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PEPPERDINE UNIVERSITY THE GEROGE L. GRAZIADIO SCHOOL OF BUSINESS AND MANAGEMENT MBAM 619.11 STRATEGIC MANAGEMENT PROFESSOR SUNIL MEHROTRA SPRING 2009 SEMESTER 3DO Case Study
HISTORY Philips CD-I 1991 1995 1992 Sega CD 1993 3DO 1994 Sega 32X Atari Jaguar 1994/1995 Sony PS-X Sega Saturn 64 bits Power PC 64 bits SGI 3DO M2 Accelerator Nintendo 64 32 bits Motorola 16 bits Motorola 32 bits RISC Machines 32 bits Hitachi 64 bits 68000 32 bits LSI R3000 32 bits Hitachi <ul><li>3DO Achievements: </li></ul><ul><li>1st 32-bit system </li></ul><ul><li>Superior technology for its time </li></ul><ul><li>Video capabilities and audio quality unmatched in 1993 </li></ul>
3DO Ownership Roles & Responsibilities: Matsushita: Manufactured double speed CD-ROM AT&T: Proprietary graphics processor chips Electronic Arts: Video game software Time Warner: Largest entertainment company Kleiner Perkins: Funding from Silicon Valley venture capital firm 3DO: Put it all together
COMPETITIVE ANALYSIS Expensive Affordable Better Performance Simple Functions Philips CD-I Sega CD 3DO Sega 32X Sony PS-X 3DO M2 Accelerator Nintendo 64 Sega Saturn Atari Jaguar
SIZE, GROWTH, PROFITABILITY MAP Growth Rate Profitability Key: Smaller Company Larger Company Philips CD-I Sega CD 3DO Sega 32X Sony PS-X 3DO M2 Accelerator Nintendo 64 Sega Saturn Atari Jaguar
VALUE CHAIN Customer Retailer Physical hardware Components are Gathered by the Manufacturer and Prepared for assembly. Manufactures assemble The video game console Using the different Hardware components. Video game consoles Packaged and ready to Be shipped to retail Stores worldwide. Video game consoles Are sold in retail stores Along with the video Games to be played on Them. Customers first Purchase the video Game console and Then purchase the Games to be played On them. This is Usually first done at The same retail Location at least for The first video Games purchased. Blank CDs or cartridges are a form of raw materials for video game software. Computer software Engineers write codes To add sound, graphics, And function to create An enjoyable video game. The final video game Whether in CD or Cartridge format are Then prepared for Distribution to retail Stores. Raw Materials Manufacturer Distributor Raw Materials Manufacturer Distributor Video Game Console (Hardware) Video Game Disc (Software)
VALUE CREATION PROCESS Raw Material Software Distributor Retailer Customer Price paid by customer $40 $37 $5 $31 Blank CD Buy games in bulk Reduce risk Economies of scale $3 per disc royalty to Hardware manufacturer Additional profits Markup $3 $3 Profit Value Added $20 $3 $6 $6 $7 Shelf space Own sales force Store experience Key: $2-$4 manufacturing cost Video game created Graphics, Audio, Interactive Code writing Most value added if enjoyable game $2 CD ROM Video Game
Founder of video games. European consumer electronics. Pioneer of CDs. High speed high performance cartridges. Leading manufacturer of arcade games. From EA. 50-50% build-craft. Good relations. Special Sauce failed $249 Atari Jaguar. Electronics retailers across US Only 5 game titles. 50 more promised 64-bit Jaguar manufactured by IBM. $200 CD-ROM add on CD-ROM Atari failed Large market audience 54% of US market Amusement centers and theme parks Japan first: TV, magazine, event marketing Customer $1,000 CD-I then lowered to $499. Budget model for $400 then $299. Launched in Japan for $500 in 1994. US in 1995. US based retailers Sega Channel $450 price High end electronic stores. Toy and mass merchant channels $700 price $75/game Distributor Retailer GoldStar and Samsung license CD-I technology Columbia, TriStar, Sony Music for game material. License fee $3-$9/disk. Acclaim, EA, 160 others License to Acclaim and Capcom. Strong games Microsoft->OS for Saturn Support Kodak CDs $3/disc royalty Licensees free to publish anything 300 developers Video Game (Software) CD-I because created CDs with Sony 32-bit Playstation 16-bit Super NES. Silicon Graphics-> Project Reality 64-bit, 100MB for $250. Super Game Boy 16-bit then 32-bit Time Warner & TCI->Sega Channel. At&T-> Edge 16. Hitachi -> Saturn. Genesis 32X add on cartridge $150 32-bit. RISC MP 600MB of content Graphics by AT&T Peripheral ports. AT&T, Sanyo, Toshiba, GoldStar, Samsung make 3DO .PC compatible Manufacturing Technology (Hardware) CD-ROM CD-ROM CD-ROM. Super FX chip. Project Reality Cartridge CD-ROM Sega CD CD-ROM Double speed made by Matsushita. Raw material (Format) Philips Sony Nintendo Sega 3DO Video Game Systems
PORTER’S 5 FORCES LOW- MEDIUM Since hardware manufacturers Wanted to make a profit on the 3DO System, they had a lot of Power over pricing and cost issues. 3DO licensed the manufacturing so they do not have much power over suppliers. They needed to Manufacture the 3DO to some Specs but the overall look and feel Differed. MEDIUM-HIGH Customers wanted enjoyable video Games whether the technology was Superior or if the system offered Other capabilities. Customers have To make the first purchase of the Console, but at such a high price ($700) this was difficult to do. Once The console was purchased, 3DO Gained back some power because Customers need to buy games to Play. LOW There are a lot of barriers to entry When trying to establish a video Game system. Crucial relationships Must be made with hardware and Software companies. Manufacturing and development Requires a lot of capital, time, and Resources. MEDIUM Substitutes to video games can Be arcade games which Sega Has mastered, amusement parks, Or even physical sports which Can make children go outside Rather than staying in to play Video games. Overall, the Industry will continue to perform Strong because there are a few Very close substitutes to video Games. HIGH There is a lot of competition within the industry With players such as Sega, Sony, and Nintendo. These companies manufacture their own Systems which allow them to take a loss on the Console in order to make up for the difference In video game sales. Price for the console is a Very competitive aspect of the industry Because once a console is purchased, further Games need to be purchased. But the Decision to purchase is mainly based on the Availability of enjoyable video games.
PORTER’S 5 FORCES Competitive Rivalry Bargaining power of Suppliers Bargaining power of Customers Threat of New Entrants Threat from Substitutes High Low Moderate Profits Video Game Industry (3DO Perspective) Threat
WHY 3DO FAILED <ul><li>Special Sauce: </li></ul><ul><li>Want 50% build & 50% craft. </li></ul><ul><li>Incumbency advantage: 1st installed base. 1st 32-bit system. </li></ul><ul><li>Licensing company. </li></ul><ul><li>Multiple platforms make it difficult to write packages, market structure unfair, royalties are silly. 3DO provides the technology and market structure to solve this. </li></ul><ul><li>Failed Because: </li></ul><ul><li>CD-ROM based software had higher development costs ($2 million/title). </li></ul><ul><li>Longer development times for video games. </li></ul><ul><li>Expensive ($700 for Panasonic REAL Interactive Multiplayer and $75 for games). </li></ul><ul><li>Too much offered too fast. No focus. </li></ul><ul><li>Too many partners (750 3DO software licensees, 40 titles, 60 more promised). </li></ul><ul><li>3DO wanted to be a licensing company. Didn’t want to do own title development. </li></ul><ul><li>Software development for M2 Accelerator too late. </li></ul><ul><li>$3 surcharge to software developers on every disc sold on top of $3 royalty for Market Development fund ($1 for advertising and promotion of 3DO machine, $2 to manufacturers to expand supply and price aggressively). </li></ul><ul><li>3DO hardware manufacturers have to absorb losses of $200 million for next 15 months. </li></ul><ul><li>Targeted mass consumers with casual and social game themes. Market not developed yet. </li></ul><ul><li>*OVER-HYPED. PROMISED TOO MUCH. “INTERACTIVE MULTIPLAYER” (AUDIO, VIDEO, PHOTO) INSTEAD OF “VIDEO GAMES”. LICENSED INSTEAD OF MANUFACTURED OWN SYSTEMS. THEREFORE, MANUFACTURERS HAD TO MAKE MONEY FROM HARDWARE ITSELF UNLIKE OTHERS (SEGA OR NINTENDO) WHO COULD TAKE A LOSS WITH SOFTWARE SALES. $700 TOO EXPENSIVE. FEW ARCADE-STYLE TITLES THAT WERE POPULAR ON 16-BIT SYSTEMS, “EXCLUSIVE” TITLES TANKED, PRICE TUMBLED DRAMATICALLY, SATURN AND PLAYSTATION TOOK OVER! </li></ul>
WHAT 3DO SHOULD HAVE DONE <ul><li>RECOMMENDATIONS: </li></ul><ul><li>DON’T BE THE “ALL-IN-ONE BOX”. FOCUS ON VIDEO GAMES. </li></ul><ul><li>MANUFACTUER SYSTEM IN-HOUSE OR HAVE ONE EXCLUSIVE PARTNER TO HAVE ONE DISTINCT SYSTEM COMPATIBLE WITH ALL GAMES. </li></ul><ul><li>INCLUDE MORE THAN ONE CONTROLLER PORT FOR MULTIPLAYERS AND MORE BUTTONS FOR PLAYING WITH POPULAR GAMES. </li></ul><ul><li>LOWER THE PRICE FOR THE SYSTEM. TAKE A LOSS AND WIN BACK PROFIT THROUGH VIDEO GAMES. </li></ul><ul><li>DON’T NEED TO FOCUS ON BETTER LOOKING, CUTTING EDGE GAMES, BECAUSE SOME SIMPLE GAMES ARE MORE FUN TO PLAY. </li></ul><ul><li>FOCUS ON PRODUCING STANDOUT GAMES: FIFA SOCCER, MADDEN FOOTBALL, ETC. </li></ul><ul><li>COMMUNICATE TECHNOLOGY: FIRST 32-BIT SYSTEM, SURROUND SOUND, S-VIDEO SUPPORT </li></ul>