million dollars in the first year of operation. The next contender on the scene was to be Sega.
Sega is ran under the guidance of CEO Hayao Nakayama, a former employee. Nakayama was familiar with the video arcade business and wanted to use his skills to dominate the market. The CEO vision knew this goal could be obtained by developing a game that employed greater graphics than employed at Nintendo and be more advanced in technology. The vision became a reality with the making of Genesis,a 16-bit game system. Genesis was marketed to compliment its arcade games. The company also had a licensing program. The two companies began a fierce rivalry. Nintendo came back with Super NES. Sega came back with a multitude of software games such Sonic the Hedgehog, John Madden, and Mortal Combat. Sega emerged the winner in the early 1990's to beat Nintendo. The pattern of rise and fall permeates the home video game industry. The always evolving technology brought new changes and new challengers into the field.
The mid 90's introduced the world to the CD ROM's and Personal Computer Games. These companies were the likes of 3DO, Sanyo, Toshiba, and Samsung. 3DO poor forecasting and overestimating the market need dropped out of the race. The next dominate force would be Sony.
Sony already had an established market in the entertainment arena and decided to jump into the fray of the home video game industry. The Playstation was born. The Playstation system was a 32-bit processor and utilized a powerful CD ROM system. Strong advertising and marketing combined with a quality product was a success with the public. The first year sales in this market were at a astounding 1.3 billion dollars!
Microsoft is coming on strong with the introduction of the Xbox. Sega is still a contender with Dreamcast and Nintendo cannot be forgotten with their Game Cube. The rise and falls of the home video game industry has many factors. These factors are based on the companies internal strengths and their weaknesses.
Internal Strengths and Weaknesses
Atari was at its strongest as a company when it agreed to let Sears sell their game systems. The push from Sears garnered one in a string of substantial profit for the home video game industry. Atari also was a pioneer of the "third party" concept. The third party concept allows for third parties to create games for other proprietor systems. The sale of Atari to Warner Brothers and the development of the Atari 2600 allowed the company to be a dominating force for seven years in the industry. The company experienced a downfall. Bushnell stayed on at Atari Inc. after the sale to Warner Brothers. Bushnell parted ways due to disagreements of strategy. Atari also had other factors that led to its demise as a company. The alienation of the game designers caused by top management. Bushnell's successor as CEO was Ray Kassar. Kassar came from the rug industry. The CEO did not know anything about his company that he was running or electronics. Kassar key function was to add stability and structure; which were not apparent under the umbrella of Nolan Bushnell. However, Kassar did not appreciate the importance of the game designers. Kassar believed the game designers to be overpaid and not manageable. This created a tension atmosphere with many game designers resigning to go the competition. The products were of poor quality that were created at Atari. The aggressive advertising and marketing Atari launched only emphasized the lackluster quality of the game systems and software. The poor sales soon provided proof of this. Jack Tramiel became the next CEO when he was sold the rights to the company by Warner Brothers. Tramiel was not able to steer the company on the correct course either. The company was sold for only 5 million dollars.
Nintendo was able to bring the sagging home video game market to life with the launch of the Nintendo Entertainment System combined with the games Donkey Kong and Mario Brothers. The company was able to do surveys pinpoint specifically what the public wanted from their games. The company was able to sell the units and have a first year of sales in America alone of 1.1 million dollars. The end of 1988, Nintendo sold 1.7 billion of the 2.3 billion dollar business. Nintendo was in the leader in the video game industry. The company controlled 80 percent of the market but by 1994 only held 45 percent of the market. There are many factors in the decline.
Nintendo began to have a lack of innovation. Sega was stepping into the market with the 16-bit Genesis as Nintendo was still selling the 8-bit (NES). It also charged paying a fee for others to write exclusively for them. Nintendo also did not sale games to the video rental dealers, they wanted to collect royalties on that market as well. The company also did not to utilize the multimedia technology. The company did not respond to ads by Sega stating that Nintendo games were tame in comparison. The major factor was the alienation of the retailers. Nintendo started to have a practice holding back games to the retailers. Nintendo management calls this inventory control but this was the companies way of trying to control the market and insure a high demand of the games. Another factor was the security key chip that was installed by engineers at Nintendo. Nintendo also made numerous deals which made it impossible for other companies to produce games for competing companies. Nintendo alienated the industry using intimidation tactics to dominate the market.
Sega took advantage of these factors. Sega offered a licensing program but with lower loyalty rates. Sega also took advantage of the Multimedia by incorporating it into the Genesis system. The strong, strategic leadership practiced by Nakayama is a great advantage. Sega eclipses Nintendo by reaching more of a market. Nintendo only has the home video game market but Sega reaches the arcade and the home video game markets.
Sega also puts vast amounts into Research and Development. The Research and Development make their goal of "being first at all cost" possible. Nevertheless, Sega has a vast amount of games that include violence, sex, and gore. The disparagement campaign that was conducted towards Nintendo "Nintendo's games being made for children only made this more of a negative factor.
Sony has the advantage of already encompassing the entertainment field. The playstation had greater graphics and faster technology in its 32-bit system. This created more of an advantage for the entertainment giant. Sony strength can also be seen in its launch of the playstation sytem. The marketing was done separate from the electronic division, this gave the new market its own identity. Sony also targeted the launch to the eighteen to thirty-five year old male market evident in such games as Tombraider; the character Lara was created to appeal to the older market. Sony reduced the price of the playstation which made the Sony product more appealing to the consumer. Sony also has built an extensive catalog of games through networking and licensing agreements. Fiscal years 1995 through 2002 the company has garnered 35 billion dollars compared to Ninteno's 32 billion dollars. Sony's internal battles on strategy could be a factor as Atari discovered. The threat for Sony is the emergence of the PC games. There are no licensing demands and it is easily and cheaply developed. In 1998 there were 4,704 PC titles available, Nintendo had 44 for the Nintendo 64, and Playstation had 344 game titles.
External Environment
The media sends the message that the home video game is owned by young male children, but surveys show this is not the case. 54 percent of the home game users are men over 18 and the PC game user is in his mid thirties. The home video game industry does tend to ignore women. However, sales among women increased 38 percent in 1999.
60 percent of women play games on their PC. The leaders in the industry Sony, Nintendo, and Sega will have to set high standards to target that market that grew up with one of their systems.
Strengths/Weaknesses/Opportunities/and Threats
Nintendo and Sony dominate the market at this time. Sega made the mistake of overestimating the market. The Sega company was unable to capture enough users with its Dreamcast system. Sega restructured itself as a company in 2001 and now is a development company for old competitors. Nintendo has been able to come back strong with the N64, a 64-bit game system. This game is targeted towards children. Sony has been able to hold its own in the competitive market and has launched the Playstation II. The new challenger is Microsoft. Microsoft is a strong competitor with the Xbox. Nintendo has also introduced the Game Cube. The three key players which are Nintendo, Microsoft, Sony continue to have closed standards. The closed standards include reluctance of the owners to release upgrades when needed and a small catalog. Nintendo has their own developers, however, games will be slow forth coming due to the time it takes. This may work against them. The new threat is the PC market. The PC market is growing by leaps and bounds. This new market is also much easier and cheaper to develop. The companies proprietor stakes on their product may also be their undoing with the PC market taken over.
Corporate Level Strategy
The players in the home video game industry have followed the same pattern. The company that became dominate soon mishandled the power they held over the market. The structure that has swept over this industry was by choice. The choice to keep out as much of the competition as possible. The companies have all made systems that are not compatible with anyone else's. The consumer is left with being a long time customer due to the pricing of the game. The consumer would pay more money to switch than to stay as a Microsoft, Sony, or Nintendo customer. There also does not seem to be a strong relationship with the developers that make the game. There is a tug of war over marketing and pricing constantly. The home video game industry has lost leadership.
Business Level Strategy
The console was marketed two years ago as the answer of the PC game market. Sony and Microsoft have incorporated Web-access and entertainment features into their consoles. The consoles also seem to be relatively inexpensive.
Sony has decided that they will be coming out with products that are just not in the audiovisual category. The company is restructuring itself and shrinking the size. The CEO Idei Noboyuki expressed interest in 2000 in online banking and possible joint ventures in the future.
The Industry Structure and Control Systems Match its Strategy
The structure and control systems do not match the overall strategy for all of the firms in the industry and that is to dominate the market. The industry has matured but the "no new entry attitude" creates an atmosphere of tension, bad and poor management, and a monopoly attitude taken by the firms. This led to Atari failure in the 1970's, Nintendo was the next in line with bad results in the late 1980's and the next in line was Sega which like Atari, is no longer in the running. Unfortunately, the developers do not hold that much power. However, the firms should realize that good working relationships lead to innovation.
Recommendations
Sony has distinguished themselves by not showing the abuse of power as have Atari, Nintendo and Sega. The industry has had a change to mature and the key player are now companies such as Microsoft, Sony and Nintendo. Warner Brothers suffered in the beginning of the home video game industry with the disastourious results of Atari Inc. However, this entertainment has proved that it can sustain itself. Companies such as AOL/Time Warner and Disney would have a chance to cross promote themselves. This would add a whole new outlook.
The threat of the PC market also brings a chance of failure to the home video market. Joint alliances would be very beneficial to the remaining companies that have matured to find success.
