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MEMORANDUM
Subject: Video Game System Industry Analysis
Date: July 14, 2010
To: Professor Ford From : Matthew Roetting Nicole Huber Kyle Lubbers Nanette Brames Billie Heilman
Introduction
As requested, an industry analysis for video game systems has been conducted. In this report, we have evaluated the attractiveness of this industry in terms of the potential for sustained profitability over time. The main focus throughout the analysis is Michael Porter’s five forces model and how they relate to the history and future of video game systems.
Industry Analysis for Video Game System Industry
Industry Name. Video game systems is the industry that is going to be analyzed. The scope is going to be worldwide and is only going to include the three major system producers: Microsoft, Sony, and Nintendo. It is valid to establish these three competitors as the industry, because they produce and sell 90% of the world’s video game consoles. Atari, Mattel, Magnavox, and Sega are the other competitors who have existed sometime throughout the history of video game consoles. When combined, these other companies have produced and sold the remaining 10%.^1 This analysis only includes video game consoles which are the hardware that operates the gaming software.
Industry Classification. The North American Industry Classification System (NAICS) code for video game systems is 339932 titled Game, Toy, and Children’s Vehicle Manufacturing.^2 Yahoo Finance categorizes the sector for Sony as consumer goods and the industry as electronic equipment. For Microsoft, they are in the technology sector where the industry is application software.3,4^ Since Nintendo is not publicly traded in the United States, they are not classified under Yahoo finance, however are classified as other products in the Tokyo Stock Exchange.^5
(^1) http://en.wikipedia.org/wiki/List_of_best-selling_game_consoles#Atari (^2) http://www.census.gov/cgi-bin/sssd/naics/naicsrch (^3) http://finance.yahoo.com/q/in?s=MSFT+Industry (^4) http://finance.yahoo.com/q/in?s=SNE+Industry (^5) http://www.tse.or.jp/english/
Output Description. The video game console is the product that defines this industry. A video game console is defined as an interactive entertainment computer or modified computer system that produces a video display signal which can be used with a device such as a television or monitor to display a video game. 6 The term "video game console" is used to distinguish machines designed for playing video games from a personal computer, which has many other functions.^7 The machines considered throughout this report are: Microsoft’s XBOX 360, Sony’s PlayStations 2 and 3 as well as their PlayStation Portable (PSP), and Nintendo’s Wii and DS. 8 These are not the only consoles still available on the current market, however, are the latest produced, and thus are the basis for this entire report.
Geographic Scope. Microsoft is home-based in Redmond, WA; Sony is based in Tokyo, Japan; and Nintendo is based in Kyoto, Japan.9,10^ The following pie charts represent the geographic markets the video game system producers primarily serve.^11
Figure 1: Geographic Markets for Video Game System Industry as a Whole
The second set of pie charts divide the geographic scope of the entire industry into the three individual competitors. This is a more specific breakdown and suggests a couple of things. First of all, it portrays the relationship of domestic versus foreign markets for the three competing organizations. As noted earlier, both Sony and Nintendo are based in Japan. According to the charts, roughly 85% of both of their revenues come from foreign markets. Microsoft, based in the U.S., receives the majority of their revenues from domestic markets. Another interesting observation is that the geographic scope of Nintendo is the same as the industry breakdown shown in the first comprehensive pie chart. This could suggest that Nintendo dominates the video game console market since their geographic market mirrors the industry as a whole.
(^6) http://en.wikipedia.org/wiki/Video_game_console (^7) http://en.wikipedia.org/wiki/Video_game_console (^8) http://gamrfeed.vgchartz.com/story/2752/totals-statistics-and-analysis-of-the-2008-world-videogame-market/ (^9) http://finance.yahoo.com/ (^10) http://www.nintendo.com/ (^11) http://gamrfeed.vgchartz.com
Table 1: Annual Output in Millions for the Three Competitors Company 2006 2007 %YOY 2007 2008 %YOY
Nintendo 30.33m 45.08m 48.63% 45.08m 59.36m 31.68%
Sony 22.28m 28.73m 28.94% 28.73m 30.75m 7.03%
Microsoft 7.47m 7.93m 6.16% 7.93m 11.37m 43.38%
Total^ 60.08m^ 81.74m^ 36.05%^ 81.74m^ 101.48m^ 24.15%
Age. The video game system industry had their major debut in 1967 when the first console, called The Brown Box, was introduced by Ralph Bare. Since then there have been dramatic improvements and innovations throughout this industry’s history. The following timeline lays out the major breakthroughs that have occurred and shows how video games have evolved over the last 43 years.^14 Figure 4: Video Game System Timeline
(^14) http://www.time.com/time/covers/1101050523/console_timeline/
1967 1972
1975 1977
1980 1985 1989
1991 1995
1996 1999
2000 2001 2002
2004 2005 2006
The first video game console was called the brown Magnavox begins production of the first box and was designed by German born Ralph Bare commercial video game console, The Odyssey.
Atari releases the 2600 SPACE VCS. This is Atari sells the first home version of Pong. the first console that can play multiple games. Mattel releases the Intellevision to challenge The Nintendo Entertainment System is released in Atari. the U.S. Nintendo introduces the first Game Boy. The Super Nintendo is released. Sega also introduces the Sega Genesis. Sony releases the PlayStation 1. Nintendo 64 is released marking the last console to use cartridges.
Microsoft enters the video game system industry Sony releases the PlayStation 2. with their introduction of the XBOX. Nintendo releases the new Game Boy Advance. The Nintendo DS is released. Sony releases the PlayStation Portable (PSP) to challenge Nintendo’s dominance in the handheld gaming market.
Mass release of the Nintendo Wii, Sony’s PlayStation 3, and Microsoft’s XBOX 360.
The Sega Dreamcast is introduced by Sega.
Industry Life Cycle. Since the video game system industry has been around for a while it would be easy to assume it is in the maturity stage of the industry life cycle. However, comparing the growth rate of the industry to the growth rate of GDP shows us that we are actually in the growth phase. From 2003 to 2006, the entertainment software industry’s annual growth rate exceeded 17 percent. Over the same period, the entire U.S. economy grew at a less than four percent rate. In fact, according to PricewaterhouseCoopers, the sector will remain “one of the above-average growth segments of the global entertainment industries through 2011.”^15 From 2005-2006 the industry’s real rate of growth was more than double the real rate of growth for the entire economy. 16 This extreme growth is mainly due to the introduction of Sony’s PS3, Microsoft’s XBOX 360, and Nintendo’s Wii in 2006. The follow diagram represents the four phases in the industry life cycle and highlights where the video game system industry lies.^17
Figure 5: Industry Life Cycle
Competitors. As noted in earlier sections, there are three main competitors in the video game systems industry: Microsoft, Sony, and Nintendo. Microsoft is home-based in Redmond, WA; Sony is based in Tokyo, Japan; and Nintendo in Kyoto, Japan. 18,
Microsoft was founded in 1975 and operates five different business segments. The following are their main operational divisions: client, server and tools, online services business, Microsoft business division, and entertainment and devices division.^20 The following table represents the percent of overall revenues and profits that come just from gaming for Microsoft.21, 22
(^15) http://www.theesa.com/gamesindailylife/economy.asp (^16) http://www.theesa.com/gamesindailylife/economy.asp (^17) http://www.12manage.com/images/picture_product_life_cycle.gif. (^18) http://finance.yahoo.com/
19 http://nintendo.com (^20) http://www.microsoft.com/msft/reports/ar08/index.html (^21) http://www.microsoft.com/msft/reports/ar08/10k_fr_not_18.html (^22) http://www.microsoft.com/msft/reports/ar06/staticversion/10k_fr_not_17.html
Video Game Systems
Nintendo was founded in 1889 originally as a playing cards company by Fusajiro Yamauchi. Since then they have become a company that solely produces video game consoles and the software that goes along with them.^26 Since Nintendo devotes their entire industry to gaming, their company-wide revenues and profits are shown in the following table.^27
Table 4: Nintendo – Revenues & Profits (in thousands of U.S. dollars)
2005 2006 % YOY 2007 % YOY 2008 % YOY
Revenues 4,812,970 4,348,951 -11% 10,920,209 151% 16,724,230 53%
Profits 816,973^ 840,842^ 3%^ 1,969,183^ 134%^ 2,573,426^ 31%
These numbers were found in of Nintendo’s annual report and were given in U.S. dollars. Based on these figures, it’s clear to see how much Nintendo has been increasing. From 2005-2008 both revenues and profits more than tripled. The reason for this increase was the release of the Nintendo DS in 2004 and the Wii in 2006 both of which have dominated this industry. We believe the main reason that Nintendo has been so successful is due to their level of specialization in the industry while Sony and Microsoft are more diversified in their product offerings.
One final important summary note to make regarding the competitors is that all of Nintendo’s revenues come from the video game industry, whereas for Sony and Microsoft, video games are just a segment. Video game revenues for Sony account for around 12% of their total revenue. For Microsoft, video game revenues account for around 6% of their total revenue. This shows that should the video game industry take a big hit, Nintendo will be more at risk then Sony and Microsoft because they have so much more invested in the gaming industry.
Market Share. One way to calculate the market share of the three competitors is to determine how much of the market each individual console produced by the three companies holds. The following pie chart represents this for the year ending in 2008 and includes the six major consoles presented throughout this analysis.^28
(^26) http://www.ncecbvi.org/students/keith/Nintendo.html (^27) http://www.nintendo.com/corp/annual_report.jsp (^28) http://gamrfeed.vgchartz.com
Figure 6: Market Share of the Six Leading Video Game Consoles in 2008
When combining the market shares of the consoles produced by the same company we come up with the following market share figures in the next pie chart for the competitors as a whole. It is interesting to note that Nintendo controls well over half of the video game system industry.
Figure 7: Market Shares of the Three leading Video Game Competitors in 2008
Financial Data. The following two tables supply the revenue and employee data for the video game industry as a whole. This first table shows worldwide video game industry sales from 2005 through 2008.^29
Table 5: Worldwide Video Game Industry Revenues (in billions)
Year Revenues % YOY 2005 29 2006 31.6 8.97% 2007 41.7 31.96% 2008 54 29.50%
(^29) http://vgsales.wikia.com/wiki/Video_game_industry
in 2006: Sony’s 20GB PS3, Nintendo’s Wii, and Microsoft’s 20 GB XBOX 360. Also included are the prices for the same systems in 2007 and 2008.34,35,
Table 7: Prices for PS3, XBOX 360, and Wii from 2006-
Year System^2006 2007 %YOY^2007 2008 %YOY Sony: PS3 (20 GB) $499 $400 -19.84% $400 $325 -18.75% Microsoft: XBOX 360 ( GB) $299 $280 -6.35% $280 $249 -11.07% Nintendo: Wii $249 $249 0% $249 $249 0%
As seen in the preceding table, there are consistent pricing differences between the three competitors. The most notable difference is the significantly higher starting price of Sony’s PS 20 GB console as opposed to the starting prices of the other two competitors’ consoles that were released in the same year. It nearly doubles the price of both Microsoft’s XBOX 360 and the Nintendo Wii, and continues to sell at a higher price throughout the following two years.
An important note to make is most of the original systems were discontinued after a short period of time and replaced with consoles that had higher gigabytes of memory. This is the major contributing factor to the reduced price over the following years. Another factor that needs to be considered is every retail store offers different prices so the prices listed above are just estimates of what the consoles were going for on average during that three year period. Notice also that the price of the Wii remained constant over the three-year period. The company claims that they are selling every Wii system that they produce and thus said, “We'll stay at $249 for the foreseeable future.”^37
Overall, according to the changing price trends of the three consoles, it appears that price-based rivalry exists between the three companies. We would suggest that Nintendo is the price leader since the price of the Nintendo has remained constant. Over the three-year period, both Microsoft and Sony reduced the prices of their consoles to a price that more closely matched the price of the Nintendo Wii.
Non Price-Based Rivalry. The main non-price based rivalry occurring in this industry is product innovation. Each company wants their product to be the most up-to-date technology on the market. An example of this is both Sony and Microsoft are coming out with motion based controls in an attempt to compete with Nintendo’s Wii.^38 The following table outlines the new video game consoles introduced by the three competitors over the past 15 years and is a good
(^34) http://money.cnn.com/2006/05/08/technology/ps3_pricing/index.htm (^35) http://www.joystiq.com/2007/07/31/circuit-city-flyer-shows-xbox-360-price-drop-on-all-systems/ (^36) http://www.joystiq.com/2008/08/20/sources-xbox-360-price-cut-week-of-sept-7-60gb-299-elite-3/ (^37) http://www.betanews.com/article/Nintendo-Wii-Price-Staying-at-249/ (^38) http://e3ign.com/
illustration of how product innovation is the biggest non-price based rivalry factor for this industry. 39
Table 8: Video Game Consoles Released by 3 Competitors over the Past 15 Years
Consoles Released Year Nintendo Microsoft Sony 1995 PlayStation I 1996 Nintendo 64 2000 PlayStation 2 2001 XBOX 2002 Game Boy Advance 2004 Nintendo DS 2005 PlayStation Portable 2006 Wii XBOX 360 PlayStation 3
Industry Concentration. As displayed in the following table, concentration for the video game system industry is very high. 40 Since Nintendo, Sony, and Microsoft control 90% of the worldwide video game console industry, it is not necessary to calculate the CR4. Therefore, we will use the herfindahl index. If the herfindahl index is greater than 1800, then it can be assumed that the potential for rivalry is reduced. It is evident in our HI calculation of 4,502 that the preceding statement is true for the video game system industry.
Table 9: Amount of Video Game Systems sold in 2008 for the Three Competitors
Company Units Sold (in millions) % Share of Units Sold Nintendo 59.36 0. Sony 30.75 0. Microsoft 11.37 0. Total 101.48 1 Herfindahl Index : 4,
Herfindahl Index= 10,000 (Σ Si
2 ) = 10,000 (.59 2 + .30 2 + .11^2 ) = 4,
Specific Assets. Given that all video game system production is outsourced, there is no need for the companies in this industry to possess a large amount of specific assets. The firms do have regular operating assets such as warehouses to store the finished products before they are shipped, office space, and knowledgeable employees to keep the business operating. The
(^39) http://www.time.com/time/covers/1101050523/console_timeline/ (^40) http://gamrfeed.vgchartz.com
order to match this demand growth. Therefore, the suppliers would need to invest in more capacity additions to meet the demand not Microsoft, Sony, and Nintendo.
Product Differentiation. Inside this industry there is a great deal of product differentiation between the three competitors. Some of the distinguishing features include the physical looks of the console, the image quality of the games, and the ability to play other electronic media. For example, the Sony PlayStation 3 can play blue-ray disks and DVDs while the Nintendo Wii has the ability to sync up with your existing NetFlix account and allows you to watch movies on your playlist immediately. Since the three competitors all produce different features, this product differentiation factor also reduces the level of rivalry in our industry.
Switching Costs. Switching costs for this business are relatively high for two reasons. For one, when a consumer wants to switch to a new system, they have to buy a whole new console and all of the necessary controls and accessories. The following diagram lays out all of the expenses that were necessary to buy the latest consoles introduced in 2006 and shows how expensive switching from one console to the other can be.^44
Figure 8: Switching Costs between Consoles in 2006
The second issue that arises with switching systems is the games that go along with it. Every competitor has their own games that can only be played on that specific system. Thus these two switching costs reduce the level of rivalry dramatically and encourage consumers to steer towards one particular system maker.
Summary of Intensity of Rivalry. After taking all of the preceding factors into consideration, we can conclude the video game system industry has reduced rivalry which increase the potential for profits. The biggest factors that lead us to conclude this is there are only three main competitors in this industry making the herfindahl index high. Further, product differentiation leads to high switching costs associated with the changing consoles.
(^44) http://www.engadget.com/2006/10/19/sony-claims-xbox-360-requires-hd-dvd-etc-thus-costs-700/
Force 2: Availability of Substitutes.
Recognizing a substitute product requires identifying products that perform the same function as the product of the industry. When an industry has a low threat of substitute products the result is that the industry appears to be more attractive which in turn increases profit potential. A high threat of substitute products has the opposite affect; the industry becomes less attractive and decreases profit potential.
In April 2010, the video game industry suffered a 37% loss year-over-year. 45 Considering that overall sales of units sold have increased year-to-year, industry insiders are not too alarmed by this decrease. They believe the drop is related to the fact that the Easter holiday fell early in April. Easter is a popular buying time for the industry and analysts believe those sales probably occurred in the month of March.^46 However, industry analysts would be remiss if they didn’t consider those lost sales might have gone to a substitute product.
In analyzing the threat of substitute products for our industry, we will focus on the usage of personal computers as a video game console. We will also discuss the effect the Iphone/ITouch/IPad has had on handheld gaming devices. Finally, we will consider the switching costs associated with choosing a substitute to a video game console.
Personal Computers. In 2003, according to the US Census Bureau, 61.8% of households had a computer.^47 In 2007, computer game software sales made up approximately 5% of the overall size of game sales.^48 In 2008, the Entertainment Software Association reported that computer game software sales totaled $701.4 million.^49 While this number pales in comparison to the $8. billion in game console software, it represents 10% of the overall size.^50 It seems reasonable to believe that a 5% growth in computer game software sales should make gaming on a personal computer a consideration by the industry as a potential substitute.
Another consideration that could give PCs the potential to steal market share away from the gaming consoles is the recent announcement by Valve to release its Steam content delivery platform to Macintosh operating systems. 51 Previously the Steam platform was used solely for Windows machines. By expanding it to Macintosh-based machines, Apple computers will become a more viable option for gamers to consider since the Steam online distribution center will give Mac users several cross-platform benefits. For one, those who already own the Windows version of Valve games will receive the Mac version at no extra charge. Secondly, the Steam Cloud feature allows players to save games players have in-progress. Gamers can begin a game on their Windows based home computer and pick up where they left off using their Macbooks.
(^45) http://www.informationweek.com/news/hardware/handheld/showArticle.jhtml?articleID=224800013&queryText=
nintendo%20sales (^46) http://www.informationweek.com/news/hardware/handheld/showArticle.jhtml?articleID=224800013&queryText=
nintendo%20sales (^47) http://www.census.gov/population/www/socdemo/computer.html (^48) http://www.npd.com/press/releases/press_080131b.html (^49) http://www.theesa.com/facts/salesandgenre.asp (^50) http://www.theesa.com/facts/salesandgenre.asp (^51) http://www.wired.com/gamelife/2010/03/steam-mac/
bargaining power of suppliers such as supplier size, concentration, substitutes, inputs, and the threat of forward integration.
Supplier Overview. In this industry the suppliers handle all the manufacturing of the gaming consoles and some of the big ones are Foxconn, Flextronics, ASUStek. 56 The big three will provide the manufacturer with the design plan of the console and then it’s up to the manufacturer to get them done on time in order to meet the intense demand of customers. They also will outsource for any hardware and software parts that go into the production of the consoles.
Supplier Size. The suppliers in this industry are relatively large. Foxconn for example has been associated with manufacturing for Sony, Microsoft, and Nintendo as well as other big electronic companies such as Apple. Foxconn in 2008 reported nearly 62 billion in revenues and also has over 480,000 employees. 57
Supplier Concentration. The suppliers in this industry are very concentrated to ensure consistency with the manufacturing of the gaming console. This will allow a better relationship between the suppliers and the companies in our industry; however having concentrated suppliers could potentially decrease future profits.
Supplier Substitutes. This industry tries to maintain good relationships with fewer suppliers because they want consistency in the production of their consoles. As mentioned before, the demand of these systems is huge which puts a lot of pressure on both the manufacturers and the big three.
Importance of Supplier Input. The suppliers depend on the design offered by the big gaming producers like Sony, Microsoft, and Nintendo. The suppliers then manufacture the gaming console as well as provide feedback on how to be more efficient and cost effective.
Threat of Forward Integration. Even though the suppliers have the manufacturing know how, we feel the threat is very low because Sony, Microsoft, and Nintendo have already established themselves as brand leaders in this industry. The cost to design a console as well as the games can get very expensive. Sony’s Playstation 3 for example was first released in 2006 and it just broke even in 2010. The suppliers also don't have the design process nor do they know what the customers want.^58
Summary of Supplier Power. After taking all these factors into consideration, we can conclude that bargaining power of suppliers is high for this industry. Since Sony, Nintendo, and Microsoft outsource their manufacturing of consoles that gives a lot of power to the suppliers because they control the day-to-day production. The big three are depending heavily on their suppliers to have the consoles built to their specifications as well as having them done in time in order to meet the expected demand of future customers.
(^56) http://mosaic.cnfolio.com/M528Coursework2008A (^57) http://www.foxconn.com/PullulateCourse.html (^58) http://news.cnet.com/8301-13772_3-10414022-52.html
Force 4: Bargaining Power of Buyers.
Buyer power refers to the ability for buyers to exercise market power over sellers. When the bargaining power of buyers is strong, the industry profitability suffers. There are several factors that need to be considered when the determining the bargaining power of buyers such as buyer size, switching costs, availability of full information, and the threat of backward integration.
Buyer Overview. Video game consoles are manufactured and sold to brick-and-mortar stores and online only retailers. Microsoft, Sony, and Nintendo do not sell directly to the consumer. On Sony’s website, for instance, they list their products, but they state that their products are to be purchased through authorized retailers. 59
Consideration should also be given to the buyers of the product from the retailers. With all the new technology that is being integrated into the games, growth of players in every age group is expected to continue to rise. According to Jesse Schell, instructor of entertainment technology at Carnegie Mellon University “There are games now for pretty much every age, every demographic. More and more women are going online. It comes down to everybody is playing games. Games are just evolving like species in order to fit into every little niche of our lives.”^60 In 2009, 250 million video game units were sold in the United States alone.
Buyer Size. The retailers selling video game consoles are some of the largest and most influential operators on the planet. Wal-Mart has tremendous control over their suppliers and vendors to get a low price.^61 Best Buy is the leader in electronic retail space. They have gained bargaining power with suppliers over the past few years due to retailers like Circuit City leaving the business. 62 If we do run into problems with the big box retailers, we have the ability to sell our products over the Internet or from other independent retailers which could decrease the bargaining power of the big box retailers.
Switching Costs. Retailers will run into some switching costs between the industry suppliers. Many of the costs for the big box retailers will not be monetary in nature. However, there are also psychological and effort and time based switching costs to take into consideration. Switching between suppliers may mean different ordering systems, purchase agreements, and possible shipping standards.^63
Availability of Full Information. Basic information on different products in our industry will be available through trade groups, news articles, and key publications. However, the specific design plans are generally only made available to outsourced manufacturers.
Threat of Backward Integration. We could have some threat of backward integration. Even though the industry requires a great deal of in house design teams and third party developers, a
(^59) http://us.playstation.com/wtb/index.htm (^60) theesa.com (^61) http://www.businessweek.com/magazine/content/10_23/b4181017589330.htm?chan=magazine+channel_news+-
+companies+++industries (^62) http://seekingalpha.com/article/59688-best-buy-will-benefit-from-reduced-competition (^63) http://stockshastra.moneyworks4me.com/learn/stock-shastra-8-%E2%80%98high-switching-costs%E2%80%99-
a-recipe-for-companies-to-hold-customers-for-life/
One important note to keep in mind with the preceding table is the fact that the figures for research and development are companywide. Since Microsoft and Sony operate multiple divisions other that just gaming, their R&D spending is a lot higher than Nintendo who is a purely gaming company. Therefore, Nintendo accurately portrays the amount of R&D spending that is necessary to compete in only the gaming industry.
Capital Requirements. The majority of major capital expenses for this industry is in warehousing, office space and equipment, brand development, and research and development^68. We feel the most important cost considerations to be brand development and research and development. Overall, It is very difficult to estimate the capital requirements to enter this industry. The capital needed to enter would depend on whether the potential new entrant would want to just operate as a stationary console producer or if they would want to do both stationary and hand-held gaming systems. The one thing that is certain upon entry, if they want to be competitive they will have to invest a large amount of capital in research and development. As seen above, Nintendo spends nearly half a billion dollars in R&D annually.
Access to Distribution Channels. Sony, Microsoft, and Nintendo use retailers as their distribution channel. Since retailers, both brick-and-mortar and online only retailers are abundant, the access to them is easy to obtain. The main consideration each company must have is to have a product that consumers want. As long as demand for the product exists in the market, the retailers will want to capitalize on it and purchase the consoles.
Excess Capacity. Neither Microsoft, Sony, or Nintendo produce any of their consoles, but capacity can also be associated with product development and branding. As previously mentioned, these three companies put a lot of their resources towards research and development. This shows that they have to have a large amount of capacity to develop new products. They all also need excess capacity for brand development. In 2008 Microsoft, Sony and Nintendo spent $13.039 billion, $6.902 billion and $1.14 billion respectively in selling and advertising expenses. 69 70 71
We can also look at the capacity needed for the companies that do manufacture their products. Foxconn, the major electronics manufacturer in the world, used to be the sole maker of the Xbox 360, the PlayStation 3 and Nintendo Wii. Then some other manufactures such as ASUSTeK and Flextronics began to realize opportunities in this industry.
Learning/Experience Curve. The learning curve for this industry is steep. A company, like Microsoft, which has been in the industry for several years, is becoming more efficient with their research and development dollars. They spend less money to achieve the same technological advances that they have in the past. Because of this change, they are able to sell their consoles for less as time progresses.^72
(^68) http://mosaic.cnfolio.com/M528Coursework2008A (^69) http://www.microsoft.com/msft/reports/ar08/index.html (^70) http://www.sony.net/SonyInfo/IR/financial/ar/2008/qfhh7c00000htn6x-att/SonyAR08-E.pdf (^71) http://www.nintendo.co.jp/ir/pdf/2008/annual0803e.pdf (^72) http://www.microsoft.com/msft/reports/ar08/index.html
Figure 9: Learning/Experience Curve Video Game System Industry
Government Policy. The government does not regulate the video game industry very closely. However, with current interest rates being low entry into an industry is generally more appealing. A potential negative that may arise from government policy is that all of the manufacturers are based in Asia. Therefore, American or European company may have to pay a tariff on the systems that are made and shipped to them depending on the amount of imports already coming in from that specific country. Based on these finding government policy has little effect on this industry.
Historical Entrants. Over the 43-year life of the industry, only seven competitors have entered into the industry.^73 The most recent new entrant into the industry occurred when Microsoft entered around ten years ago.^74 Currently, the concentration and size of the existing companies would make it difficult for a new company to enter and obtain a portion of the market share. We believe the most realistic threat of new entrants will come from already existing technology companies that want to expand their business portfolio. In the global business world, there are many other companies that could potentially fit this profile. Even if one of these technology companies have the money and know how to get started they may come to find that the opportunity cost of entering this well defined industry will be much higher than pursing other endeavors.
Summary of Entry Threats. It appears that economies of scale, product differentiation, capital requirements, the learning/experience curve, and historical entrants are all factors that would discourage new entrants from coming to this industry. Capacity and access to distribution channels seem to favor new entrants and government policy seems pretty neutral. With all this considered we conclude that the threat of new entrants will be low for current companies in the industry.
(^73) http://www.time.com/time/covers/1101050523/console_timeline/ (^74) http://www.time.com/time/covers/1101050523/console_timeline/
Cost Per Unit
Cumulative Volume
Video Game System
