Software! 36! SWOT Analysis! 37! Strengths! 37! Weaknesses! 37! Opportunities! 38! Threats! 38! VRIN Analysis! 39! Technological Resources! 39! Cross-divisional Synergy! 39! Conclusion! 40! Reference! 41! Bibliography ! 45
  • 5. of 5 45 ! The advent of the video game industry is seen by many to be a recent development in the entertainment industry (Allen Kim, 2005). As an entertainment medium, video games can appear unfamiliar to some audience in comparison with the more traditional media such as TV or radio. However, video game is a mature industry with its own life cycle, value chains, and market leaders. The video game industry is ill defined by current industry classification system. In addition, the relationship between software developers and hardware manufactures is complex due to overlaps of their revenue streams and the interconnections between the industry value chains. Such ambiguous definition exists in other computing related industries. The video game console industry will be the main focus in this report, while the entire video game industry will be discussed so that the readers can understand the nuance in the overall video game industry. ! Industry definition and key characteristics are introduced first, and this section provides required background knowledge. Three analytical frameworks are used in the external analysis: PEST, Porter’s 5 Forces, and Industry Key Drivers. Finally, company analyses of two of the three video game console incumbents Sony and Nintendo are presented. In the company analyses, company history, and mission statements are provided. Financial, strategic, SWOT, and VRIN analysis are conducted. ! Industry Definition ! Under the International Standard Industry Classification, the video game industry overlaps 7 different and distinct sectors from “software publishing” to “retail sales of games and toys”. Similar blur of industry definition exists under the North America Industry Classification System as well (Beinisch, Paunov, Vickery Wunsch-Vincent, 2005). In addition, there are components of the video game industry that are not coded at all, such as “online computer game industry” (Schmidt, 2013). One way of describing the industry is to look at a simplified value chain. Figure 1 separates the video game industry into: video game consoles, games, services, and peripheries. Figure 1: Video game industry definition by value chain ! ! Consumer Consoles Games Services Peripheries
  • 6. of 6 45 However, the video game industry is best defined by its revenue sources: software (games), hardwares (game consoles), online gaming subscription, development, manufacturing and distribution of games, and hardware related accessories (Figure 2) (Schmidt, 2013). ! Figure 2: Video game industry definition by revenue source ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Online Gaming SubscriptionSoftware Development Manufature and Distribution Related Accessories Hardware
  • 7. of 7 45 Key Industry Characteristics ! History ! Ralph Baer, the “Father of Video Games”, built the first video game console in 1966, and the console was later licensed under the trade name Magnavox Odyssey. At the time, video game consoles had not gained wide public recognition and ownership until the game PONG was published in 1972 (Wikipedia, 2014). Console and game sales have been increasing ever since. Figure 3 charts the total industry revenue from 1990 to 2011, and distinct cycles can be observed in this graph (in-between red arrows). These cyclical changes mark the end of one generation of consoles. Figure 3: US consumer expenditure on video games and consoles ($ billion) ! ! ! ! ! ! ! ! ! ! ! Source: Grant, R.M. (2013). Contemporary Strategy Analysis. ! The video game industry timeline is segmented based on video game console generations, and game software is also labeled on this generational timeline (Grant, 2012). Each generation lasts for about five years, and the 8th generation just jump-started with the release of Sony PlayStation 4, and Microsoft Xbox One in 2013 (Figure 4) (Wikipedia, 2014). Figure 4: Video Game Console Generation Timeline !!!! ! ! ! ! Source: Wikipedia (2014). Video Game Consoles. 2nd Gen.! 1978-1985:! Leader— Atari 3rd Gen.! 1985-1990:! Nintendo 4th Gen.! 1991-1995:! Nintendo 5th Gen.! 1995-1998:! Nintendo 6th Gen.! 1999-2005:! Sony 7th Gen.! 2006-2012:! Nintendo 8th Gen.! 2012-:! Sony
  • 8. of 8 45 Industry Revenue and Forecast ! The global revenue of the video game industry is $38 billion in the US, and the annual decline between 2008 to 2013 averages 2% (figure 5). This is largely attributed to the 2008 recession, and as personal disposable income and consumer confidence drop, video game industry experience synchronous decrease in revenue (Schmidt, 2013). However, due to a steady recovery of the economy, along with an increase in personal disposable income and consumer confidence shown in figure 6, IBIS (2013) expects an average annual growth of 4% from 2013 to 2018. Figure 5: Global percentage change and forecast in video game industry revenue ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !! Source: Schmidt, D. (2013). IBISWorld industry report: NN003 video games in the US. Figure 6: Global percentage change and forecast in per capita disposable income ! ! ! ! ! ! ! ! !!!!!!! Source: Schmidt, D. (2013). IBISWorld industry report: NN003 video games in the US.! oming five years, the Video dustry is expected to grow at a pace. More specifically, 2014 is expected to be 7.0%, the release of pent-up s consumers’ disposable mprove. In addition, new leases (expected year-end uld help reinvigorate the albeit at cost to hardware anticipated to reach $46.4 presenting an average annual e of 3.9% over the coming period. e gaming space is expected by stry analysts to grow y over the next few years, with mobile gaming revenue to reach $11.4 billion by 2014. However, IBISWorld because 60.0% to 70.0% of downloaded p profitable games. These then put on the Apple App oogle Android Market for ownload, providing s with revenue through a ee or in-game ments. The low barriers to n compared with console and developers, have caused the video game publishing s to explode over the past five wing an estimated annualized total industry employment has risen at an annualized rate of 6.6% over the same period to reach 156,539. However, due to the low retail price of these games (most through in-game ads, while the rest retail for less than $5), smartphone games have industry revenue. %change 15 −10 −5 0 5 10 1905 07 09 11 13 15 17Year Industry revenue SOURCE: WWW.IBISWORLD.COM Video Games in the US August 2013 6 mance d Internet connections. These nclude multiplayer modes, dable content and in-game chat , which can be free or provided r subscription basis. Consumers asingly use these online The percentage of services d online is expected to increase 013, representing a potential ity for the industry. Consumer Confidence Index how consumers view the current economy (i.e. positively or negatively) and their expectations over the next several months. When consumers generally have a positive view of the economy, they are more likely to purchase discretionary goods, like video games. This driver is expected to increase during 2013. %change 5.0 −5.0 −2.5 0.0 2.5 1806 08 10 12 14 16Year Per capita disposable income SOURCE: WWW.IBISWORLD.COM 1804 06 08 10 12 14 16 ent on leisure and sports
  • 9. of 9 45 Market Segmentation ! In 2013, the video game industry is segmented into: “physical games and software” (41.%), “consoles” (33%), “online games and software” (17%), and “accessories” (9%) (Figure 3). Figure 7: Market share by revenue of different segments ! ! ! ! ! ! ! ! ! Source: Schmidt, D. (2013). IBISWorld industry report: NN003 video games in the US. While console sale represent the second largest segment, it is not the centre of the industry, and this is partially the result from high production cost. The console industry deploys a “razor model”, where products are sold at a loss, but complementary products are sold to make up the the lost revenue (Grant, 2013). Video game softwares sold on a particular console are charged a royalty fee, at this fee constitutes the profit-making device for the console industry. Piracy issues become highly relevant to the health of video game console industry, and the major console manufactures are reluctant to enter certain market due to a lack of intellectual property protection policies (Beinisch, Paunov, Vickery Wunsch-Vincent, 2005). Retailing of games generate the largest share of revenue in the game industry, IBIS (2013) estimates that the sales of console games, PC games and used games will generate 16 billion by the end of 2013. Development fees charged to publishers are rising as well, due to industry expansion, and console makers are realizing that new console systems drive up demand for quality games, and not providing such content could have devastating effects on the new platform (Schmidt, 2013). Some console makers such as Microsoft even paid the game developer for console exclusive content. Among publishers, such trend of competing for game developers also exists. IBIS (2013) estimated that development revenue to grow at a annual rate of 12.8% as a result of this shift in buyer/supplier power. AAA titles is a strong driver for revenue, for instance, established franchise such as Call of Duty Ghost had generated revenue of $1 billion in the first day of its release (VGC, 2013). The growth 41.4%Physical games and software 32.6% Consoles 17.2% Online games and software 8.8% Accessories
  • 10. of 10 45 of AAA games are estimated at an annualized rate of 9.8% from 2008 to 2013 (Schmidt, 2013). Other than franchises, publishers attempt to create niche market for different genre of games. Existing genres include first-person shooters (FPS), real-time strategy (RTS), and simulation (Sims). These genres are sometimes platform dependent, for example, RTS is almost exclusive to the PC platform due to a superior input systems, since it is difficult to select different game characters using a console controller compare to mouse and keyboard. 35% of PC games are RTS games, while only 3% of console games are designed this way (Schmidt, 2013). Even some of the AAA franchise cannot surpass this hardware barrier. Halo, a major title on Xbox 360, had tried to introduce RTS play on the console platform and received only lukewarm response (VGC, 2012).! Value Chain ! There are 6 key players in the value chain of video game industry: hardware manufactures, developers, middlewares, publishers, distributor, and retailer (Beinisch, Paunov, Vickery Wunsch-Vincent, 2005) (Figure 8). Despite console manufacturers being the largest participants, console itself is not the focus of the market, it is just a vehicle to deliver contents (much alike theatres being the conduit, and movies being the content). Games are the focus of the industry. Figure 8: Value chain of video game industry ! ! ! ! ! ! ! ! ! ! Source: Adapted from Beinisch, Y., Paunov, C., Vickery, G. Wunsch-Vincent, S. (2004).Working Party on the Information Economy Developers first have to find publishing companies to fund the game project, then they use game- making softwares made by middleware companies to produce games, and finally, the publishers find distributors such as GameStop, Toys “R” Us, or Walmart. Distributors sometimes buyback
  • 11. of 11 45 used games, and then selling second hand games for a very high margin, even higher than margins for the developers and publishers (Schmidt, 2013). Video game publishing is similar to book publishing, in that the more popular and profitable the developer (author) is, the more power the developer exert on the publisher. Then, the publisher can charge more for the successful games’ distribution, and retailer pass that on to the consumer (Schmidt, 2013). Successful game titles plus the releases of new console system drive the growth of retail (9.8% annual increase) (Schmidt, 2013). It is important to note that, just as diagram 2 shows, developers are the value creators and drivers for the entire value chain, but they cannot exist without any other components.! Industry Life Cycle ! Video game industry’s industry life cycle high resembles that of the video game console product life cycle. Figure 9 has consumer expenditure on video games side-by-side to product life cycle of console market leaders through different generations. Figure 9: Industry life cycle compared to console product life cycle ! ! ! ! ! ! ! ! ! Source: Adapted from Marchand, A. Hennig-Thurau, T. (2013-07-19). Value Creation in the Video Game Industry: Industry Economics, Consumer Benefits, and Research Opportunities. ! Changing Environment ! Many of the industry norms and conditions are starting to change due to technological and demographical shifts. For instance, in 2006, the introduction of motion sensing technology by the Nintendo Wii had catapulted the console to market supremacy, but later economic recession, and competition by other platforms had pushed Nintendo to the corner (VCG, 2013). !
  • 12. of 12 45 External Analysis ! This external analysis will look on three levels of the video game console industry: macro- environmental factors, competitive landscape, and specific key industry drivers. The structure is shaped so that there could be a reverse pyramid structure from the broad to the specific topics. Figure 10 summarizes the frameworks that will be used in the external analysis. Figure 10: Structure of the external analysis! ! PEST Analysis ! Macro-environmental factors shape the backdrop of the video game industry, and general trends of these factors inform companies of their strategic decisions. For example, Nintendo Wii’s commercial success correlates strongly with the rise of casual gamers. PEST analysis provide a framework for users to categorize macro-environmental factors into: political, economics social- cultural, and technological. Political ! Public debates on the relationship between video games and violence has been persistent, and the fundamental disagreement revolves around the balance between freedom of expression and public interest. Several mass-shootings in the US are blamed on influences of violent video games, with prominent example of the Columbine Massacre (Gaudiosi, 2011). There are laws in many European countries that outlaw or censor racist or there defamatory content. In the US, the Communications Decency Act puts restrictions on the content of games, but up-to-date, only a handful of games have been pull off the shelf due to violence or indecency (Clark, 2014). In addition, the Entertainment Software Rating Board (ESRB), a self-regulatory organization, assigns and enforces appropriate age rating to video games. Most video game retailers do not carry any games without ESRB ratings, and console manufactures will not licence games for their system unless they carry ESRB ratings (ESRB, 2014). PEST Analysis! ! ! Porter’s 5 Forces Analysis! ! ! Key Industry Drivers Analysis Macro-environmental ! ! ! Competitive! ! ! ! ! Industry Specific
  • 13. of 13 45 Economics ! It is hard to separate the video game industry into distinct components, since the industry is often described by economists as a two-sided market, where the operation and revenue model of market A (hardware) is dependent on market B (software), and vice versa (Michaud, 2011). For example, console makers will sell their hardwares often at a loss, but will want to increase “installation base” in order to attract software developers to produce game titles for their platforms. On the other hand, when a game becomes successful, the resulted increased “installation base” will further provide incentives for other game developers to adopt certain platform. Socio-cultural Demographic ! As video game is increasingly becoming an important leisure activity, socio-cultural and demographic became important external factors that determines the nature of the video game industry. i) Socio-cultural Language matters in both the production and consumption of video game contents. All the major software coding languages are in English, and countries without trainings in English will find difficulties development game contents. Moreover, translated video games are only available for countries with enough customer base (Beinisch et. al., 2005). The cultural aspects between different consoles and the game contents are important as well. Microsoft has better console sales figure in North America and Europe, and its sales in Japan is only 1.5 million units up to date (VGC, 2013). This muted reception in Japan is attributable to a “lack of content aimed at Japanese gamers” (BBC, 2008). For example, there are more first personal shooters games that feature Western protagonists from Western game developers, with titles such as Call of Duty, Grand Theft Auto, and L.A. Noire. On the Japanese end, consumers favour games that feature emotionally vulnerable Eastern protagonist, such as Final Fantasy XIII and Metal Gear Solid. Moreover, there are striking dissimilarities in terms of art style, cultural reference and character development between two regions. Sony definitely has the software advantage in Asian countries, the top 10 selling games in Japan in 2013 are all developed by Japanese studios (VGC, 2013). ii) Demographic In the US, younger male gamers have traditionally been the lifeline of the video game industry, However, some publishers are already eyeing the untapped market of female gamers and aging gamers (Figure 11). Despite the shifted attention towards female gamers, the vast majority of gamers (55%) are still young male younger than 45 years old (Schmidt, 2013). This demographic is likely to remain the major consumers for video games indefinitely. The highest grossed video game titles between
  • 14. of 14 45 2008 and 2012 are Grand Theft Auto V, Call of Duty Ghost, and Halo: Reach, which are all targeted towards male gamers (VGC, 2013). Figure 11: Consumer demographics by consumption ! ! ! ! ! ! ! ! Source: Schmidt, D. (2013). IBIS World industry report: NN003 video games in the US. ! Technological i) Moore’s Law ! Moore’s law observes that for computing hardware, the number of transistors on integrated circuits doubles approximately every two years (Wikipedia, 2014). The same can be predicted for the capabilities of many electronic devices, such as processing speed, and memory capacity. The consoles industry follows this general trend, producing evermore powerful machines as new generation of consoles emerges (Orland, 2013). For illustrative purpose, figure 12 shows the average polygons per second of different generation of games. Polygons per second is representative of the graphical capability of consoles. Figure 12: Average polygons per second generated by different generations of consoles ! ! ! ! ! ! Source: Oralnd, K. (2013). Does the power of today’s consoles keep up with historical trends?
  • 15. of 15 45 ii) Broadband Access ! 70% of American adults aged 18 and older have high-speed board band access at home, this covers 80% of the video game consumer demographic (The Pew Research Center, 2012). Broadband access allows console makers and software developers to deliver data-heavy content and services. As information storage and processing are moving to the “cloud”, new business model and revenue model will soon emerge. iii) Mobile Platforms ! Mobile gaming has become more prevalent thanks to the rise of smartphones and tablets, and there was an explosion of developers for mobile games (Schmidt, 2013). These games have a simpler design complexity compared to console games or PC games, therefore a small group of developers can make profitable games and act as their own publishers. Mobile games are placed in virtual market place such as Apple App Store or Google Android Market, and they are generally sold for a small fee (Schmidt, 2013). Moreover, additional revenue is generated through the downloadable contents or in-game advertisement. Due to a low barrier of entry resulted from having smaller development team, the mobile gaming market is highly competitive, and has attracted many new entrants over the past five years, growing an estimated annualized 38% in 2013 (Schmidt, 2013). However, due to a over saturation of games and relatively low retail price, mobile gaming remains only a small portion of the game industry, with an estimated revenue of 12 billion in 2014 (Schmidt, 2013). The expansion of mobile devices would increase the accessibility of mobile games in other underserved markets, but piracy issues remain strong in those markets. Many smartphones are “jail-broken” or “rooted”, meaning that manufactures and wireless providers cannot monitor the legality of software running on those smartphones (Beinisch, Paunov, Vickery Wunsch- Vincent, 2005). ! ! ! ! ! ! ! ! !
  • 16. of 16 45 Competitive Analysis ! Porter’s 5 Forces is used to conduct a competitive analysis for the video game console industry. Industry rivalry, barriers to entry, and supplier power are high. Buyer power is moderate, and threat of substitute is low. A graphical representation is provided in figure 13. Figure 13: Porter’s 5 Forces ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Industry Rivalry — High ! Competition in the video game console industry is high and the trend is steady. Microsoft, Sony, and Nintendo are the only players in the industry, and by 2013 market share has equalized among the three (VGC, 2013). Competition is intense due to the acknowledgement that for every purchase of a console a near-guaranteed games sales will be made, and royalty of the games will be collected from publishers. Since the console manufactures maintain the “razor model”, attaining market dominance is crucial for their survival. Barriers to Entry — High ! Barriers to entry in the console industry are high and increasing. New ventures into producing video game consoles will be ill-advised. The barriers preventing new entrants to this market is prohibitive, and these barriers are attributed to RD cost, and manufacturing cost (Zackariasson Wilson, 2008). The most recent entrant into the video game market was Microsoft, and its Xbox console was able to capture 31% of market share in 2013. This is largely due to Microsoft’s extensive financial backing (VGC, 2011). Entering the video game market is not only unaffordable for most startup companies, but also the cost associated with fully exploit economy of scale is enormous. Incumbents have extensive brand power that commend considerable loyalty amongst gamers, so called “console wars” Industry Rivalry: High Barriers to Entry: High Supplier Power: High Buyer Power: Moderate Substitue: High
  • 17. of 17 45 between fractions of different console supporters had been a constant headline topic on internet forums (VGC, 2013). In terms of costs of RD and manufacturing, Microsoft’s Entertainment and Devices division had an operating costs of nearly $ 7.6 billion in 2011 (Microsoft, 2011). Given the time it takes a console to reach its profit generating phase, entry to this market without extensive financial backing is unlikely. Moreover, the talents and skills required in this industry are highly specific, ranging from electric engineering, assembly line manufacturing to financial planning. Acquiring these talents would be impossible for new entrants whom have limited human-resource connection and industry recognition. Since the beginning of the video game industry in 1980s, only five console manufactures achieved noteworthy marketshare. These companies are Atari, Sega, Nintendo, Sony and Microsoft. Atari and Sega are long driven out of the market, leaving Nintendo, Sony, and Microsoft dominating the market for the past 13 years (Wikipedia, 2012). Any new entrants will face intense retaliation by the incumbents. New entrants would face the problem of accessing distribution channels. Most of consoles are sold via electronic and gaming-specific retailers, and incumbents have long-established connection with these retailers (Zackariasson Wilson, 2008). Also, due to large volumes of existing consoles moving through the retailers, console manufactures have relative high bargaining power, which new entrants cannot achieve in a short time. Online retailing exists as a plausible distribution channel for new entrant. However, this method does not have the reach retail stores have, and the extra cost of shipping will pass down to the customers which has negative consequences to the initial introduction of a new console. Suppliers Power — High ! Two major components of a video game console are central-processing unit (CPU), and graphic- processing unit (GPU). AMD (market share of 20%) and Intel (market share of 70%) are the only two major CPU producers in the world, and dominant manufacturers for GPU are Nvidia and AMD (PassMark, 2013). The supplier market is dominated by three large suppliers, and they have great supplier power. There are no substitutes for these two critical components, since alternative CPUs and GPUs are either targeted to mainframe computers and mobile devices (Subramaniam, 2013). Furthermore, graphics quality is one of the differentiating factor for the console industry, and none of the incumbents wants to “cheap out” on the CPU and GPU they place in their console. One exception is the Nintendo Wii and WiiU, since Nintendo focuses on non-graphic intensive game market. Buyer Power — Moderate ! Electronic and gaming-specific retailers are the major customers for console manufactures, and the customer market is dominated by few large customers. Even though both Sony (approx. 70
  • 18. of 18 45 stores) and Microsoft (approx. 80 stores) have their own retail stores in North America, but that figure pales compared to BestBuy (800 stores) and GameStops (4,500 stores) (Schmidt, 2013). 90% of consoles are sold via retailers (Schmidt, 2013), and the retailers have a significant share of purchasing activity. This leads to the retailers having large customer power. However, console sales provide 15% margin for retailers and there are only few alternative forms of video game platforms, balancing out customer power (Schmidt, 2013). Threat of Substitutes — Low ! Only the PC and mobile platforms stand to compete with the console industry. However, piracy issues and low profitability plague the two possible substitutes, resulting in game publishers reluctant to produce for these platforms. Moreover, retailers are not focused on gaming-PC market which boast comparable graphic capability as game consoles (PCMagazine, 2013). The price point for a PC that has acceptable graphics quality is around $1,000 (excluding monitor and other accessories), yet the most recent generation of game consoles sell around $400 (PCMagazine, 2013). This discrepancy exists because PC has piecemeal assemblage, with many components selected from various manufactures, and this does not take advantage of economy of scales achieved by game consoles which have standardized components. Secondly, a PC can handle more tasks than a game console, resulting in much CPU and GPU power diverted to theses tasks. While a game console is solely constructed to play video games, ensuring a maximization of hardware utilization. A lack of publishers and a higher price range for the PC and mobile platforms brought about a low threat of substitutes for the game console industry. ! ! ! ! ! ! ! ! ! ! !
  • 19. of 19 45 Key Industry Drivers ! Four key industry drivers are situated in the value chain of the video game console industry: a) RD capacity, b) First-to-market advantage, c) Expanding consumer base, d) Additional revenue models. Each of these factors creates value for the video game console industry and helps ushering new generations of products and services. Figure 14 illustrates the key industry drivers in the context of product, delivery process, and consumers. Figure 14: Key industry drivers arranged in segments of value chains ! ! ! RD Capability ! RD of new console technology stands to be the key winning ingredient to attract customers. However, abstract specifications are rarely the deciding factors on customers’ purchasing behaviours (Schmidt, 2013). Customers often compare the availability of AAA games between consoles before making a purchase, and most contemporary AAA game titles are build on impressive graphics, and RD efforts translate into the capabilities of consoles in supporting these AAA games (Schmidt, 2013). First-to-market Advantage ! First-to-market advantage is equally important as console technology, since once a customer already purchased a console, he/she will be unlikely to purchase a second (Schmidt, 2013). Even so, a balance has to be reached between spending time to refine console technology and releasing the console earlier than competitors. A cautionary tale can be found of Nintendo WiiU. WiiU was released a year earlier than its competitors, and it reached North American sales of 1.7 million units in 2013, however this figure is much lower than what Nintendo had projected. Both PlayStation 4 and Xbox One, which have better graphic, reached 1 million unit sales within the first day of their release (VGC, 2013). Expanding Consumer Base ! From 1990 to 2000, the number of female gamers had remained stable, and they were satisfied with playing games designed for male gamers. In 2013, female gamers represent 40% of game Video Game Consoles:! ! RD Capability First-to-market Advantage Consumers:! ! Expanding Consumer Base Delivery: Additional Revenue Models
  • 20. of 20 45 players, 48% of game buyers and 39% of total revenue generated by the video game industry (Schmidt, 2013). Recent change in marketing and game design philosophy have opened a path for publishers to exploit this customer segment. Criticisms arise in existing video game industry, citing sexist comments in game and on game forums, and sexist game character designs (Myers, 2012). Such observations are related to the percentage of male developers in the industry, and there are calls for female developers to counter-balance the sexist elements in video game designs (Myers, 2012). ! The video game industry started from 1980s, and the primary consumers from that era are approaching their mid- to late 40s. In order to capture/recapture this market, some publishers resort to nostalgia, bringing back older game titles such as Pokemon and Pong on to the mobile platform and consoles’ arcade market (VGC, 2012). Another trend is to claim health benefits of gaming towards the aging population, with Nintendo’s Brain Age games that supposedly improve memory retention. Nintendo Wii has also been widely adopted in retirement homes, and there are reported case that states sports simulation decreases fall risks in elderly residents (Clark Kraemer, 2009). ! Additional Revenue Models ! i) Accessories and Input Devices ! Approximately $3 billion is generated from accessories sales in 2013, and with improved and innovative technology such as motion control, this category of revenue is projected to increase (Schmidt, 2013). Sony had fully integrated touch-interface and gyroscope into PlayStation 4’s controller, while Microsoft bundled its Kinect motion sensing camera to its Xbox One (Microsoft, 2013 Sony, 2013). ii) Used Games ! Used games is a contentious issue in the video games industry, while movie retailers are prohibited from selling second-hand copies of films in the same retail space as new copies, no such protection exists within the game industry (Schmidt, 2013). Game and publishers are against the used-games industry, stating that more reluctant gamers would wait until a game is on the second-hand market instead of buying first-hand copies. Revenues generated this way would not involved developers and publishers, all the proceeds would go directly to the used-games retailers (Beinisch, Paunov, Vickery Wunsch-Vincent, 2005). Used games have a typical 46% margin compare to 20% for new games, and this creates further tension between used-games retailers and publishers (Schmidt, 2013). However, some used-games retailers argues that being able to sale used-games actually generate more disposable income for consumers to purchase new releases (Schmidt, 2013).
  • 21. of 21 45 Publishers have to depend on used-games retailers, since most of the retailers are also new-game retailers. For instance, GameStop Corporation, which is both retailer and reseller of used games, takes up 14% of market share, and has immense bargaining power over publishers (Schmidt, 2013). As a compromise, there are informal restrictions on when a game can be traded in— normally not within the first month of a new game’s release (Michaud, 2011). However, some publishers are already creating their own digital retail platforms, in order to circumvent physical retailers thus avoiding used-games issues. iii) Subscription Model and Online Content ! Other than conventional video games retailing, online subscription model had gained popularity due to its profitability and an ease of digital rights management (Schmidt, 2013). This model can provide a video game company steady streams of revenue, instead of the conventional single-sale model where purchases are only made once and the residual values go to used-game retailers. The PC games segment used to face intense software piracy issues, and this threat has been ever escalating due to an increased broad-band internet users and un-paid hackers whom are willing to “crack” a game and share it with the internet community (Michaud, 2011). As a result, most developers prefer to develop for the consoles platform where such piracy issues are less prevalent (Michaud, 2011). Games with heavy reliance on the internet can successfully overcome piracy issue, since the game is either hosted in servers owned by the game company, or anti-piracy softwares can detect and reject illegal copies (Michaud, 2011). Blizzard Entertainment’s World of Warcraft (WOW) is an massively multiplayer online game (MMOG), and it retained an active user base of more than 10 million, generating $100 million per month (Blizzard, 2013). Many other companies tried to imitate WOW’s business model by offering monthly subscription games (subscription-based software as a service), however the financial performance of these games are mixed. The failure to capture market by these companies are twofold: a) Much time-commitments have to be made when playing MMOG, since users already paid “rents” for playing the game, and the game is inaccessible when the renting term elapses. This condition restricts users willingness to purchase multiple MMOG subscriptions all at once. b) In order to retain existing customers and attracting new ones, MMOG has to develop updates and new in-game contents at a frequent pace. Companies with limited internal and external resource simply cannot keep up with this pace. Variations of subscription-based software as a service (SaaS) exist, and these normally involve downloadable contents (DLC). AAA game titles commend enough follower base to warrant the sales of DLC for a fraction of the original price. These are virtual contents that build on existing game, such as maps, additional missions that adds to the original storyline, or multiplayer modes. This model has the two advantages of SaaS, meanwhile does not put time-commitment pressure on consumers discussed in a). Lastly, selling DLC bypasses retailers, and giving more economic values to the game publisher.
  • 22. of 22 45 Company Analysis ! Three dominant players contest in the 7th generation video game console industry: Sony, Microsoft, and Nintendo. They each represent 31%, 30%, and 39% of the 7th generation console market share by units shipped (VCG, 2013). However, market share doesn’t reflect true profitability due to margin differences between consoles and tied-in software royalties. Figure 15: Market share of 7th generation video game console (by units shipped) ! ! ! ! ! ! Source: Adapted from data retrieved from: http://www.vgchartz.com Sony and Microsoft both have products and operations outside of the video game industry. For example, Sony has major stake in audio and video equipment, and Microsoft occupies the personal computer operating system industry. Nintendo, on the other hand, only deal with video games related products such as video game consoles, software, and peripheries (Nintendo, 2013). Sony and Microsoft are similar in their approach to the video game console industry. In terms of hardware specifications, consoles produced by both companies feature intensive graphic capabilities (Wikipedia, 2014). In the current 8th generation consoles, both companies used the same supplier (i.e. AMD) for their CPU and GPU, indicating further alignment and competition of their consumers (i.e. graphical-intensive hardcore gamers) (Sony, 2013 Microsoft, 2013). The genera of games available on both consoles are also alike, ranging from Role-Playing Games (RPG) to First-Person Shooters (FPS) (VGC, 2013). In addition, Sony and Microsoft rely less on their internal game software developers to produce blockbuster games compared to Nintendo (VGC, 2013). In comparison, Nintendo focuses only on the video game industry, and all top-selling games ever published on Nintendo platforms are developed internally (VGC, 2013). Due to the similarity of Sony and Microsoft’s market positioning in the video game console industry, only Sony’s company analysis will be presented to contrast with Nintendo. ! ! PS3! 31% Xbox 360! 31% Wii! 39%
  • 23. of 23 45 ! Nintendo Overview ! Nintendo has been the market leader in the video game console industry from 1980s to 1990s with the release of Nintendo Entertainment System (NES), and Nintendo 64 (Grant, 2013). Other than dominating the hardware industry, Nintendo has also introduced few of the best-known video game franchises: Super Mario, Tetris, and Pokémon. These games all broke sales record, and each game had more than 30 million units sold. In 2006, with the introduction of Nintendo Wii, Nintendo captured 70% of the market share within three years (VCG, 2013). However, after the 2008 recession, Nintendo’s ran into some trouble. Their Wii sales declined dramatically, and their 8th generation console Wii U had only obtained 1 million sales compared to its predecessor, which obtained 100 million sales (VCG, 2013). By 2011, Nintendo’s revenue declined by 100% and they are running an operating loss of $165 million (Nintendo, 2013). ! Nintendo’s Vision Mission Objectives ! Vision ! • Quality products is only one facet of Nintendo, customers are the centre of attention. • Commitment and enthusiasm are crucial to the high quality of Nintendo’s products and support services. • Customers should be treated with attention, consideration and respect (Nintendo, 2013). ! Mission ! ! • Nintendo listens to their customers, and wants to constantly improve its products and services. • Nintendo aims to treat its employees with the same consideration and respect as Nintendo treats their customers. • Nintendo values its 5000 employees and puts equal amount of commitment towards employees as it did customers (Nintendo, 2013). ! Objective ! • Produce and market the best products and support services available (Nintendo, 2013). ! Financial Analysis ! Nintendo Wii had sold 100 million units up-to-date, and Wii’s commercial success had rocketed Nintendo’s revenue from $2.7 billion in 2006 to $7.3 billion in 2008 (Schmidt, 2013). Operating income also grow proportionally with revenue from $104 million in 2006 to $400 million in 2008, these data are shown in figure 16 . The rosy financial performance was maintained for 3 years until 2009 when operating income dropped by almost 50%, and in 2011, Nintendo suffered an unprecedented loss of $35 billion (Nintendo, 2013). Up to this point, Nintendo had never suffered an annual loss since it entered the video game industry (Jones Castaneda, 2011).
  • 24. of 24 45 Nintendo’s dire financial situation is attributed to Wii’s becoming outdated as 8th generation console looms, and initial RD cost for the new generation console WiiU. RD cost is recovered as console sales grow (Schmidt, 2013). ! Figure 16: Revenue Operating income trend of Nintendo from 2006-2012 ($ millions) ! ! ! ! ! ! ! ! ! ! ! ! ! Source: Adapted from Nintendo’s Financial Reports 2006 – 2012. ! Toward the shift into a new generation of consoles, it is expected that a company’s console sales will begin to decline, leaving a revenue gap between the generations. (Schmidt, 2013). However, figure 17 shows that, Nintendo’s sales declined faster than its competitors and corresponds to the drop in revenue in 2008. Market saturation, and demand elasticity are the most crucial factors that affected Nintendo’s profitability post 2008. Figure 17 : Nintendo Wii’s yearly units sold superposed on Nintendo’s yearly revenue ! ! ! ! ! ! ! ! ! ! ! ! ! ! Source: Adapted from Nintendo’s Financial Reports 2006 – 2012 data retrieved from: http:// www.vgchartz.com
  • 25. of 25 45 Market Saturation ! Nintendo’s amazing sales record after its initial launch was attributed to Wii reaching out for a broader consumer base (i.e. casual gamers) (Grant, 2013). Casual games generally have simple rules and ease of game-play, these features attract gamers who have less experience playing video games and also gamers from any age group or skill levels (Surette, 2013). Almost all of Nintendo’s games have the attributes of casual games, with prominent titles such as Super Mario, Wii Sport, and Tetris (VGC, 2013). ! However, the casual games market traditionally dominated by Nintendo has been under assault from both Sony and Microsoft, as both companies had opened up their consoles to independent game (indie-games) developers (Wikipedia, 2013). Indie-games are video games produced by individuals or small teams. Due to the limited size of the development team and a lack of financial-backing from publishers, most independent developers aim for the casual games market where the demand for complexity and graphics are lower than mainstream games (Surette, 2013). ! Mobile platform is challenging Nintendo’s incumbent position as a causal gaming platform. Thanks to the portability and accessibility of mobile devices, many independent developers were able to extend their casual games to a wide audience. Both leading mobile operating systems (iPhone Android) have mature market places, which elevated the distribution of games to an unprecedented scale in contrast with other gaming platforms. For instance, Angry Bird, produced by independent developer Rivio, has reached a staggering 1.7 billion downloads in 2012 (Lunden, 2013). ! Demand Elasticity ! In figure 18, yearly hardware comparison between the three 7th generation console shows that demand elasticity is high for Nintendo’s Wii. This trend suggests that casual gaming market is sensitive to general economic conditions compare to the traditional hardcore gaming demographics. Figure 18: Nintendo Wii’s yearly units sold !!!! Source: Adapted from data retrieved from: http://www.vgchartz.com ! !!
  • 26. of 26 45 Economists think the entertainment industry as “recession proof” (Bijli, 2008). However, Wii’s sales decline coincides precisely with the 2008 recession, as indicated by the red arrow in figure , while PS3 and Xbox 360 are going through a regular product life cycle. This is a good indication that casual gaming is not recession proof. Several other casual explanations could be given to account for Wii users’ sensitivity to economic recession. First, Wii was priced and marketed to casual gamers and non-gamers, and they are more price conscious and sensitive compared to hardcore gamers (Marchand Hennig- Thurau, 2008). When the price sensitive customers have less disposable income due to recession, gaming would be the first thing they remove from their shopping list. Secondly, there are demographic attributes that make hardcore gamers’ purchasing behaviour less affected by a recession. Microsoft Advertising (2011) surveys that showed male UK Xbox Live users between ages 25-34 reported high personal income, indicating that male gamers are likely to have more purchasing power compared to female cohort. Lastly, consumer loyalty can affect how soon people will stop buying games for the console when recession hits. Attach rate is often used to measure consumer loyalty, it is simply the number of software sold over number of console, and Wii, despite its large installation base, rank the lowest (Xbox 360 9.93, PS3 8.9, Wii 8.59) (VGC, 2013).! Strategic Approach ! Hardware: 7th Generation ! Nintendo’s 6th generation console GameCube has been behind its competitors in terms of sales, and Nintendo neither had the financial resource as Microsoft, nor the technological expertise as Sony (VGC, 2013). Nintendo Wii is the last to join the 7th generation of console arena, its release was overshadowed by the existing two competitors Sony and Microsoft (Grant, 2012). Furthermore, Nintendo’s Wii console has inferior technical specifications compared to Xbox 360 and PS3 (Grant, 2012). However, Wii was innovative in terms of its controller and motion sensor technology (Schmidt, 2013). The wand like controller was able to bring new ways of game design for developers and interaction with the game for the users. Moreover, Nintendo has strong franchise lineups that were able to utilize this new controller at launch instead of waiting for third-party developers to adopt the new game interface (Wikipedia, 2013). The Wii was able to capture the market of “casual gamers” which included a broad range of demographic such as females and elderlies (Schmidt, 2013). The surprising success of Wii lead Nintendo into the leading market share position. Hardware: 8th Generation ! Wii U was launched in November 2012, it featured similar design and hardware capability as its predecessor, but with a slight adjustment to its control interface. Wii U comes with very basic internet features such as paid TV services, Internet browser, social interaction softwares and an
  • 27. of 27 45 rudimentary e-market (Nintendo, 2013). This is disappointing given that Nintendo had three generations of time to develop its internet presence. Expansion into more online features should not be a relatively capital intensive venture compared to developing new hardware technologies, however obtaining appropriate internal capacity might prove to be difficult. This is especially the case versus Microsoft whom has extensive experience with internet product development (Marchand Hennig-Thurau, 2008). This missed opportunity could be detrimental for Wii U, since both Microsoft and Sony aligned their strategy to “providing software and service at the same time”, and much of the differentiating force will come not only from games provided but also the type of service tethered to the console (Schmidt, 2013). In terms of control interface, Wii had already lost some of its original customer attraction due to Sony and Microsoft’s own version of motion sensing control interfaces (Kinect and Playstation Move) . To make matter worse, Microsoft’s Xbox One will ship pre-packaged with Kinect, thus reducing Wii U’s ability to leverage its unique selling point. A new touch-screen based GamePad controller is included with Wii U, where video image are streamed wirelessly to the GamePad, thus creating a new interface with the games. The GamePad could have been made into a stand-alone portable gaming device, such in the case of PlayStation 4 and PlayStation Vita. This shows that Nintendo is afraid of its existing portable game console market being cannibalized. However, cannibalization is already happening between Wii and Wii U. Figure 19 compares Wii U and Wii sales combined in 2013 and Wii sales , in its already lowest point, at 2012. Figure 19: WiiU plus Wii’s sales combined in 2013 compared with Wii sales in 2012 ! ! ! ! ! Source: Adapted from data retrieved from: http://www.vgchartz.com ! 0 175 350 525 700 Jan Feb Mar Apr May Jun Jul Aug WiiU+Wii sales combined in 2013 Wii Sale in 2012
  • 28. of 28 45 On the software front, Wii U is trying to recruit some cross-platform franchise such as Assassin's Creed and Call of Duty, in order to attract hardcore gamers (Nintendo, 2013). However, in-house developed games still contribute a large percent of current Wii U game sales (VGC, 2013). In addition, Nintendo’ games are known to be non-graphic intensive, and it will be difficult to capture hardcore gamers whom have high demand for graphic intensity. Software ! Nintendo has in-house game development teams that deliver game titles with initial console launch (Nintendo, 2013). Nintendo stands out in contrast with its competitors as it was able to be profitable relying only in-house developers, while other two consoles rely heavily on third-party developers (Hicks, 2008). All the Wii titles with over 10 million sales consist exclusively of Nintendo in-house games (VGC, 2013). This disgruntled many third-party developers, and is likely to affect the willingness of future game titles to come on a Nintendo console. Nintendo’s strong software sales depends on backward compatibility, a feature that allows current generation console owners to play games from previous generation consoles (Nintendo, 2012). This can been seen as added value to consumers, but also it boosts revenue for companies by relaunching old game titles which initial investment that already have been recouped. Sony and Microsoft did employ similar strategy, however their consoles had always featured graphic capability as a unique selling point (Marchand Hennig-Thurau, 2008). Since older generation games do not match up graphically with current generation games, therefore, customers are less inclined to purchase older games. Currently, both Sony and Microsoft have removed backward compatibility from their consoles (VGC, 2013). Alarmingly, Nintendo kept recycling its old franchise without creating any new titles (Gamespot, 2013). There are 13 versions of Super Mario Bros games on different Nintendo platforms. This underlines Nintendo’s reluctancy to extend its software product range, and may lead to consumer apathy. Independent developers such as the makers of Angry Bird are threatening Nintendo’s market position in casual games. Casual game developers on the mobile platform have low barrier of entry, and can effectively create substitute games (Schmidt, 2013). Moreover, casual gamers on the console platform are being depleted due to competition from Sony and Microsoft, whom offer arcade and independent games in order to captures the casual audience (Microsoft, 2013 Sony, 2013). Regionality is another factor to consider with software distribution. Many games are protected and only launched in certain regions, Nintendo will only release certain games in Japan (VGC, 2012). Furthermore, Nintendo’s games launched in one region will not work with machine purchased in another region (Wikipedia, 2013). This inconsistency and excessive control had lead to much frustration among the Nintendo customers. !
  • 29. of 29 45 SWOT Analysis ! Nintendo faces unique weaknesses and industry wide threats, meanwhile it also possesses identifiable strengths and market opportunities. Strength, Weakness, Opportunity and Threat of Nintendo will be presented in SWOT analysis. Table 1 summarizes salient findings of SWOT analysis. ! Table 1: SWOT analysis ! ! ! Strengths ! • Identifiable brand image due to Nintendo’s long established market position. Nintendo entered the video game market in 1983, and its first product Nintendo Entertainment System (NES) had been a well-known household product (Nintendo, 2014). ! • Focus on family units to advertise, thereby providing future customer base. ! • Brand name synonymous with gaming. Unlike Sony and Microsoft whom have major stakes in other industry, Nintendo deal exclusively with the gaming industry. This generate brand exclusivity. ! • Innovative technology compare to competitors. Nintendo Wii’s success is derived partially from its motion control technology. Motion control was able to reduce the unfamiliarity of video game interface and allows a wider range of audience to enjoy video games. ! • Affordable pricing compare to Nintendo’s competitors. From the 5th generation to the 8th generation of game consoles, Nintendo always sales for less than its competitors. This price advantage is a result of Nintendo not targeting the graphically intensive video game software, thus saving on video game console components such as GPU and CPU (Wikipedia, 2013). ! ! ! Strengths: ! ! • Brand image! • Innovative technology ! • Affordable pricing Weaknesses:! ! • Dependence on exclusive software! • Over-reliance on casual games! • Deflating currency (Japanese yen) Opportunities: ! ! • Maturing digital distribution system! • Increasing independent developers! • Expanding consumer base Threats:! ! • Threat of substitution ! • Lack of diversification
  • 30. of 30 45 Weaknesses!• Dependence on console exclusive titles and in-house developed titles. Limited games may result in poor console sales. ! • Over-reliance on the casual gaming market. Nintendo may suffer from market saturation and highly elastic demand curve. ! • Nintendo’s brand image is targeted towards family units, and this might limit the appeal of Nintendo’s consoles to certain gamers. ! • Nintendo’s 7th and 8th generation consoles do not have similar graphical capability as its competitors. The firm’s internal resource and capability to develop graphically intensive hardwares are restricted. ! • Geographical and cultural references may not reach Western audience. Most of Nintendo’s software studio are located in Japan, and the games produced may not appeal to certain demographic (Nintendo, 2013). ! • Japanese yen’s deflation will impact Nintendo’s margin. Exchange rate between US dollar and Japanese Yen had reached a 4 year high, and 40% Nintendo’s sales are made in North America (Google Finance, 2014 Nintendo 2013). ! Opportunities ! • Digital distribution systems are in its maturity phase, and Nintendo can expand their business by offering more content and services through this platform. This also remove physical distribution channel from the value chain, thus allowing Nintendo to obtain additional value. ! • Expanding number of independent game developers greatly increase the potential third party developers for Nintendo. Nintendo can consolidate its market position in casual gaming. ! • The gaming community is expanding, and many non-traditional customers start to experiment with video games. In addition, house-hold penetration of video game consoles have reached 71% (Surette, 2006). Nintendo can further capitalize their experience on developing new consumer base. ! • Globalization of video game industry will lead Nintendo to discover new profitable regional consumer base. ! Threats ! • High threat of substitution, with other platforms such as mobile and online. ! • Lack of diversification. This threats is less so with Nintendo’s competitors, since they have other source of revenue other than from video game console. !
  • 31. of 31 45 VRIN Analysis ! Nintendo’s competitive advantages lie in its existing vertical integration, experienced software division, and global presence. However, with changing industry environment and consumer preference, Nintendo has to secure the continuation of these competitive advantages. VRIN (valuable, rare, imitability, substitutability) framework identifies the sustainability of these three core competencies. ! Vertical Integration ! Figure 20 illustrates the value chain of the video game industry, and Nintendo vertically integrated all the components other than retailing (bordered in red). Vertical integration had allowed Nintendo to control the interaction and logistics between the different chains. Developers feedback and request on the hardware capability greatly inferences design choices and cost for the console makers (Wikipedia, 2014). Because Nintendo is vertically integrated, it was able to control the hardware manufacturing cost of Wii at $150 while Sony’s PS3 cost $800 per unit and sales for only $499 at lunch (Shilov, 2009 Murph, 2006). Figure 20: Video game industry value chain ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! Source:Beinisch, Y., Paunov, C., Vickery, G. Wunsch-Vincent, S. (2004).Working Party on the Information Economy Nintendo’s ability to vertically integrate is highly valuable, and it allows Nintendo to control cost, and establish coherent strategy (e.g. targeting certain segments of customers). Such feat is also rare in the industry, since Microsoft and Sony was unable to create a fully integrated platform. It is difficult to imitate this core competency since barrier of entry for the console
  • 32. of 32 45 industry is high and it takes years to create the capability to develop and publish blockbuster games on consoles. Nintendo’s brand image and 50 years experience in the video game industry are hard to be substituted. Nintendo’s vertical integration core competency provide a sustainable competitive advantage. ! Experienced Software Division ! Nintendo’s Software Planning Development (SPD) division is responsible for many major hits developed and published by Nintendo, with titles such as Wii Sport (80 million sales) and Super Mario Bros. (40 million sales) (VGC, 2014). The SPD division had created commercial success ever since 1989, and this division had retained several of the original development officers from the old software divisions (Nintendo, 2013). The SPD is headed by video game veterans that’s been involved in the video game since its conception (Yahoo Finance, 2014). This internal capability in human resource marks a core competency of Nintendo. ! Video game software is the driving force of the entire industry, therefore Nintendo’s SPD division is an inseparable and valuable part of the company. Only few software developers remained from the start of the industry until present day (VGC, 2013). Nintendo’s ability to survive and generate constant profit is rare, un-substitutable and in-imitable in the video game industry. ! Global Presence ! Nintendo has four major international divisions in Europe, Asia, North America, and Australia. They are responsible for regional distribution, marketing, and advertising (Yahoo Finance, 2014). This large global reach ensures timely product launch and economy of scale. Global presence is certainly valuable for Nintendo as a Japanese based company to reach out for a wider customer base, but both Sony and Microsoft have similar global presence (Yahoo Finance, 2014). ! Out of the three resources and capabilities, only vertical integration and experienced software division provide Nintendo with sustainable competitive advantage. Table 2 summarizes Nintendo’s VRIN analysis. Table 2: VRIN analysis ! Resource or Capability Valuable Rare In- Imitability Non- Substitutability Does this resource or capability provide a sustainable competitive advantage? Vertical Intergration Yes Yes Yes Yes Yes Experienced Software Division Yes Yes Yes Yes Yes Global Presence Yes No No No No
  • 33. of 33 45 ! Sony Overview ! Sony Computer Entertainment (SCE) is the subsidiary of Sony that is responsible for the video games related products and development (Sony, 2014). SCE was established in 1993, prior to the launch of the PlayStation — Sony’s original video game console. Other than research and development of the consoles, SCE is also a developer and publisher of video game software (Sony, 2014). However, the the sales of Sony published games have less sales compared to third- party developed games (VGC, 2014). The first PlayStation was released in the US in 1995, and Sony has since established itself as a leader in the console market. PlayStation reached global sales of 105 million units, 150 million for PlayStation 2, and 77 million for PlayStation 3 (Schmidt, 2013). PlayStation 3’s current market share is 31% despite its slow sales after launch (VGC, 2013). Sony has also gain revenue through publishing AAA game titles such as Grand Theft Auto and Final Fantasy. Sony Computer Entertainment’s Vision Mission Objective ! Vision ! • Create exciting new digital entertainment experiences for consumers. • Bring cutting-edge products with latest generation content and services. (Sony, 2014). ! Mission ! • Develop broad range of innovative products and multimedia services. • Challenge the way consumers access and enjoy digital entertainment (Sony, 2014). ! Objective ! • Ensure synergy between business within the organization • Create new worlds of entertainment that can be experienced on a variety of different products (Sony, 2014). ! Financial Analysis ! Sony’s launched PlayStation 3 in 2006, however the sales was only 1.2 million due to the console’s high premium ($ 499) and a lack of games (Zackariasson, 2008). This lack of sales and costs associated with launching the console lead Sony to announce an operating lose of $225 million in 2006. In 2007, sales increased 8 folds and revenue jumped two times to $3 billion, as shown in figure 21. PlayStation 3’s sales was able to reach a peak in 2010 at 15 million units (VGC, 2013). However, Sony’s sales-growth comes at a cost of profit margin, as production cost came closet to $800 while retail price is only at $500 (Murph, 2006). The video games segment
  • 34. of 34 45 of Sony was able to turn an operating loss of $144 million in 2008 into a profit of $110 million in 2009, as unit cost decreased as a result of economy of scale and cost reduction effort. By 2010, Sony was able to break-even on its PlayStation 3 instead of running a $300 lose per sale at launch (Hesseldahl, 2013). Figure 21: Revenue Operating income trend of SCE from 2006-2012 ($ millions) ! ! ! ! ! ! ! Source: Adapted from Sony’s Financial Reports 2006 – 2012. ! Sony’s operating income in 2012 is only at meagre $9 million, and this is attributed to research and development cost of the new generation console PlayStation 4 (Sony, 2012). Figure 22 shows that units sold of PlayStation 3 did not correspond to revenue trend in contrast with Nintendo’s unit-revenue comparison. This is due to PlayStation 3’s high unit cost, for Nintendo was able to have consistent margin since launch compared to Sony’s break-even margin in 2010 (Brightman, 2007). Figure 22: PS3’s yearly units sold superposed on SCE’s yearly revenue ! ! ! ! ! !! ! ! ! Source: Adapted from Sony’s Financial Reports 2006 – 2012 data retrieved from: http:// www.vgchartz.com 0 700 1400 2100 2800 2006 2007 2008 2009 2010 2011 2012 Revenue ($ million) -300 -225 -150 -75 0 75 150 2006 2007 2008 2009 2010 2011 2012 Operating Income ($ million)
  • 35. of 35 45 Strategic Approach ! Hardware: 7th Generation ! Sony had a much delayed launch of PS3 on November 2006. PS3 had a similar strategy as PS2 in terms of redefining the media storage standard. PS2 had a DVD drive, which normally sold separately for around $100, and this provides added value for a machine that sells for $299 (Wikipedia, 2013). PS3 wanted to use the same strategy by bundling the PS3 with a Blue Ray DVD drive. PlayStation 3’s $500 price tag was most daunting for consumers, especially in comparison with Xbox 360 ($400) and Nintendo Wii ($250). Blue Ray technology increased the data capacity of a single disk, however this has little impact on game graphic quality. However, including Blue Ray as the disc drive substantially increased production cost, in addition, PS3 has multicored-cell processor which puts the production cost through the roof. It is estimated that Sony loses $300 for every PS3 they sell (Grant, 2013). Moreover, the added hardware complexity of the platform made it hard for developers to fully exploit the capacity of PS3, and the standard developer kit offered by PS3 provides a daunting task for developers to produce cross-platform games efficiently (Wikipedia, 2013). As a result, Sony had to cut royalty rate in order to encourage developers to make games for it (Grant, 2012). However, later on through downgraded hardware and increased marketing, PS3 had caught up with Xbox 360 to a market share around 30% (VGC, 2013). Ever since the 6th generation, connectivity and online component had became a industry norm, but this is pursued with different strategies. PlayStation Network (PSN) was instituted as a free online network that provides downloadable contents (DLC), and multiplayer mode. As user based was well established, PSN transitioned from free version into subscription based. The subsequent PlayStation Plus generated $1.2 billion, more than the console segments in 2013 (Schmidt, 2013). Hardware: 8th Generation ! Other than being a powerhouse console (judging on tech specs), there are three points worth mentioning about the PlayStation 4. First, the PlayStation 4 has a “second screen” function, where Sony’s existing portable gaming device PS Vita is used. Similarly to the Wii U GamePad, PS Vita acts as controller but it also functions independent gaming system. This feature effectively achieved “killing two birds with one stone”. On one hand, it reduces the unique two screens system offered by Wii U, on the other hand, Sony could boost the sales of PS Vita. Second, Sony acquired a game streaming company Gaikai in 2012. PlayStation Store will allow users to access stream games and demos, without the need to wait for lengthy downloads. This allows Sony to bypass game retailers, also provide more expedient access to customers preference.
  • 36. of 36 45 Lastly, Sony has broken away from the traditional “razor model”, and PlayStation 4’s production cost is $18 lower than its retail price (Hesseldahl, 2013). Moreover, PlayStation 4 is priced $100 below Microsoft’s Xbox One, a reverse situation in the 7th generation. This cost advantage and price advantage have already proven to work, with PS4’s first day sale arriving at 1 million units in the US (VGC, 2013). Software ! Sony’s software strategy is aligned with industry standard of building installation base to attract third-party developers. There are few in-house developed games that made it to the top-sells chart such as Gran Turismo. In addition, platform exclusive games are sought after by PlayStation supporters, and are a driving factor for console sales. IBIS (2013) estimates that platform exclusive games drive 20% of console sales. Sony’s future software strategy is unlikely to change (Schmidt, 2013). ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! !
  • 37. of 37 45 SWOT Analysis ! Sony has significant brand recognition in Asia and PlayStation 4’s sales has 4 million within 4 months of its launch (VGC, 2014). Under these optimistic conditions, slim operating income and decreasing bargaining power still threaten Sony’s prospect. SWOT analysis will address these factors. Table 3 summarizes the findings of SWOT analysis. Table 3: SWOT analysis Strengths ! • Effective cost control in the 8th generation console market. Sony was able to reach unit cost break-even at the launch phase compare to $300 deficit in the 7th generation consoles. • Brand recognition as leading electronic manufacturer. Sony’s brand commands respect especially in Asian countries (Grant, 2012). • Well-established and profitable online platform. PlayStation Plus has reached revenue equitable to that of market leader Microsoft in online services (Ivan, 2013). Weaknesses ! • Games on the PlayStation may only appeal to certain audience, as majority of the console exclusive software are developed by Japanese studios (VGC, 2013). • Slim operating income. Sony needs to increase its profit margin per unit in order to avoid similar financial performance during the 7th generation consoles. ! ! ! ! Strengths: ! ! • Effective cost control! • Brand recognition ! • Profitable online platform Weaknesses:! ! • Limited appeal to consumers! • Slim operating income Opportunities: ! ! • Synergies with existing products and divisions! • Lifting of video game bans in China! • Lowering computing hardware cost Threats:! ! • Competition! • Decrease bargaining power
  • 38. of 38 45 Opportunities ! • Synergies with existing Sony divisions and products. Sony’s entertainment division has music labels and films that are currently being distributed on the PlayStation Plus, and Sony’s portable system PlayStation Vita can act as secondary controllers for PlayStation 4. • Liberalization of video games in China. The Chinese government bans video games consoles and software’s official sales, and most of the consoles within the country are smuggled in. In 2014, the Chinese government has temporarily lifted this ban (Webster, 2014). This new segment of the Asian market should provide fertile ground for Sony to profit. • Reduced cost of computing hardwares overtime. The Bureau of Labor Statistics reported in 2009 that from 1998 to 2009, the price index of computing hardwares dropped 20% every year. If this trend continues, the production cost of consoles will likely to be reduce. Threats ! • Increased bargaining power of software developers. Alternative platforms are available for publishers which reduces the bargaining power of incumbent platforms. • Competition from new entrants. Such new entrants include Valve Corp. whom has just announced the Steam Machine, a direct competitor for the PlayStation 4, and Ouya whom provides video game streaming services. ! ! ! ! ! ! ! ! ! ! !
  • 39. of 39 45 VRIN Analysis ! Sony, as a conglomerate, performs many functional activities such as logistics, but these capabilities are easily imitated by Sony’s competitors. However, the core competencies of the Sony Computer Entertainment division lies in its technological resources and cross-divisional synergy. Technological Resources ! Sony technical capability was featured in many of its earlier innovations. Sony along with other companies introduced many industry standards such as Compact Disc, Digital Versatile Disc, and the most recent Blue-Ray Disc. In terms of hardwares, Walkman, MiniDisc and the first PlayStation was revolutionary and created completely new markets (Marcus, 2010). Technologically, Sony produced more advanced consumer-electronic products than its competitors (Marcus, 2010). For example, the first PlayStation introduced the new concept of 3- dimensional games while Nintendo and Atari still focused on traditional 2-dimensional games. The technology behind 3-D game play was preambled by the development of CD which can hold more data. PlatStation was the first video game console that broke the 100 unit sold record (Wikipedia, 2014). From this example, we can see that Sony was able to leverage its internal divisions’ technical resources, and get ahead of its competitors. Sony’s experience and expertise in research and development are supported by the number of patents it owns. From 1997 to 2012, Sony has be consistently on the top 10 companies the United States Patent and Trademark Office (USPTO) issues patents to. In 2012, the USPTO issued 3017 patents to Sony. Cross-divisional Synergy ! As mentioned in the last section, Sony’s many break-through products are results from cross- divisional efforts. Sony has a multidivisional organizational structure, with many strategic business units (SBU) within each division. SBU relates to each others in terms of shared products or markets (Marcus, 2010). SBU allows individual units to be responsible for its own profitability and targets, and this provides certain level of autonomy for each SBU. Meanwhile, each SBU can share experiences and expertise with one another (Gretz, 2010). The evaluation of Sony’s resource and capability is appended in Table 4. Table 4: VRIN analysis Resource or Capability Valuable Rare In- Imitability Non- Substitutability Does this resource or capability provide a sustainable competitive advantage? Technological Resources Yes Yes Yes Yes Yes Cross- divisional Synergy Yes Yes Yes Yes Yes
  • 40. of 40 45 Conclusion ! The video game console industry was able to recover from the 2008 financial crisis, and with the release of the 8th generation consoles, the momentum the industry accumulated in the earlier decades is making a comeback. In such as technologically advanced industry, the reliance on boasting the highest quality hardware and software is perhaps the most important selling point. Both Sony and Microsoft responded to the market call and are reaping record-breaking level of sales on their respective release date. On top of advanced technology, having a quality console first to market can deliver a major competitive advantage, but the market failure of Wii U remains a cautionary tale for hasty deployment of products. Data processing, storage and sales are moving to the cloud, and console manufacturers are shifting their focus towards online integration of their products. Revenue conflict against the used-game industry can be resolved this way. However, hard-copy retailing of games are not likely to become passé in the distant future. The value chain within the overall game industry is large and complex, with many co-dependent players. Regardless, one should be reminded that game softwares are still the fountainhead of revenue generated in the industry. Due to recent shift of “razor model” pricing practice, and ever more innovative gaming accessories, the hardware market might proven to be profitable after all. ! ! ! ! ! ! ! ! ! ! ! ! ! !
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