Video Game Industry Analysis

Industry background

The video game industry (formally referred to as interactive entertainment) is the economic sector involved with the development, marketing and sale of video and computer games. It includes video game consoles, game software, handheld devices, mobile games and online games. The video gaming industry has been growing exponentially in recent years. The growth is expected to leap-frog in the future.

Following chart shows the projected market share by 2010 of different segment in the industry-

Following chart shows growth of different segments in the industry-

From the above charts, it is clear that the console is the largest segment in the industry, but online, mobile, pc software and broadband are some of the fastest growing segments.

Industry Competitors by Segment

Segment Microsoft Sony Nintendo

Console XBox, XBox360 PS2, PS3 Wii

Games Third party Third party In-house

Handheld devices N/A PSP Game Boy, DS, DS Lite

Mobile gaming N/A N/A N/A

PC / Online gaming Xbox live N/A N/A

Interactive TV N/A N/A N/A

Industry’s dominant economic features

Market size and growth rate вЂ" More than $35 billion was spent on video games consoles, game software etc. Industry is expected to have more than $51 billion sale by 2010.

Numbers of rivals вЂ" The three main contenders are Sony, Microsoft and Nintendo.

Scope of competitive rivalry вЂ" Global presence with regional focus is required for company's competitive long term success.

Numbers of buyers - About 250 to 300 million people worldwide played video games in 2007. The average age of a video gamers has jumped to 33 years by 2005, and 25 percent of gamers were over age 50.

Degree of product differentiation вЂ" The larger the degree of differentiation, the more competitive advantage.

Product innovation вЂ" Product innovation plays significant role to capture market share and to take competitive advantage in the market.

Pace of technological change - New advanced technology plays a significant role to be competitive and to dominate in the video game industry. It is must required to have strong technological capabilities to capture and retain its market share.

Economies of Scale вЂ" Any new innovative video games and/or its components with larger economies of scale help the company to reach a larger market with greater geographical area. It also helps to maintain a competitive price on video game products.

Learning/experience curve effects вЂ" Innovative video game developing companies will have experience and resources to innovate and/or to adapt to new technologies. Any efficiency learned from one video game or its component development can be used in other new video game products. It also applies to value chain process.

Industry’s driving forces

The following are the driving forces that govern the video game industry that have been behind the change and evolution of the industry over time-

Technological Change: Technology in the industry is constantly changing, producing successive generations of increasingly powerful systems, typically at lower costs.

Product Innovation: The software development side of the industry is increasingly becoming a business of risky bets on individual software titles that are hoped to be significant hits. The large number of developers has resulted in a continuous production of highly innovative products.

Changes in the personal computer industry: As a significant substitute for consoles, the lower cost and increasing performance of home computers can eventually threaten the industry.

Changes in the industry’s consumers: Although video game hardware has largely appealed to adolescent males, changes may occur, which cause the demographics of the industry’s customers to expand to young adults and women in general.

Changes in the mobile industry: Mobile devices are changing the landscape of many industries e.g. music, camera, GPS, games etc. and is rapidly becoming one-device fits-all. As technology advances, this will have significant impact on handheld gaming consoles.

Outlook and future prospects

Future generations of game systems would undoubtedly include even more impressive technological capabilities than the next generation consoles launched in 2005-2006.

The online console gaming market is set to take off, as the new generation of consoles arrive with advanced networking and online gaming capabilities. The ability to download game demos, buy casual, as well as full-fledged console games, and access advanced content, including high-definition (HD) video, will play a major role in shaping the subsequent console generations.

Key success features

- Rich playing experience

- Appeal and variety of supported games

- Product innovation and differentiation

- Keep up future changes

Porter’s 5 forces competitive analysis

Threat of new entrants: Low. It takes lot of resources and capital to enter into this market

Bargaining power of Buyers: Moderate. Buyers hold moderate bargaining power because of low number of competitors and high switching cost

Threat of substitute: Moderate. Interactive entertainment substitutes are not that many.

Bargaining power of suppliers: Moderate. There are not many companies that the suppliers can supply to. But on the other hand the game development companies can have more power by developing specific games.

Competition among industry rivals: Strong. There