Case 11 - Competition in Video Game Consoles: The State of the Battle for Supremacy in 2008
What are the strategy-shaping business and economic characteristics of the console segment of the video game industry? What is the industry like?
The video game industry is the economic sector involved with the development, marketing and sale of video games. It encompasses dozens of job disciplines and employs thousands of people worldwide. It includes video game consoles, game software, handheld devices, mobile games and online games. Console is the largest segment in the industry, but online, mobile and broadband are some of the fastest growing segments. In recent years, the video gaming industry has been growing rapidly and is expected continue to grow in the future.
There are several strategy-shaping business and economic characteristics of the console segment. These include the intensity of competition, the relationship between console manufacturers and game producers, and global economic health. The major business characteristic that shapes strategy is the competition, combined with the large size of the industry. The market is dominated by three global firms - Microsoft, Sony and Nintendo. They are all locked into the same technology cycle, and the dawn of each cycle provides an opportunity for tremendous gains or losses in market share. The strategies of each of these firms are heavily influenced by the competition and the technology cycle.
Description of Economic characteristics
1) Market size & growth rate: 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.
2) Number of rivals: There are a lot of game consoles worldwide but there are only 3 leading video game consoles appeal to generate large-volume sales of new units: namely, Microsoft’s Xbox 360; Sony PlayStation 3; and Nintendo’s Wii.
3) Scope of rivalry: Global presence with regional focus is required for company's competitive long-term success.
4) Number of buyers: Buyers are in all ages. Most of them are preteens, teenagers, and young adults. Average game player’s age increases to 33 and 25% of buyers are over age 50. Buyers are video game console literate. In 2008, there are about 300 million game players worldwide.
5) Degree of product differentiation: The larger the degree of differentiation, the more competitive advantage.
6) Economies of Scale: 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.
What is competition like in the video game system industry? Which of the five competitive forces [new entrants, suppliers, buyers, substitute or rivalry] is the strongest? Which is weakest? What competitive forces seem to have the greatest effect on industry attractiveness and the potential profitability of new entrants?
Industry rivalry here occurs in the strategic alliances i.e. battle to control market. With huge players like Sony, Nintendo and Microsoft there is a tough battle between companies to dominate the market, therefore rivalry is the strongest of the five competitive forces. The threat of entrants into the industry can be negligible with the existence of players like Sony, Nintendo and Microsoft. Also, It takes lot of resources and capital to enter into this market. Hence, new entrants is the weakest of the five competitive forces. There can be no substitute to the video games. The power of buyers in the video game industry is low as there are very few successful companies in the video game industry, therefore a small variety of video games available to the buyers. On the other hand, the power of suppliers is pretty high as there are more suppliers available to a handful of companies in the video game industry.
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