Business Analysis of the Game Console Industry
Business Analysis of the Game Console Industry
Executive Summary
Game console manufacturers find themselves at the crossing point of two rapidly developing industries, entertainment and consumer electronics. Software and hardware developers are in a kind of symbiosis: no one can survive without each other, although they are not directly related. But while software programmers can switch hardware platforms easily in the event of failure, hardware manufacturers have to stick to the system, as this is their main product. Improving an unsuccessful console after its initial release is difficult as well because of its monolithic design using special, single-purpose components.
Sony has tried to adopt a strategy based on the success of its first console and used the same basic strategy of releasing a multitude of titles thus giving the consumers a wider choice than any of its competitors. Sony's PSX2 seems to be targeted at the older game playing generation (16-26). The release of a backward-compatible console was an industry first and looked upon as quite a major risk. However, many of the PSX2 customers will already be owners of the PSX 1 and, due to the large amount of games available, will be relieved to know that these will not have become obsolete. Thus, buying the PSX2 will not really be a risk to customers, because if the new games do not meet to all the desired standards, then they can fall back on their already purchased games as well as making use of the new capabilities on the PSX2 such as the DVD player and internet connectivity.
Nintendo, on the other hand, seem to be targeting the younger age range (5-16). This is evident in not only the actual console design but also in the types of game that Nintendo already produces and is set to produce for the GameCube. Nintendo's strategy seems to be based on exclusivity and sequels for established brands. The introduction of optical disks based games is a first for Nintendo, as well as an industry one, and is most likely designed to attract software developers back to Nintendo.
Environmental Analysis of Game Console Industry
From the advent of inexpensive personal computers in the mid-1980s, or at least since the beginning of the so-called "Information-Age" with the appearance of the World Wide Web as a popular medium of data exchange in the early 1990s, the market for hard- and software has been expanding enormously, equalled during the same period of time only maybe by the entertainment industry. Since these early days, there have been companies trying to participate and therefore profit from both markets at once - forming what will be referred to as the computer game industry, developing systems and applications for private customers (or users), instead of companies, designed just for entertainment (or fun), instead of work.
As with the computer industry in general, the computer game industry can be roughly divided into two parts: software and hardware. No part can exist independently of the other, which leads to a symbiosis of some kind:
* Software development companies create the computer games the user hopefully will buy and play, but which cannot run without the hardware.
* Hardware manufacturers design and build the actual machines these games will be executed on, but which will not sell without good games to promote them.
This scheme of sharing the work can be likened to the music industry, where musicians create the songs (as some sort of software), while the electronics companies build the equipment (or hardware) to play these songs. In both cases, the "Hardware" industry has to rely on their "Software" counterpart to deliver sufficient applications in both quality and quantity to promote their system. On the other hand, "Software" developers will always be looking out for the most powerful machines in the market, on which they can create the most impressive software, which in turn hopefully will sell well.
But unlike in the music industry, where companies tend to agree on standards for hardware like the CD or Dolby Surround, in computer industry, systems compete. Thus, standards evolve in a Darwinian process, like the IBM-compatible PC did, which over the years pushed alternative systems like the Atari ST, Commodore C64 or Amiga out of the market. In the console industry, which as a part of the computer game industry builds integrated machines for the sole purpose of entertainment (as opposed to the multipurpose PC), even more competitors have been fighting for market share in the past.
While software developers can easily switch from an unsuccessful system to a more promising one, console manufacturers do not have this option. As the system is their product, the risk is great that in the event of failure, the will suffer heavy losses, and face bankruptcy. A recent example for this is SEGA, which, after being unable to sell its Dreamcast console up to its expectations since the launch in 1999, had to resign from manufacturing hardware into developing software for the SONY Playstation2, with about 66% market share the market leader at the moment. The only other competitor to be taken seriously is Nintendo with its upcoming GameCube, who, unlike SONY, has been in this market for over 10 years now, since the appearance of its Nintendo Entertainment System, the first console to be really successful worldwide. New entrants, like Microsoft, which wants to release their PC-technology-based Xbox earlier this year, will have a hard time to overcome the barrier of entry imposed on this market. In the last years, many other promising systems (and with that, the businesses having developed them) failed at the same task - for instance Amiga CD32, Neo Geo and Atari Jaguar.
One of the problems adding to this is that consoles are not modular (as PCs are), but monolithic in design. Except for gadgets, there is no real possibility of upgrading these systems, leading to the fact that many console manufacturer are unable to react quickly and flexible to changing consumer requirements, over the past year for instance features like online distribution of software and wireless gaming. Moreover, there is no chance in fixing an ill-designed system after it hit the market. Therefore, the life cycle of consoles tends to grow shorter, while the time and money needed for ...
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One of the problems adding to this is that consoles are not modular (as PCs are), but monolithic in design. Except for gadgets, there is no real possibility of upgrading these systems, leading to the fact that many console manufacturer are unable to react quickly and flexible to changing consumer requirements, over the past year for instance features like online distribution of software and wireless gaming. Moreover, there is no chance in fixing an ill-designed system after it hit the market. Therefore, the life cycle of consoles tends to grow shorter, while the time and money needed for development of a new generation machine seems to expand, due to the fact that the systems become more complex as more features are added.
Unlike PC's, the speed of consoles' usually is not determined by the frequency their processor runs on, but it's bandwidth, which tends to double from one generation to the next. For the current generation of consoles this is 128-bit, meaning the CPU can process a stream of data of this size in one go. Consoles usually consist of special, single-purpose hardware, which performs image manipulation and matrix operations very fast, to display high-quality graphics with high frame rates. This special hardware is not bound to a specific vendor, so that upon designing a new console, hardware manufacturers often license promising technology from many different other companies, or just take over these smaller chip factories1.
2 Business Strategies
Prior to a company developing their plans or strategies it is essential for them to be aware of their present market position and review the resources and capabilities of the company.
A strategy is a plan on how to best achieve a goal by a specified time, it may also incorporate a more cost effective method.
There a three individual levels of strategy and these are as follows: -
. Corporate Strategy: - Scope of the business and a long-term direction for the company.
2. Competitive/Strategic Business Unit (SBU) Strategy: - This focuses on how to compete in the market place and has a mid-term direction.
3. Operational/Functional Strategy: - Contribution of Finance, Marketing, Production, H.R etc and has a short-term direction.
A company must know which areas need to be improved, as by doing so they must evaluate all available options. One of the processes which may be implemented is known as SMART: -
S - Specific: - The strategy must be adaptable and flexible enough to fit meet the specifications.
M - Measurable: - Success can only be managed if it is measured.
A - Achievable: - Goals must be built up over time and therefore must not be rushed hence they must be achievable.
R - Realistic: - It is essential for any targets which are set to be practical.
T - Time Frame: - Targets must be achieved within the proposed period, as any unforeseen delays will cause hindrance in other areas.
An effective strategy should not only incorporate the SMART technique but also be innovative and easily modifiable with change. Change plays a vital role in the market place and has been known to fluctuate on a day-to-day basis.
There are three elements that a strategic decision must be based upon; context this is concerned with the environment within which the strategy is operating, closely linked with this is the main actions of the proposed strategy otherwise known as the contents. Finally the process element determines the way in which the strategy will be developed and achieved.
Successful strategies should aim to add value to a business or a product it must perform consistency with circumstances surrounding the business and must further allow the company to gain a competitive advantage against their rivals. The originality of a strategy is crucial to deliver the defined purpose.
A poorly directed strategy may lead to short-term setbacks. It is not necessary for a company to incur losses in order to be aware of the fact that they are under-performing. It is quite possible that the reason for a company's underachievement is the result of the company revenue or sales not growing at the same rate as that of the market.
2.1 Sony PlayStation 22
The Sony PlayStation 2 also known as PSX 2 was launched in Japan in March 2000. Sony's market strategy stated that they propose to launch the PSX 2 in the UK by Autumn 2000. They further predicted to shift 1 million units in Europe on the first day of release. These strategic estimates made by Sony were on the basis that they would produce 300,000 units per month.
Apart from better enhanced graphics Sony admitted that the PSX 2
"Is no great leap forward in gaming technology"
The total worldwide shipments of PSX 2 hardware were 85.44 million units by June 30th 2001. The total worldwide production shipment of the PSX 2 software resulted in a total of 783 million units as of June 30th 2001. These figures provide a realistic approximation of the gap, which Sony found within the market indicating that Sony have sound knowledge of the industries needs and were able to meet consumer demands.
Despite being aware of this fact they were certain that they would be able to successfully generate large sales purely on the fact that new game releases will be launched compatible only with the PSX 2. As with Nintendo, Sony has no shortage of company's developing software titles for the PSX 2, by September 1999, some 90 companies had been signed up to develop games. Its strategy appears to be to dominate software shelves - in terms of the number of titles on offer as it has done with the first PlayStation console.
The existing 3,000+ software titles available for the PlayStation 1 are compatible with the PSX 2. This represented somewhat of a risk for the company, knowing that this would set a precedent within the industry. The concerns were that with gamers being able to play existing games, the demand for PSX 2 games would be much lower than what they otherwise would have been. This would have provided Sony with problems in terms of the willingness of companies to develop games for the new console but as sales figures have shown, gamers were eager to switch from their old console in favour of the new console knowing that they could still use their old software. The PSX 2 is also DVD compatible and supports the PC-Smart card thus providing PC capabilities with extra hardware.
2.2 Nintendo GameCube2
Despite being number one in the handheld console market, Nintendo have always settled for second best in the video game market. Nintendo's $76 million advertising blitz isn't just about building awareness. The Game Cube, which will sell for $199, is $100 cheaper than the PSX 2.
Nintendo's marketing strategy differs from the PSX 2 as they plan to launch their software games in sequels. They anticipate to grasp the audience via their huge advertising campaign and are certain that once the gamers have experienced the technology and gaming capabilities they will be sure to purchase future best selling sequels. Nintendo, creator of the wildly popular Pokemon game character, is also promoting its own games, such as the Mario and Zelda series. These series represent different brands which Nintendo market and expect to maintain exclusivity with.
The stakes are high for Nintendo. It faces intensified retail competition, not just from the market leader Sony but also a new deep-pocketed rival Microsoft, which plans to launch its XBox November the 15th, three days earlier.
Other factors like the sagging US economy and threat of war create a difficult environment for selling what amounts to be a pricey toy. Indeed, Game Cube got off to an anaemic start in Japan on September 14th 2001, where it failed to sell out the 450,000 units it shipped to stores. Analysts blame the countries weak economy for Nintendo's disappointing domestic debut.
American interactive entertainment analyst Edward S Williams quoted:
"People are probably going to be travelling less therefore spending more time at home and hence spending more on in-home entertainment."
Marketing gurus further predict that parents are eager to insulate their children from the evil of the world and computer entertainment is one key area in which children are more than fascinated by. By analysing these facts America seems like a suitable market to release home entertainment in.
If Nintendo launch at a low price, the prospects look good. Much will depend upon Nintendo's software houses to provide the console with appealing games at launch. Given the fact that the console utilises optical discs, manufacturing costs should be lower than that for cartridges resulting in lower retail prices for games. Many industry sources maintain that should Nintendo's preference for its own development houses-over external partnerships - continue this could hamper its success.
Nintendo has learned from its own mistakes by opting to use an optical disc as a storage medium instead of the silicon-cartridge format they used traditionally. This offers game developers the same easy platform to work on as it is based on the same technology as DVD.
Nintendo is betting everything on a back-to-basics strategy. Sony and Microsoft are pushing black boxes designed as home entertainment centres that play DVD movies and music CDs as well as games. Nintendo's colourful, compact machine does just one thing: games. The idea is that fans will flock to a console that's not loaded with gimmicks they'll probably never use. Nintendo is moving away from the prevailing trend of increasingly complex games to "simple and fun" entertainment games that are both easy to play and cheaper for designers to write.
GameCube looks set to finally launch in late-2001. However, the company maintains that rather than hardware problems, the release date was put back as it wants to be able release software titles worthy of the technology, therefore avoiding some of the problems it encountered with its N64 console.
Due to its release date coming significantly after Sega and Sony's new-generation consoles, Nintendo will set the market entry price around £199. GameCube, like the PSX 2, will be DVD-based but unlike PSX 2 will not be backwards compatible.
2.3 Alternative strategies
Sony
The launch of PSX2 has meant a significant fall in demand for the PSX leading to the fall in prices of PSX software. This has already begun with many games now priced at £30 or under. The PSX 2 will still benefit from lower prices, as PSX 2 will be backwards compatible enabling those upgrading to still be able to play their old PSX games.
The Sony PSX 2 has superior software support than the other manufactures with numerous games developers looking to produce games for the console. This issue was considered to be the reason why PSX achieved quick success and one of Nintendo and Sega failings with their last console launches.
The company has content: Sony movies and music. It has hardware: TV sets, PCs and game machines. What Sony lacks is a communications tool, and that's where the PSX 2 is to come in. It is one the three Internet gateway strategies, as Sony believes that its future lies not with its TVs and camcorders, but with the fast moving on-line world.
A modem can easily be added to the PlayStation 2, as well as supporting broadband links via a faster cable modem. This should eradicate the problems encountered by Dreamcast on its release. The PlayStation 2 also has a hard disk peripheral up to 50Gb's on which to download games, music and movies at high speed. Sony plans to distribute digital movies via PSX 2 some time in late 2002 or early 2003. Downloading of MP3 files is also a possibility. With this in mind one of Sony's strategies was to propose to distribute digital movies via PSX 2 some time in 2002 or early 2003.
Sony's future as an entertainment company is being modelled around the Internet. They are encouraging gamers to download games and movies from the Internet as opposed to distributing them to retailers. This way CD pirating will be minimised, and the success or failure of the PSX 2 could lie in its E-Commerce strategy and capabilities.
Sony has also reduced the price of the PSX 2 just before the launch of its rivals. This could have two effects.
* The customers will notice that prices do not vary significantly between the competitors and therefore they will effectively remove the console's cost and possibly focus on the other advantages such as DVD player on the PSX 2.
* The media will not focus completely on the new consoles being released and therefore promote the PSX 2 as still being a viable option even though it has been released for a longer period of time.
This is in line with Sony's price strategy which is always being reviewed to fit market conditions.
Nintendo
Nintendo is currently in a precarious position with its N64 console as it's sales did not meet the company's expectations and by their standard was a huge flop, leaving the company heavily reliant on the launch of its 128-bit GameCube console.
Nintendo will continue to command a high degree of brand loyalty, however the company faces the threat of its core market converting to Sega and Sony, which will have got their 128-bit machines on the market much sooner. If GameCube fails, Nintendo may be forced out of the console market altogether.
For Nintendo, the GameCube's "cuteness," combined with beefed-up software line-ups, represents a new strategy to get an edge over PC-like systems made by technology heavyweights. Like the PSX 2, Game Cube will also aim to target the over 18 crowd via the computer's ability to download games, music and videos. Sponsors such as men's magazine "Maxim", Smirnoff Vodka and Hollywood premiers are just a few of the high budget sponsorships supporting the company.
Nintendo have been at the forefront of the handheld consoles sector since 1990, when it launched its GameBoy. Since then, Nintendo's 100 million selling GameBoy has enjoyed a monopoly market share. It has become a huge cash cow. Nintendo's next challenge is to expand on this franchise into an even more lucrative business. To do this, the GameBoy and GameCube have been made to be compatible, an industry first. The hope is that that kids will want both so that they can play on the handheld while on the move and then upload the game at home to continue on the GameCube.
3 The future for Sony & Nintendo
The console manufactures will continue to dominate the UK market, with the only competition in the near future coming from Microsoft, which is looking to enter the market with its new console. The X Box is due to launch later this year and is designed to compete directly in the console market. The inclusion of a hard drive, DVD drive and modem will combine to create a home entertainment centre to rival all of the other new-generation consoles. Microsoft's entrance into the video game console market reinforces the view that the static controls and PC gaming sectors are moving further apart and is two totally different markets.
Recent failures in this industry will prompt the major manufactures to continue to develop their own niche strengths. Sony is characterised by the high number of software titles available and Nintendo will promote games including its own highly successful characters.
PC gaming will remain second to consoles due to a number of reasons. The price of PC's will remain much higher than consoles, encouraging consumers to the latter.
The improvement in console technology is set to result in consumers not looking for the console with the greatest graphics- as the 128-bit machines will all be state of the art- but those with the best games and the greatest choice available at the time of release. This may count against the stagnation in the console market, prior to the limited success of the Dreamcast, is due to consumers waiting for the new-generation consoles, primarily the Sony PlayStation 2 consumers have proved reluctant to buy hardware which will soon be out of date and do not include features the new-generation console promises. Internet access, DVD capabilities, as well as better graphics are the major advantages the new-generation consoles will have.
At present the strategies, which companies such as Sony and Nintendo have adopted, are to enhance and update their current hardware giving them a new name and to release new software titles compatible to the new hardware. However the way the industry will be moving in the future will be to deliver software via the Internet Websites and provide a "pay and play" service, whereby a consumer will be able to access these sites for a minimal charge and play their desired game over high speed connections. The general viewpoint will be to provide reviews of games and allow users to purchase them on-line. This will lead to the manufacturers developing joint marketing and branding strategies.
The current capabilities of the UK's Internet Service Providers will not make such a strategy possible, as the Internet bandwidth remains very low, meaning on-line gaming has yet to become a viable reality due to its slowness.
4 Conclusion
In light of the strategic tactics it would be fair to comment that Sony has the upper hand at the moment. However this does not by any means suggest that there is no niche in the market for rivals. By further analysing the computing industry it is evident that consoles have the edge over PC's in the video gaming industry.
The Internet is rapidly rising in use, while consoles will continue to dominate, the advent of Internet gaming could conceivably rise. Despite this dominance in the computing industry the average console price drops by around 30% in each year after it's launch. Manufacturers are aware that they only have a product life cycle of no more than two years. The market size generally grows in the second year of the product cycle despite the price cuts this is due to more software availability and discounted prices.
It is apparent that the company's product life span is very much dependent on its software. The games software market is the fastest growing sub-sector, fuelled by the heavy market competition between the market leaders Sony and Nintendo. In 1999 games made for the Sony PlayStation accounted for three quarters of its income. It is known for a game to generate more income than a Hollywood film; as a consequence, well known film Stars and pop Stars help create games by providing scripts or soundtracks written for the game. The strategies which Sony and Nintendo adopt are highly influenced by the market pattern, hence the similarities in their strategies.
Playing catch up with your rivals is an on-going affair in all industries as only the strong hearted will survive. The strategies and technology development contribute a lot to the successful launch in this industry. Managing these new techniques and maintaining the constant development of future consoles are essential, as change is a constant issue which must be kept in mind at all levels of success.
We believe that both Game Cube and PSX 2 make good competitors as they have sufficient resources and capabilities to be a motivator to the firm and have the ability to provide differentiation as well as credibility and viability. Both firms are clearly aware of their weaknesses that will lead it to conclude that it is futile to attempt to gain relative position against their rivals. Both Sony and Nintendo further prove to be good competitors, as they understand and play by the rules of the industry, they also have the ability to read market signals. The assumptions they have made to the present moment in time are realistic, as they have not made the mistake to over estimate the industries growth.
APPENDIX
PEST ANALYSIS
Political future
* Gaming: No real political value, therefore unimportant to politics.
* Consoles not usable for other purposes than gaming, therefore not subject to current political issues concerning computing, like cryptography and digital rights management.
* Hardware is patentable, which guarantees high security of R&D investment for console manufacturers.
Economical future
* Console development cycle follows roughly the general computer industry cycle: doubling of computing power in 1.5-2 years, newest hardware sells at a constant price.
* Relaunch of consoles normally not economically efficient, leading to total redesign, which is expensive.
* Consoles not upgradeable, consumer has to buy complete new system, generating a cyclical stream of income.
* Entertainment-sector as a market of high annual growth, even in times of crisis.
* Computer hardware as a market of rapid development and high fluctuation.
Socio-cultural future
* Game consoles designed purely for leisure purposes.
* As "entertainment" belongs to the top-level motives of Maslow's Pyramid, it will still be of high importance in the future.
* Attempt to establish the console as the digital centre of the living room, incorporating different other devices as CD and DVD-Player.
* Increasing importance of gaming and online communities for social contact.
* Ability to compete against any other player anywhere at any time via Internet creates a continuous challenge to the gamer, hooks him.
*
Technological future
* Faster central and graphics processing units for smoother animations.
* Better graphics compression and larger storage media enable life-like 3D graphics and cinematic movies.
* Adding of multimedia capabilities to develop a product appealing to older customers.
* Hardware usually state of the art, as this gives competitive edge.
5 YEAR OVERVIEW OF SALES
(All amounts in Millions of Japanese Yen, Year ended March 31.)
2000
999
998
997
996
Corp.
Sony
Nintendo
Sony
Nintendo
Sony
Nintendo
Sony
Nintendo
Sony
Nintendo
Net sales
630,662
530,340
760,071
572,440
699,574
534,325
408,335
417,593
N/A
353,754
(Note: Figures for Sony comprise of business segment "Games" only)
Corp.
Sony
Nintendo
Sony
Nintendo
Sony
Nintendo
Sony
Nintendo
Sony
Nintendo
Net income
21,835
56,061
79,004
85,817
222,068
83,697
39,460
85,482
N/A
59,871
(Note: Figures for Sony comprise of Sony Corporation and Consolidated Subsidiaries, to take in account shifting of income between different business segments.)
PEST ANALYSIS
2 5 YEAR OVERVIEW OF SALES
