Strategic Management
MGT 703
Task1
Strategic case study analysis
Electronic Arts and the Global Video Game Industry
Question 1
The dominant economic features for the video gaming industry are the market size and growth, scope of rivalry, buyer needs and requirements, pace of technological change and product innovation. ‘In 2003, the video game industry represented $ 31 billion on the global market which meant a tripling of the market share since 1995 ($10 billion ‘(C_297). It operates globally and ‘consists of makers of video game consoles, handheld players and arcade machines [hardware], game developers [software], retailers and online video game company producers’ (C_297). The video game industry actors are described in appendix A. The hardware (i.e. console) manufacturers experienced ‘a huge industry shake-out’ (C_298) before 1998. Maturity set in with Sony (playstation) as world leader in 2005 with 70 % of the market share, Nintendo at 26 percent. Microsoft entered with its Xbox in 2002, to make it a three-way contest (C_298) at hardware level. There are roughly 200 independent video game developers in the US (Shah, 2005, p 15). The developers of software ranged from small companies with limited resources for developing, publishing, and marketing video software to bigger ‘ independent game developers like Electronic Arts (EA), Activision, Take-2 Interactive, Capcom, Eidos, Acclaim entertainment, Sega and Lucas Arts , THQ and many more’(C_308). ’Small developers were struggling and forced to consolidate to a smaller number of larger developers’ (C_308) hereby also entering early maturity stage. Specific data on the lifecycle stage of all actors are depicted in appendix A(c). The market growth is considerable as the financial data show: The growth in interactive entertainment as game-playing hardware and software continued to improve, hardware and broadband penetrated more homes, and technology continued to evolve (C_301) resulting in broader game content, integration of movies and sport icons in the video games (C_299). In addition, players continued playing the games as they grew older, which meant that they had more disposable income (Shah, 2005, P7). ‘But besides growth in the developed economies, gaming console market is also seeing huge adoption in the emerging economies especially Brazil, Russia, India and China’ (Market Research, 2007). Rivalry in the video game industry market is high, ‘characterized by continuous introduction of new games, updated titles and development of new technology for creating and playing the games’ (C_308). Competition of video game development is based on game features, product quality, timing of releases, access to distribution channels and retailer shelf space, brand-name recognition, marketing effectiveness, and price. Software developers also competed with other form of entertainment like movies and TV (C_308). To be successful in the interactive entertainment business the company must operate worldwide. A decade ago companies functioned well focusing on a single market such as the U.S. or Japan. In recent years, much of the market growth occurred in North America and Europe and the new emerging worldwide markets as mentioned above. To address the needs and requirements of the buyers, console manufacturers cooperated with developers in the area or were based in their operating areas. The buyers in 2003 were 250 to 300 million people worldwide that were active or frequent players of videogames (C_298) and ‘another 100 million were infrequent players’ (C_298). Players that started in a younger age category continued on playing videogames. These players have substantial more disposable income to spend (Shah, 2005, p. 7). The bargaining power of the customer is relatively low. Due to the necessary procurement of a console to play the videogames, the buyer would experience switching costs if he wanted to switch to some other brands of videogames. Having said that, the supply of video games per console is still considerable with ‘more than 500 titles for Playstation, 200 titles for Xbox and 150 titles for Game Cube’ (C_304). The consumer is ‘brand’ sensible’ and chooses games based on game features, product quality, timing of releases (C_308). Due to the price of the videogame and the amount of time that a user can spend with one game, this product is not bought in large quantities. The gaming Industry is a knowledge based industry with high degree of innovation. Through technological innovations, technologies progress over time (Kayal, 1998). Between 1990 and 2003, the capacity of the consoles increased considerably from the 8-Bit device in 1989 to 128-bit in 2002. Simultaneously, the video games evolved to ‘push the limits of each new generation of consoles’ (C_303). As a result, the costs of this innovation increased accordingly due to the extended time needed to explore increased possibilities. Advanced technological skills are required and huge capital investment influences the capacity of the players in the market.
Question 2
The rivalry among video game developers is strong. To gain competitive advantage, the video game companies need fast innovation of the products and produce high quality products. As a result, smaller video game companies were forced to consolidate to a smaller number of large developers (C_308). The demand for video games is steadily growing due to increased amount of players (regional expansion and addition of new players whilst the existing players continue buying the games) and the attractiveness and quality of the product (better technology induced more features, introduction of sport and movie idols). There are a large number of videogames and rivals are competing for shelf space in retail to the point that ‘retailers demanded hefty slotting fees to stock lesser known or slow selling games’ (C_304). The rivalry between the console manufacturers is much weaker due to the fact that there are only three major console manufacturers and each is focusing on their own segment in the market. The customer loyalty and switching costs for the buyer are high. The video game industry has high entry barriers for both the hardware and software component in the industry. Appendix A(c) specifies the possibilities to enter the market of each component in the video gaming industry. The fast pace of development in the video game industry requires continuous innovation of technology to introduce updated and new products at a fast pace. This requires access to large amount of capital for research and development, skilled labour and industry experience. Outlays exceeding levels that maximize short-run joint profits for going firms can build entry barriers (Porter & Caves, 1977). New entrants have to make a unique product without the infringement of the already existing patents. Moreover, established relationships of the major publishers with retail make it difficult for new entrants to enter this market. As a result, the market of console manufacturers has established their market segment and does not experience threats of new entrants. The software component still has new entrants to the market. The relatively new concept of online gaming that is not dependent on strong retail relationships, has the most new entrants. The competitive threat of a substitute product increases as it comes closer to fulfilling a similar function to the original product. The closest substitute for video gaming is ‘other forms of entertainment i.e. movies, television, music and sports’ (C_308). According to Alpert (2005), the major differences are that entertainment software is continuously interactive at the individual level, the experience with the video game is longer than any other entertainment product and it has a learning curve and requires skills. Although the switching costs to substitute products are low and these products can be purchased at a lower price, the performance of the video games as described above reduces the competitiveness with its substitute products. The video gaming industry has initiated coopetition by integrating themes of movies and sports in video games creating mutual increase of profit and popularity. The bargaining power of the hardware suppliers is high. There are only three major manufacturers that serve different segments of the markets. There are switching costs involved for the buyer since the console is relatively expensive. Suppliers innovate their products thus able to charge premium prices for these consoles. In addition, the console manufacturers are vertically integrated in the video game development (software). The bargaining power of software suppliers is weaker. There are numerous videogame developers that have to adjust their product to the existing consoles. Moreover, ‘console manufacturers have final approval over all games for its consoles’ (C_304). Due to the amount of titles and the relatively low price, the buyer has greater power when choosing their product. The online game suppliers do have relatively more power since they do not rely on strong retail relationships. The customer has a relatively weak bargaining power with regard to the hardware. There are three major brands that produce consoles and the switching costs to another console are rather high. Due to the great amount of video games, ‘more than 500 titles for Playstation, 200 titles for Xbox and 150 titles for Game Cube’ (C_304) and its price, the buyer has more bargaining power over the software supply. ‘The consumer is ‘brand’ sensible’ and chooses games based on game features, product quality, timing of releases (C_308).
