Competition in video game consoles Essay

Competition in Video Game Consoles: The State of the Battle for Supremacy in 2008 1. What are the strategy-shaping business and economic characteristics of the console segment of the video game industry? What is the industry like? 1-1 Segmentation: The industry was segmented into console hardware, console software (both sales and rentals), handheld hardware, handheld software (both sales and rentals), PC software (both sales and rentals), broadband, interactive TV, and mobile phones. 1-2 Market Size: Table 1: Size of the Global Video Games Markets, by Sector, 2000, 2003, and 2005, with Projections for 2010 ($ in millions) | 2000| 2003| 2005| 2010| Console hardware| $ 4,791| $6,047| $3,894| $5,771| Console Software (both sales and rentals)| 9,451| 16,449| 13,055| 17,164| Handheld hardware| 1,945| 1,501| 3,855| 1,715| Handheld software(both sales and rentals)| 2,872| 2,238| 4,829| 3,113| PC software (both sales and rentals)| 5,077| 3,806| 4,313| 2,955| Broadband| 70| 497| 1,944| 6,352| Interactive TV| 81| 249| 786| 3,037| Mobile phones| 65| 587| 2,572| 11,186| | 24,352| 31,370| 35,248| 51,292|. Source: Informa Telecoms & Media, â€Å"Games Market to Score Big in 2007,† press release, October 24, 2005, and â€Å"Games Industry Boom Continues,† press release July 24, 2003, both at www. informamedia. com (accessed September 8, 2006). As we can see the table above, the market size has grown from $24. 352 billion in 2000 to $51. 292 billion in 2010. In other words, the video game market becomes bigger and bigger. 1-3 Market growth rate Table 2 Compounded Annual Growth Rates For the Video Game Industry 2000 – 2005 and 2005 – 2010 (projected) | CAGR (2000-2005)| CAGR (2005-2010)| Console Hardware| -4. 1%| 8. 2%|. Console Software (both sales & rentals)| 6. 7%| 5. 6%| Handheld hardware| 14. 7%| -14. 96%| Handheld software (both sales & rentals)| 10. 95%| -8. 4%| PC software (both sales & rentals)| -3. 2%| -7. 3%| Broadband| 94. 4%| 26. 7%| Interactive TV| 57. 5%| 31. 04%| Mobile Phone| 108. 7%| 34. 2%| Total| 7. 7%| 7. 8%| CAGR is compound annual growth rate. The formula is(VtnVt0)1tn-t0-1. V (t0): start value, V (tn): finish value, tn ? t0: number of years. The numbers above are calculated from table 1. 1-4 Entry/Exit barriers The three existing companies are one of the entry barriers of other potential companies that would like to enter this market. Video game industry needs huge capital to invest on research and development department. Also, the entrants need to recruit skillful engineers and other talent staff to develop the products and make efficient marketing strategies. Combinations of all the entry elements, the entry barriers level is high for the perspective entrants. However, the software development is easier to enter this market than the hardware part. Potential entrants only need to focus on the software for the existing companies’ hardware products. This will have less cost than develop entire hardware and software. 1-5 Scope of rivalry. Sony, Nintendo, and Microsoft are the three main companies in the video game industry. Before 2001, there was one more competitor, Sega, in the market. It tried to compete with Nintendo and Sony but it finally was out of the industry in 2001. After 2001, video game industry has entered new war. Sony, Nintendo, and Microsoft compete with each other by gaining sales and increasing installed base. Play Station 2 from Sony has significant unit sold in $299 each; however, its newest generation, Play Station 3 has not successful result in the market. Play Station 3 was beaten by Xbox and Wii which are from Microsoft and Nintendo respectively. As the result, Nintendo and Microsoft were substitute Sony to compete the leadership position in recent year. In addition, the retails which those three main companies sold their products in are in the price competition. Furthermore, console technology, online gaming, and mobile gaming has gradually changed the competitive situation. The impressive technologies become important for the competitive companies to develop new generation console. Also, game software enter new world which the internet is common, so the online game is on the trend that is expected to continue to increase in market. According to the mobile phone using population increasing, the games are installed in the mobile phone are in the increasing trend also. In short, the video game industry rivalry has become fierce. 1-6 Scale economies According to produce the entire console hardware, a company cannot manufacture all components by itself. Therefore, Sony, Microsoft, and Nintendo would like to produce large amount of console hardware to reduce the costs. They choose to ally with IBM, maker of GPUs or Intel to get components to assemble their console. Because those ally companies need to offer not only one buyer, they can produce large volume for the buyers. Thus, the price would be reduced by huge amount of production. Sony, Microsoft, and Nintendo can through this way to reduce the production cost and reach the economy scale. 1-7 Consumer characteristic. There are 300 million population played video games which include console system, handheld devices, and mobile phone all over the world in 2008. Most of them are preteens, teenagers, and young adult who are between 20 and 40 year-old. In 2005, the average age of players is 33 in US and there are 25% of gamers who were over 50. In addition, there are 31% of all gamers are under 18 and there are 44% of players were 1 to 49 year-old in 2005. Moreover, there is 62% of players are males. 2. What is competition like in the video game system industry? Which of the five competitive forces is strongest? Which is weakest? What competitive forces seem to have the greatest effect on industry attractiveness and the potential profitability of new entrants? 2-1 * The bargaining power and leverage of buyers—a __weak_______ competitive force First of all, retailers almost do not have bargain power because they only can buy the products in those three companies. A retailer cannot buy the product from other companies and they may need to sell more than one brand to attract different customers taste. Therefore, they only have low bargain power. * The bargaining power and leverage of suppliers—a ____moderate_____ competitive force Although it is easy for video game companies, such as Sony, Microsoft, and Nintendo, to switch the suppliers, the large suppler still contain bargain power. The bargain powers come from special technology, unique parts, and risk of quality control. The small suppliers cannot guarantee the quality of products. Moreover, if those video game companies require unique components, then the suppliers may have bigger power to bargain. In short, the hardware component suppliers have bargain power but the video game companies have ability to change suppliers also although it is not very easy. In addition, video game software suppliers are in the different situation which compares with hardware suppliers. Software suppliers may have bargain power if they make a very wonderful game or they can bargain for the sales of hardware volume. If the sales of hardware console are not good, the software companies may not be willing to produce the software games. However, those video game companies have abilities to produce the software. They can publish their own game software. Therefore, software suppliers may not have bargain power as strong as hardware suppliers. In short, integrate hardware and software suppliers’ competitive forces. Suppliers have moderate bargaining power. * Competition from substitutes—a __weak to moderate______ competitive force Video game is for people to spend their leisure time. Except video games, people can do outdoor activities, board games, watching TV, seeing movies†¦etc. for their free time. Those activities may not instead of the feeling of playing video games but this depends on how video game players like to play video game. According to the data, video game enthusiasts can spend 6 hours per week to play video games. Therefore, those people usually do not do other activities in their free time. In short, there is no activities totally the same with video game but there are still other things that players can do to instead video game. Thus, the substitute force is low to moderate. * Threat of entry—a __weak_______ competitive force. Due to the entry barriers, it is not easy to enter this industry. The requirements of entry are high. In order to enter video game industry, entrants need to invest large capital and possess enough technologic skills to compete with the existing companies. Furthermore, the existing companies have higher ability to stay in the industry and have strong competitive products to threaten new entrants. Consequently, the threat of new entry has weak competitive force. * Rivalry among competing video game console producers—a __Strong_______ competitive force There is strong rivalry within the industry. As we can see, Sega was forced to withdraw from the industry in 2001. The existing three companies have started competing with each other keenly. They continue to develop their products, to compete sales volumes and price. As long as one of them does not pay attention to each other action, they may lose a lot. Therefore, the competing within video game console producers is strong. 2-2 The strongest competitive force is rivalry among competing video game console producers. The weakest competitive force is threat of entry. The competition from substitute is the greatest effect on industry. Because there are no substitutes which can provide totally the same experience for consumers, this is the greatest attractiveness and the potential profitability of new entrants. 3. How is the video game system industry changing? What are the underlying drivers of change and how might those driving forces individually or collectively change competition in the industry? Driving forces will include: * Product innovation The development of software and hardware of console is an important driver to push the industry to change. New technologies can attract individual buyers to purchase. The enthusiastic consumers may want to obtain newest games, so they may be easy to change their favorites. Also, new development can force other producers to improve their products. A new innovation product can be success in the industry. Then, it may give pressure to other competitors to improve their products. Therefore, product innovation is a driver of change. * Emergence of new video game devices The new video game devices are a driver to let the producers to change their products because new devices may improve the products and may be a trigger of consumers’ willing to buy. When a new device comes out, a producer does not catch up the trend and then it may be kicked out the market. Moreover, a new device may become a trend in the industry and may trigger a new competition war. * Emergence of internet-based video games Internet-based video games allow multiplayers at the same time. Also, the players may change their purchasing pattern. Internet is convenience for the consumers to purchase new games and has accompanies to play games device so it will enhance the products become more vivid and convenience to possess. Therefore, internet-bas video games become a trend in the industry. The major players of industry have started to develop their products to allow users to player through wireless networking. Therefore, the producers are making change to fit the consumers’ new using and purchasing pattern. * The buyer characteristics The players characteristics are gradually change. There are more young adults and female to become players. This trend attracts the producers to consider the buyers age and gender. They have started to design the console and games to match those buyer segment needs. For example, the goal of Wii is even mom can know how to play it. Therefore, the consumers’ segment change can impact the industry trend and push the major industry players to change the design to feed the different segment of players. * The aspect of society The aspect of society is change in this decade. Parents are willing to accompany their kids to play video games. They think some video games can let people to use their brains to think and some video games can help people to do exercises. For example, some games may use particular barriers that push players to figure out what element they need for enter the other stages. Moreover, many sport games of Wii are required users to move their body. Thus, many people think that video games do not only require users to stick in front of the screens and just move the fingers but also require users to operate their brains and move their bodies. Therefore, many video game console producers have started to change their design to fit more potential customers’ needs. 4. What does your strategic group map of the video game industry (all segments) look like? Which strategic groups do you think are in the best positions? The worst positions? Types of Video Game Suppliers/Distribution Channels. Strategic Group Map of the Video Game Industry Arcades Machine Arcade operators Home PC game suppliers Sony, Microsoft, Nintendo Home PCs Video Game Consoles Several online game site: MSN game zone†¦etc. Online Video Game Sites Low Medium High Cost to Players of Video Games Arcade operators can distribute for the arcade machine and little part for home PC use. Sony, Microsoft, and Nintendo produce games that can be use on home PC, video game consoles and online games. The online video game supplier may distribute the games to online use and may have little part for video game console use. Arcade game costs players very little. Sometimes it just cost few coins to play and players do not need to buy the machine back to homes. Home PC game players have to buy PC and they just can play the games or they may need to go to some Internet bars. Therefore, the cost is highest. Video game console cost players around $100 to $400 to purchase a hardware console. For the online video game sites, they may just cost few dollars from players to download the games. 5. What key factors determine the success for video game console producers? Factors that are necessary for competitive success in the console segment of the video game industry include: * Large installed base While the installed base is getting more and more, the producer company could be profit from the increasing installed base if the producer develops its internal game capabilities. Nintendo and Microsoft have this strategy. Nintendo has published many popular games and those software operating profit margins contribute around 35% to 40 % of Nintendo’s profitability. Also, independent game publishers also benefit from the large installed base because they can have increasing continuous sales. * Technological capabilities According to the improvement of technologies, every industry players are eager to develop the new products that the new technologies ameliorate them. This is because consumers have required more and more functions and quality of the products. They want high definition, easy to use†¦ etc from the products; therefore, every producer is entering the technological capabilities war. The technological abilities can help producers offer better products to attract customers to purchase. * Partnerships with independent software developers. Those software developers are important for the hardware game console producers because there is no fun without game software. Many players have â€Å"must have list. † This is just like the fashion world. People who pay attention on fashion trend know what should be had. Thus, â€Å"must have list† is the fashion trend in the video game industry. Therefore, partnerships with independent software developers are one of key factor that can push the video game console producer to succeed. Those partners can develop the popular software to urge the sales of video game console producers. * Acceptable development and production costs The price of the console should be reasonable for consumers. If the price is too high, the product may be like PS3 to fail in the market. Because Sony spent a lot on developing the better technologic component for PS3, it priced PS3 in $499 and $599 each to charge customers. However, the new design of PS3 did not completion yet at the launched time because PS3 had only 24 PS3 game title can backward compatible with PlayStation and PS2. The development of PS3 is not acceptable and blue-ray technology was too expensive. Therefore, the incompletion development and high production costs are transferred to consumers. The result is PS3 fail. In short, acceptable development and production costs are one of the factors can determine video game console producer will succeed or not. * Access to distribution Retailer distribution: this is the common distribution channel of hardware and software console. Those retail stores, such as Wal-Mart, Target, Best-Buy, Flyer’s and Amazon, have high consumers’ density. Due to the development of internet use, online retailers become popular and contain powerful sales. Online download: Because of internet-base becomes a trend, many console producers have developed the online gaming. Hence, internet becomes a potential way to distribute the online game products. Product variety: Some video game producers have variety products. For example: Nintendo produces hardware console and software console game. The software console game cannot only use in Wii but also can use in PC, PS2, or other hardware console. Thus, as a software game publisher, Nintendo access to more than one distribution for its software game. In short, how to access to more distribution is also one successful factor of video game console producers. 6. Which console makers seem to be best able to perform the industry’s key success factors and other measures of competitive strength? What ratings do Microsoft, Sony, and Nintendo merit in a competitive strength assessment? | ImportanceWeight| SonyStrengthRating| SonyStrengthScore| MicrosoftStrength Rating| Microsoft StrengthScore| NintendoStrengthRating| NintendoStrengthScore| Large installed base| 0. 25| 7| 1. 75| 6| 1. 50| 9| 2. 25|. Technologicalcapabilities| 0 . 15| 9| 1. 35| 9| 1. 35| 7| 1.05| Partnership with independent software developer| 0. 15| 8| 1. 20| 8| 1. 20| 8| 1. 20| Acceptable development and production costs| 0. 25| 6| 1. 50| 7| 1. 75| 8| 2. 00| Access to distribution| 0. 20| 8| 1. 60| 8| 1. 60| 9| 1. 80| Sum| 1. 00| | 7. 4| | 7. 4| | 8. 3| (Rating Scale: 1=very weak; 10=very strong) General speaking, Sony with PS2 has performance very well in the industry. However, Xbox had beaten Sony’s PS3. Then Nintendo’s Wii has very strong performance to become industry leader. Thus, Nintendo seems to have best performance in the industry. The table above shows the ratings and scores of Sony, Microsoft, and Nintendo. Sony and Microsoft have the same score, 7. 4 and Nintendo has higher score, 8. 3. Although Nintendo do not have strong technological capabilities, it has powerful marketing strategic and variety products to access more distribution. Its product can reach more population to use and weaker technological capabilities become its strength to increase the sales volume. Therefore, I gave rating 8 for the acceptable development and production costs which is higher than Sony and Microsoft. Therefore, the overall rating of Nintendo shows that it has best performance in the industry. 7. What recommendations would you make to Microsoft to win the next generation battle in the video game console industry? to Sony? to Nintendo? Microsoft According to the revenue data, we can see Microsoft has less revenue than Sony and Nintendo. Also the sale unit of Microsoft products are not as mane as Sony and Nintendo. Therefore, I recommend that Microsoft should increase sale volume of its products. Xbox may be popular in America but how about Asia? Asia is a potential place to increase the sale. Therefore, Microsoft may need to create the new generation product can fit more population taste. Sony Sony should remember the lesson of launching PS3. Although it had pressure to launch PS3 earlier, the product was not ready yet to public. This situation can drag more profit down than launching PS3 later. Therefore, I recommend that Sony should make the marketing plan well and prepare more than one back up plan to face the rivals’ new products. Sony should have ability to predict or estimate actions of competitors. Nintendo Nintendo has strong performance of its Wii. Wii is design to reach more population so the key features of Wii are not as strong as Sony Play Station and Microsoft Xbox. Now, Wii has been successful to reach more population, and then I will recommend that Nintendo should figure out how to improve its technological abilities. The consumers cannot be always satisfied with the simple designs. Moreover, Nintendo has famous software game such as Mario Brothers. The game is many people childhood memories. Nintendo could make serial products for the special anniversary of Mario Brothers. Many people would like to collect the serial products, such as the first generation Mario Brother game. This is Nintendo’s strength and Nintendo should use it.