Strategic Management

THE HOME VIDEO

GAME INDUSTRY,
1968 TO 2010

Introduction

Considered by some as a curiosity in the mid1970s, the video game industries have grown
from focused markets to mainstream.
They took in about $9.5 billion in the US in 2007,
11.7 billion in 2008, and 25.1 billion in 2010.
Customer base constantly increasing providing a
rapid growth opportunity for the market.
Attention towards gaming has increased over
time leading to the development of cutting edge
and advanced gaming experience

History- 1970s Atari

Somewhere between 1968 and 1972 is when the home

videogame industry was born.

Mr. Bushnell had envisioned videogames sitting next to the

pinball machines in every arcade. 1972 was a period of
innovation for Nolan Bushnell and for the birth of what we all
know as "Pong

The videogames had to be as simple as possible.

In 1972, Nolan Bushnell installed the prototype for Pong in a

tavern located in California and within the first week, the game
generated ten times as much revenue as the pinball machine it
set next to.

History- 1970s Atari

Nolan Bushnell lacked the capital to mass-produce the game so

he went to a local bank and talked his way into a line of credit
and the rest is history.

Many employees who went to work for Nolan Bushnell went on

to become innovators themselves, to include Steve Jobs and
Steve Wozniak.

By 1974, Atari made 3.2 million dollars resulting in an increase

in competition from other firms

With this competition came more innovation and Atari wanted to

make a Pong system for the home backed by Sears, resulting in
a rise in sale again hitting $450 million by 1975.

History- 1970s Atari

1975 was the year the home videogame system

arrived.

The following year 1976 Nolan sold Atari to

Warner Communications for 28 million dollars
and the name was changed to Atari, Inc.

Atari's success followed with the 2600 system in

1977. Atari, Inc. floundered around for the next
couple years

History-1980s Nintendos Reign

In1983 , Atari lost 500 million dollars in the first nine months.

With the surplus of videogames, the prices were dropping

drastically from thirty dollars in 1979 to four dollars in 1983.

Commentators claimed that the videogame industry was

dead and personal computers were taking the place of
gaming consoles.

No one in America wanted anything to do with the home

videogame industry, except for Minoru Arakawa, the head of
Nintendo's U.S. subsidiary, Nintendo of America (NOA).

History-1980s Nintendos Reign

The Kyoto based company was ran by Hiroshi Yamauchi that

believed that Nintendo had to develop its own videogame
machine which resulted in development of Famicom.(known as
Nintendo Entertainment system in US by 1984)

The realization that the key to the entire industry was great games
that complimented the hardware.

Games for the first time included a story line that was intermixed
with graphics- Donkey Kong and Mario Brothers.

Yamauchi realized that the software would drive sales on the

consumer end and that Nintendo alone could not satisfy the
growing thirst for new games, so he initiated a licensing program.
Companies had to agree to certain terms it they wanted become a
licensee.

History-1980s Nintendos Reign

Six companies jumped on board bringing a profit and earning

that they did not experience before.

Arakawa in his drive to dominate the market and with his big
fear of illegal, low-quality Taiwanese games infiltrating the U.S.
he had engineers develop and install a chip in the NES that
restricted the system to playing only Nintendo-approved games.

NES became a major success with its launch in the U.S. In

1986, approximately one million NES units were sold increasing
to 3 million in 1987, and in 1988 the number jumped to seven
million.

In the same year thirty-three million game cartridges were sold

and Nintendo mania had arrived in the U.S.

History-1990s Sega

After being tossed back and forth Sega ended up in Japan

under the helm of Hayao Nakayama, familiar with the
videogame business, he wanted to use his skills to dominate
the market.

Nakayama's vision was wrapped up into a 16-bit system known

as Genesis which was launched in Japan in 1989 and in the
U.S. in 1990.

Nintendo and Sega began a fierce battle between who would

own the most market share. Sega emerged the winner in the
early '90's. The pattern of rise and fall permeates the home
videogame industry

History-3DO

CD-ROM based platform in mid 90s

32-bit
600 MB of content
Very expensive piece of hardware
Low sales

History- Late 1990s Sony

Sony already had established reputation in the

entertainment market resulting in development
of Play Station
32-bit CD ROM based platform
Cost $500 million to develop in 4 years
Marketed as hip and alternative to Sega and
Nintendo
Set up in-store displays at retailers
New target group- 18 to 35 years age
Reached $1.3 billion out of 2.2 billion market

History- 2000 and

beyond

Microsoft began developing the Xbox in 1999 and Bill Gates

announced the project in March 2000.
The Xbox completely changed the industry and the direction
it was heading

The videogame industry saw a sales record of 9.4 billion

dollars in 2001. In 2002, Sony still held the most sold game
consoles with 11.2 million units compared to 2.2 million
units of Xbox and 2.7 million of Nintendo's GameCube.

Unable to compete Sega withdrew from console

manufacturing to focus more on developing games for other
platforms.

History- 2000 and

beyond

Microsoft began to put the pressure on the competition by

adding other services like Xbox Live.

No other console had this capability without buying more

hardware for them.

Even though Microsoft was setting these new standards and

expectations in 2004 the PS2 was still ahead in the market
compared to the Xbox.

From 2001 - 2006, when the PlayStation 3 (PS3) hit the

market, Sony sold around 110 million PS2 consoles, versus 25
million for the Xbox, and 21 million for Nintendo's GameCube.

History- 2000 and

beyond

In 2005, Microsoft introduced Xbox 360 to the consumers

one whole year prior to the PS3.

The competition became very strong during this time

because the Xbox360 was trying to push the HD-DVD
format while Sony decided to wait a year to work on more
development to create their PS3 that was bundled with a
Blu-Ray player.

It was a turning point in the industry because the two

companies were no longer battling for their consoles they
were also battling about the format the entertainment
industry would move towards Blu-Ray or HD-DVD.

History- 2000 and

beyond

Blu-Ray won the battle and the PS3 began to

compete against the Xbox 360 for market share.

In November 2006 Nintendo entered the

competition between Sony and Microsoft by
creating their new console known as the Wii.

At the end of December 2009 Nintendo sold 3.81

million Wii's, Microsoft sold 1.31 million Xbox360
units, while Sony's PS3 sold 1.35 million units.

Internal AnalysisStrengths
Atari
First mover advantage
Friendly and open work environment
Coin based video game
Visionary leadership- hired employees like Steve Jobs and

Steve Wozniak
Huge profits
Nintendo
Comparatively Low priced
Huge profits
Emphasis on developing games according to the customer

needs
Launch of gaming titles like Donkey Kong and Mario Brothers

Internal AnalysisStrengths
Sega
Low fee licensing programs
Incorporating multimedia into Genesis system
Strong Leadership
Cutting edge technology at the time-16 bit console
A more realistic gaming experience Mortal Kombat

Sony
Free internet connectivity
Well known brand worldwide
Strong marketing plan
Built in blu-ray Player
Strong market position
Extensive list of games

Internal AnalysisStrengths
Microsoft
Concentration on online gaming
A complete Entertainment system
Highly advanced network servers that can

handle huge traffic

Kinnect and motion sensor

Internal AnalysisWeakness
Atari
Strategic misalignment- Bushnell resigning
Emphasis on making profits
Misuse of power
No importance to game developers
High employee turnover

Nintendo
High licensing fee
Lack versatility in gaming catalogue
Lack of innovation
Loss in market share
Inability to counteract Sega's aggressive marketing campaigns
Alienation of the retailers

Internal AnalysisWeakness
Sega
Unable to adopt to market trends
Huge investment into R&D
Huge inventory turnover
Graphics and power

Sony
Weak network as compared to Microsoft
High prices
Emergence of Pc games

Microsoft
Huge costs on maintaining the online severs
High prices
X-box's hardware is not as durable as the PS3
Smaller gaming catalogue

External Analysis

Opportunities
A more family oriented gaming experience to

create wider market share e.g. Wii

Emphasis on piracy laws to reduce the number of
illegal copies and downloads
Further growth and increase in customer base
Motion sensor technology and Online gaming
Rising demand for a bigger gaming catalogue
Previously untouched demographic segments of
females and old age.
Distribution channels

External Analysis

Threats
Extremely high competition
Bad reputation to overcome
Economic downturn-disposable income reducing

turning entertainment into a luxury item

Constantly changing industry patterns
Technological advancement- raising
manufacturing costs
Media portrays current games as bad for kids
due to excess promotion of drugs, violence and
sex.

SWOT Analysis
Intense competition between the current market

leaders
Sega made the mistake of over estimating the
market, failed and is now a software development
company for different platforms.
Nintendo keeps coming back strong with a focus
gaming experience (Wii) on having fun as family or
with friends, amore wholesome approach with
concentration on younger audience.
Sony continues to hold its own with its Play Station
Platform and developing world renowned gaming
titles.

SWOT Analysis

Microsoft has become a competitor to watch out for

because of their innovations and their concentrated
efforts to online gaming.
The three key players within the gaming industry are
Microsoft, Nintendo and Sony and they all continue to
have closed standards:
Reluctance to release upgrades when needed
A small game catalog

The threat that these companies have is each other

and the technology involved.

Industry Structure and Control

System

Rigid and hostile industry structure with

abuse of power.

Structure and control system do not

match the strategy of market dominance.

Matured industry but a No New Entry

attitude creating an atmosphere of
tension and bad management.

Industry Structure and Control

System

Monopoly attitude of all the firms leading

to the failure of Atari in 70s, followed by
Nintendo and Sega in 80s.

Game developers do not hold that much

power.
the firms should realize that good working

relationships lead to innovation.

Corporate Level Strategy

Value creation through related

diversification.
Competition is inevitable for the big players
Making consoles that are not compatible

with each other

Continuous tug of war between marketing
and pricing strategies
Constantly providing new gaming
experience to gain bigger market share

Business Level Strategy

Integrated low cost/ Differentiation

Companies have no choice but to provide

lowest possible cost with unique features

Extremely volatile and highly competitive
industry.
Consoles have replaced PC gaming in the
market. All key players have incorporated
internet and entertainment features in their
consoles.
Relatively inexpensive compared to PCs.

Conclusion

Sony has distinguished itself by not showing the abuse of power

like Atari, Nintendo and Sega.

Shift in key players to companies like Sony (PS3), Microsoft (XBox 360) and Nintendo(Wii).

The home video game industry has proven that it can sustain
itself.

Demand and customers are constantly increasing for home video

game industry

Whoever brings the latest technology and gaming experience

would come out as the winner.

Recommendations

Constant innovation to bring the latest gaming

technological advancement to the customers
Key players need to move towards motion
sensor and virtual reality gaming technology.
More emphasis on online gaming experience
Possibly land a partnership with the makers of
the biggest online game of all time World of
Warcraft
Joint alliances would be very beneficial to the
companies that have matured to find success.

Recommendations

The extra features of the consoles have to be

further developed, as the producers aim to
establish the consoles as the central tool for any
kind of home entertainment, not just for video
games playing.

It is of significant importance to develop a much

larger library of games before the introduction of
the next console, as this was proved to be a
major factor for success in the past.

Recommendations

The companies should make an effort to

entice new target groups: females and
older people, by creating a greater
range of games, directed towards the
interests of these players.