Video game industry analysis

The video game industry (formally referred to as interactive entertainment) is the economic sector involved with the development, marketing and sale of video and computer games. It includes video game consoles, game software, handheld devices, mobile games and online games. The video gaming industry has been growing exponentially in recent years. The growth is expected to leap-frog in the future. Following chart shows the projected market share by 2010 of different segment in the industry.

Following chart shows growth of different segments in the industry- From the above charts, it is clear that the console is the largest segment in the industry, but online, mobile, pc software and broadband are some of the fastest growing segments.

Industry Competitors by Segment SegmentMicrosoftSonyNintendo ConsoleXBox, XBox360PS2, PS3Wii GamesThird partyThird partyIn-house Handheld devicesN/APSPGame Boy, DS, DS Lite Mobile gamingN/AN/AN/A PC / Online gamingXbox liveN/AN/A Interactive TVN/AN/AN/A Industry’s dominant economic features.

Market size and growth rate – More than $35 billion was spent on video games consoles, game software etc.

Industry is expected to have more than $51 billion sale by 2010. Numbers of rivals – The three main contenders are Sony, Microsoft and Nintendo. Scope of competitive rivalry – Global presence with regional focus is required for company’s competitive long term success. Numbers of buyers – About 250 to 300 million people worldwide played video games in 2007. The average age of a video gamers has jumped to 33 years by 2005, and 25 percent of gamers were over age 50.

Degree of product differentiation – The larger the degree of differentiation, the more competitive advantage.

Product innovation – Product innovation plays significant role to capture market share and to take competitive advantage in the market. Pace of technological change – New advanced technology plays a significant role to be competitive and to dominate in the video game industry. It is must required to have strong technological capabilities to capture and retain its market share.

Economies of Scale – Any new innovative video games and/or its components with larger economies of scale help the company to reach a larger market with greater geographical area. It also helps to maintain a competitive price on video game products. Learning/experience curve effects – Innovative video game developing companies will have experience and resources to innovate and/or to adapt to new technologies. Any efficiency learned from one video game or its component development can be used in other new video game products.

It also applies to value chain process. Industry’s driving forces The following are the driving forces that govern the video game industry that have been behind the change and evolution of the industry over time- Technological Change: Technology in the industry is constantly changing, producing successive generations of increasingly powerful systems, typically at lower costs. Product Innovation: The software development side of the industry is increasingly becoming a business of risky bets on individual software titles that are hoped to be significant hits.

The large number of developers has resulted in a continuous production of highly innovative products. Changes in the personal computer industry: As a significant substitute for consoles, the lower cost and increasing performance of home computers can eventually threaten the industry. Changes in the industry’s consumers: Although video game hardware has largely appealed to adolescent males, changes may occur, which cause the demographics of the industry’s customers to expand to young adults and women in general.

Changes in the mobile industry: Mobile devices are changing the landscape of many industries e. g. music, camera, GPS, games etc. and is rapidly becoming one-device fits-all. As technology advances, this will have significant impact on handheld gaming consoles. Outlook and future prospects Future generations of game systems would undoubtedly include even more impressive technological capabilities than the next generation consoles launched in 2005-2006. The online console gaming market is set to take off, as the new generation of consoles arrive with advanced networking and online gaming capabilities.

The ability to download game demos, buy casual, as well as full-fledged console games, and access advanced content, including high-definition (HD) video, will play a major role in shaping the subsequent console generations. Key success features -Rich playing experience -Appeal and variety of supported games -Product innovation and differentiation -Keep up future changes Porter’s 5 forces competitive analysis Threat of new entrants: Low. It takes lot of resources and capital to enter into this market Bargaining power of Buyers: Moderate.

Buyers hold moderate bargaining power because of low number of competitors and high switching cost Threat of substitute: Moderate. Interactive entertainment substitutes are not that many. Bargaining power of suppliers: Moderate. There are not many companies that the suppliers can supply to. But on the other hand the game development companies can have more power by developing specific games. Competition among industry rivals: Strong. There is intense competition among Sony, Microsoft and Nintendo for market share.

Strategic Group Map Following chart shows the position of each product in the video gaming industry with a year of launch vs. launch price. The size of the bubble shows the number of unit sold. Weighted Competitive Strength Analysis MicrosoftSonyNintendo Competitive factorsWeightRatingWeighted ScoreRatingWeighted ScoreRatingWeighted Score Console Graphics0. 987. 298. 154. 5 Controller0.

843. 25497. 2 Game titles0. 976. 387. 265. 4 Price0. 573. 56394. 5 Console features0. 886. 486. 475. 6 Technology Innovation0. 785. 674. 964. 2 Innovative Ideas0. 764. 253. 585. 6 36. 4 37. 1 37 Conclusion: The above chart shows there is no clear winner.

Each contender has its strength and weaknesses but overall they are very close. Market is expected to see fierce battle between these competitors. SWOT analysis for Microsoft, Sony and Nintendo Strengths Microsoft: •Internal resource strength in developing software •First mover in High definition (HD) gaming products (Xbox 360). •Production cost is falling. •Successful marketing strategy. Sony: •Experience in entertainment industry •Blue Ray HD technology which is considered video disk platform of the future •Competitive advantage incorporating multiple technologies in PS3.

Nintendo: •Low development cost for Wii video games. •Wireless wand controller technology. •Strong internal resource strength of being innovative. Weakness Microsoft: •Uses HD technology, which is not supported by the industry. •High development cost of video games. Sony: •Pricing Strategy had flaws for PS3 launch, High price. •Unable to deliver product on time. High production cost. •High video game development cost. •Very limited online games. •Uninspiring online experience Nintendo: •Not able to support HD(1080p), •Inability to meet consumer demand. •Limited game titles on Wii.

Opportunities Microsoft: •Diversify into Handheld, mobile games. •Wireless wand controller technology Sony: •On demand entertainment. •Wireless wand controller technology Nintendo: •Going into HD market. •Create more games for WII and for adult population. Threats Microsoft: •Mobile gaming, •Game software piracy. •Technological incompatibility. •Dying Support for HD technology. Sony: •Mobile gaming, Cell phone is threat to hand held device. •Game software piracy. •Technological incompatibility. Nintendo: •Mobile gaming, Cell phone is threat to hand held device. •Game software piracy.

•Technological incompatibility. Current Strategy of Industry Competitors Sony: 1. Sony is following a Fortify-and-defend-strategy. 2. It tries to adopt and improvise existing products, based on customer taste and market needs. 3. Sony is trying to appeal to a wider market with limited product features following a broad differentiation Microsoft: 1. Microsoft is trying to use first-mover strategy with clever advertisement and promotions. 2. They are trying to stay on the offensive. 3. Microsoft is creating a cross-market-subsidization, pulling revenue from its cash cow enterprise. Nintendo: 1.

Nintendo has always been following the path of Blue-Ocean strategy by trying to out-innovate its competitors 2. Their products currently follow a Focused-differentiation based on product features for young population. 3. Nintendo’s products are easy to use and create a fun game playing experience for the user. Recommendations Nintendo: 1. We recommend Nintendo to make the following technologies investments: a)Developing high definition capable devices. b)Tie up with PC manufacturers to develop wireless wand controllers for PC games. c)Partner with mobile phone companies and offer games to mobile phone users. 2.

We recommend the following steps to be taken to increase Nintendo’s market share: a)Form strategic alliances with game developers that would enhance game library. b)Increase production of WII to meet the market demand that will increase their revenue and profits. This will also increase customer loyalty for Nintendo and keep the rivals away from capturing their potential market. c)Develop games that could attract adult segment of 18-35 males. Sony: 1. We recommend Sony to adapt the following products/pricing strategies: a)Lower the price of PS3 to be competitive with Microsoft XBox 360 and improve their production capabilities.

b)Provide incentives for PS2 users move to PS3. c)Enhance PS3 product features like online experience and expand on gaming titles d)Improve on the controller sensing capabilities to adopt and improvise the wireless wand controller by Nintendo. 2. We recommend Sony to adapt the following Alliance strategies: e)Form Strategic alliance with innovative companies like Apple to enter the PC gaming market. f)Built on the strength of high video quality in their laptops by utilizing Apple’s support of high quality graphics in their operating system.

Microsoft:We recommend Microsoft to take following initiatives: a)Support Blu-Ray HD technology in their Xbox 360 to increase market penetration. b)Forward integration by acquiring game developing companies. They can use their internal resource strength of software development and easily master game development. c)Use Xbox live to become a first mover in online gaming. d)Develop remote sensing capabilities to compete with Nintendo’s wireless wand controller. e)Leapfrog into mobile gaming industry by capitalizing on their mobile operating system strength.