Video Game Industry

Case 7

1. What are the defining business and economic characteristics of the video game console industry?

The video game industry has currently had seven generations of consoles released and is gearing up for the eighth generation. As of the time this case study was written Nintendo's WiiU had not yet been released. Nor has Sony and Microsoft released there next consoles. When this case was written there weren't some of the major changes that are currently shaping the industry today. Companies like Valve are developing their own consoles. There is even a Kickstarter funded system that is based on the Android OS called the Ouya that is set to release into the market now. Given all these factors, as well as the growing popularity of the mobile gaming market on the smart phones the industry has indeed taken some interesting turns from its original trinity of offerings, namely the Wii, Xbox360, and PS3.

As of this case study the characteristics of the industry are as follows:

* Intensity of competition: The competition in the video game industry is fierce. There are three large companies in the industry, which are Nintendo, Sony and Microsoft.

* Market size: The target market for the products cover all over the world, however, the highest sales are in Europe, Japan and the U.S compared to other regions.

* Influenced by global recession: A video game is not considered a necessary product. It can be described as a luxury, hence, the global economic recession have influenced the sales of video games, consoles and accessories. The industry revenues declined 6% in 2010 compared to 2009, and have continued decreasing into 2011.

* Growing rapidly: Despite the recession, and the initial decline in sales, the video game industry has been growing rapidly, and also is expected to continue growing in the future.

What is the industry like?

The industry is composed of 3 types of gaming mediums:

1. The consoles - Xbox360, Wii, and the PS3 (Steambox and Ouya coming soon and Apple is rumored to have their next TV to come with a gaming feature set to rival consoles).

2. The mobile devices such as the Nintendo 3DS, PlayStation Vita, and smartphones (fastest growing market).

3. The gaming PC's (always the cutting edge of graphics and constantly upgraded)

All the companies in video game industry prefer to provide high technological and innovative products. They includes online games, mobile games, video game consoles and handheld games. In order to attract existing and potential consumers and build on their customer loyalty, these companies proliferate their efforts to enhance the technology of the products offered. Because of this, the video game business sector updates very fast and the new generation replaced the old typically within short period of time. The target market used to only comprise of children and men but that is rapidly changing as gaming becomes more and more socially accepted and has grown to include people of all ages both men and women alike.

2. What is competition like in the video game console industry? Do a five-force analysis to support your answer. Which of the five competitive forces is strongest? Which is weakest? Would you characterize the overall strength of competition in video game consoles as fierce, strong, moderate to normal or weak? Why?

Rivalry amongst competing sellers is the strongest force at play in this industry. In order to gain market share on the "battlefield" companies such as Nintendo, Sony and Microsoft have competed by "developing products that were technologically superior and more powerful than the offerings of rivals". Sony and Microsoft were losing money on console sales in the hope of increasing market share and profiting from the subsequent games sales. Each new console release was quickly followed by a superior offering by industry competitors and this continued to be the trend until the recession slowed it. That was the case before Nintendo decided to focus more on innovation than technical prowess.

This cycle of using technological enhancements, such as graphics and processing power, as a means to differentiate consoles was broken when Nintendo launched the Wii. This new and simplistic approach to gaming console development appeared risky and shocked the industry commentators. It proved successful for Nintendo since by 2009 they had sold 51.6 million Wii consoles which almost amounted to the combined sales for Microsoft's Xbox 360 and Sony's PlayStation 3. Nintendo had found its niche.

As I read the case study it referred to the competition in the video games console industry as having intensified due to factors such as new competitors, consolidation and the continuous development of new products. At present, however, it could be said that the weakest competitive force is that posed by the threat of new competitors for a number of reasons. The relatively high capital requirements for manufacturing, distribution and advertising involved are just a few of the factors that make entry difficult. This might not continue to be the case much longer if the current trend on Kickstarter takes hold. The slow growth rate in the console market at present would also suggest that it may be unattractive to attempt a new entrance strategy even if you can find funding via a Kickstarter campaign.

There are also high switching costs from one console brand to another and a strong network effect. This comes about when gamers build up a myriad of games linked to one particular console and have friends they can exchange games with and play against. They may also have a brand preference which may impact on any new competitor's ability to gain a market share.

The competitive pressures from the substitute products of companies considered to be outside of the games console industry could be classed as weak at the moment. Arcade video games could be classed as a substitute to a games console but this seems to be a dying market. There are a growing number of games available online through social networking sites which are largely accessed for free. Consumers may also opt for more traditional board games. If general economic conditions are prolonged the competition exerted by substitute offerings may increase. Who knows maybe even reading books will increase in popularity via the new eReaders.

The power of suppliers in the games consoles market is weak at present due to the backward integration of a number of manufacturers. The inputs required for games consoles can be sourced from any number of producers and companies in the console industry have formed partnerships and