Business & Corporate Strategy Video Games Industry

Corporate Strategy Case Study Competition in Video Game Consoles: The State of The Battle For Supremacy Julie Petitdemange MGE – 2eme Annee 24/11/2010 Ecole de Management Strasbourg I. Analayse the Industry of Video Games History: The video game industry grew in prominence with the 1985 introduction of the Nintendo entertainment system and was well into battle for supremacy among third generation consoles in 2008. The development of video games began in 1947 with the introduction of the first games: “Tennis for Two” and “Spacewar”. The first patent for video game was created in 1968 by Ralph Bear.

Until 1983 consumers could only play simple arcade-type games, but Nintendo rescued the video game industry in 1985 with the introduction of NES (Super Mario Brothers). The sale of game systems and software declined as the installed as the installed base grew and consumers had purchased “must have” titles: industry sales slowed considerably between 2003 and 2005. 2005 represents the launch of a new generation games which offers unparalleled computing power and high definition (HD) graphics and in the same year sales of video games equipment in the US exceeded 10 billion dollars.

The most popular category of games is Action with 30,1% of related PC games in 2005. The global size of the market is quite high with 35,248 million dollars in 2005 (compared to 24,352 million on 2000) and the “boom” is continuing over the years. Competition Producers of video game consoles: Nintendo’s ability to create innovative game systems leaded to a competitive, technology driven industry. Today, the industry of video games is clearly composed of three main competitors that have exclusive possession on the market with their products: * Microsoft Entertainment and devices division * Xbox system (Nov 2001) * Xbox 360 (2005) Xbox Live Website * Sony * Play Station (1995) * Play Station 2 * PSP (March 2005) * Play Station 3 (Nov 2006) * Nintendo * Game Boy (1989) * Nintendo 64 (1996) * Game Boy Advance (2001) * Nintendo DS * Nintendo Wii * Sony PS3, Nintendo Wii, Microsoft Xbox 360 proved to be must have gifts 2006-2007 * Game software developers focused their efforts on Nintendo and Sony * Microsoft, Sony and Nintendo each allied with IBM in the development of the console microprocessor; all three companies maintain similar relationship with makers of graphic processing units to display HD quality graphics and 3D effects, which increases the competition.

PC manufacturers: * AMD * Intel * Falcon Northwest * HP & Dell (the world’s two largest manufacturers of Desktop and laptop computers in 2008): created PC model with advanced graphics Value chain allies (such as discounter, electronic retailers, and toy stores): * Wal-Mart * Target * Best buy * Circuit City * Toys R us There was little competition among retailers in the sale of video games consoles and software. More price competition at the retail level was found with video game accessories. Sony, Nintendo or Microsoft tended to sell at comparable price points across retailers. Game systems: * Installed base consoles Handheld consoles * Online gaming * Mobile gaming Consumers In 2008 about 300 million people worldwide played video games. Majority of video players are preteens, teenagers, and young adults but the average age is rising as teenagers continue to play in their adult years. Video game enthusiasts spend 6 or more hours per week playing video games; the average American was said to play 75 hours annually playing video games in 2003 There has been a dramatic increase in the amount of time consumers playing video games during the late 1990s and early 2000s (due to the improved capabilities of game consoles).

Avid gamers purchase the largest percentage of the industry’s game software. * Consumers have a low power of bargaining as there are only three main suppliers (Nintendo, Sony & Microsoft), so it is difficult for them to drive prices down. Product Various products characterize the industry of video games: * Software & Hardware * Video game consoles * Handheld consoles * Video games * PC and since recently, mobile phones Strategies Microsoft’s strategy: Innovation strategy.

Microsoft tends to be the first in the launch of new products. The company contracts its manufacturing activities for its game consoles and video game disks to third parties in Asia to cut the costs of production. Microsoft invests a lot in marketing in order to approach consumers the best way and attract them (the company supported the Xbox 360 with a 150 million dollars ad campaign in 2007). Sony’s strategy: Such as Microsoft, Sony relies on innovative products and tries to launch new products on the market to attract consumers.

The company invests a lot in developing new games Nintendo’s Strategy: different from Microsoft and Sony: Nintendo’s approach focuses on earning profits from the sale of game consoles as well as from game software sales. * Nintendo has never held technological advantage in the industry. It had succeeded to reach success developing intuitive and easy games. Strategy matches to children and casual gamers and encourages people around the world to play video games * Goal: expend the gamers population Porter’s Five Forces analysis can help to understand the industry: Threat of New Entrants

The threat of new entrant is quite low as companies need special knowledge to meet new generation demand in video games. Moreover, the market is currently occupied by three main companies that have the monopole and that are well known all over the world, it would be difficult to struggle against these competitors Buyers Power Until recent years the power of buyers was pretty low as they could only refer to three main suppliers (Microsoft, Nintendo and Sony). But with the appearance of new substitutes this power is increase, overall with the free online games. This increase can allow consumers to drive prices down

Competitive Rivalry The number of competitors is low in the sector of video games providers BUT the competition on the market is really high as they all provide the same products always more sophisticated. Supplier Power It is quite easy for suppliers to drive up prices as the demand is huge and they are in a monopole situation. However the introduction of online gaming will reduce their power Substitutes Some substitutes are appearing on the industry of video games and represent an important threat: * Mobile phones capable of providing games * Internet with online games I. Do the SWOT analysis of Nintendo

Internal Factors| Strengths * Nintendo rescued the industry of video games in 1985 with the introduction of Nintendo Entertainment System and the launch of the famous game “Super Mario Brothers” * Nintendo’s handheld devices had been the dominant leaders in the mobile video game player market segment: it has aso captured a solid lead in the handheld game category, with the Nintendo DS selling more than 8,5 million units in the USA along 2007 (sony PSP: 3,8 million) * The introduction of Nintendo’s video game Donkey Kong transformed the company into a household name in America, Europe and Asia * Nintendo has its own software development teams, which reduces its costs considerably * Software operating profit margins that ranged from 35 to 40% had been a consistent contributor to Nintendo’s profitability * Nintendo’s innovations made the company leader of the market and particularly the launch of the Nintendo Wii which has been the first console able to respond to hand motions * Nintendo Wii sales exceeded 20 million units in 2008 (compared to 17 million for Microsoft’s Xbox 360 and only 10 million for Sony’s installed base) * In the USA, one in four households had a Nintendo game system of one generation or another * The net income of Nintendo’s company rose from 313 million dollars in 2004 to 2,573 million dollars in 2008 * The Nintendo DS had been the top-selling video game system during the 2006 and 2007 retail seasons * Nintendo’s strategy (encourage people around the world to play video games providing easy use games) leads to expand the gaming population> Nintendo has positioned itself well to maintain its status as a key video game player in the digital future.

Weaknesses * Despite its success, Nintendo’s products remain designed to casual players or children and it is difficult for the company to compete against Sony and Microsoft who provide next-generation computer capabilities * Nintendo is not really able to respond to game players needs that have a high level of interaction and backgrounds * Graphics-oriented gamer seem to prefer Microsoft’s Xbox 360 * The company’s sales sowed between 2004 et 2006 as video game users waited for the introduction of next-generation consoles * Nintendo has never held a technological advantage in the industry of video games, contrary to its competitors * The company had been unable holiday demand in 2007 with a lot of stock shortage * Analysts believe that Nintendo may have given up 1 billion dollars or more in sales in 2007 because of this inability to meet demand| External Factors|

Opportunities * In 2005 sales of video games equipment in the US exceeded 10 billion dollars. * In 2008 about 300 million people worldwide played video games * The average player spend about 6. hours per week playing games * There has been a dramatic increase in the amount of time consumers playing video games during the late 1990s and early 2000s * Consumers have a low power of bargaining * The recent interest in new technologies increases the interest in video games (and particularly HD games) * Teenagers and young adult are the main players but the average age is rising as teenagers continue to play in their adult years (which also increases the population of video gamers)

* The growth in video games sales had allowed it to account for a larger share of US’ consumers’ entertainment dollars than the motion picture industry| Threats * The industry of video games is very competitive (Three main leaders: Microsoft, Sony and Nintendo) * 44% of most frequent game players play games online in 2005, up from 19% in 2000 (this highly contributes to decrease the sales in Video Games & Video Consoles) * The popularity of game-capable cell phones, Ipods, and other sophisticated handheld devices has lead to decrease video game consoles sales (as it is not indispensable to play anymore) * The addition of Ethernet ports and Wi-Fi spots with the increase percentage of homes with broadband access had given rise to online games (which can lead to the decrease in consoles sales) * Best Buy and Circuit City had no inventory of Wii consoles in October 2008, which contributed to the inability of Nintendo to meet demand * Going into the 2008 retail season, Sony has lowered the price of Play Station 3 and had given it a larger hard drive (80 GB)| It is clear according to this SWOT analysis that Nintendo has a leader position in the industry of video games.

However the company should be careful about its main competitors (Microsoft and Sony) that seem to excel in the domain of next-generation computer capabilities and that provide the best games for players with high level of interaction and backgrounds. More and more games benefit from a high level of graphic designs and 3D effect, and if Nintendo does not manage to create such games, it risks to lose market share in the future. Obviously the Wii and the DS console contributed to the success of Nintendo, but as consumer needs evolve very quickly, the company must not lose time and should already concentrate on the next-generation console to conserve its position on the market.

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