3 DO Analysis Composite of the Best Slides from class submissions

new product/service new process new business model K. Thakur Industry Analysis PEST Analysis Value Chain Porter’s 5 Forces Incumbency Competitive analysis Opportunity Value Proposition Target Customers Revenue Model Unique Capabilities Distinctive Activities Value Creating Activities

Market Structure, 1991 World-Wide Home Video Game $3 Billion North America Entertainment Arcade games, Movie theater, Video Rental Japan Europe Asia Home Video Game Companies belong to: All other amusement and recreation industry (713990)‏ $29 Billion Overall HC Jun

Social Trends

Social Trends

Industry Analysis

Industry Analysis

Multiple Layers Industry Value Added * $50 Retailers $27.5 Developers Software Hardware $5 License Fee $450 – Retailers Manufacturer ** (Closed Architecture)‏ 1~5% Margin * In case of Sega’s case. ** Only estimation is available, but some says that retail price could be lower than manufacturing cost. (http://www.alexassoc.com/white/sony.shtml)‏ $19.5 Revenue

How Industry Worked HCJun

Pricing Strategy of Industry HCJun

What Attracts Gamers? Own Titles Best Seller? Many titles sold? Others have it? Technology – Better System Quality of Graphics or Sound? Speed of Processing, Loading Price How many gamers can buy it? … HCjun

Own Titles

Best Seller?

Many titles sold?

Others have it?

Technology – Better System

Quality of Graphics or Sound?

Speed of Processing, Loading

Price

How many gamers can buy it?

HISTORY Philips CD-I 1991 1995 1992 Sega CD 1993 3DO 1994 Sega 32X Atari Jaguar 1994/1995 Sony PS-X Sega Saturn 64 bits Power PC 64 bits SGI 3DO M2 Accelerator Nintendo 64 32 bits Motorola 16 bits Motorola 32 bits RISC Machines 32 bits Hitachi 64 bits 68000 32 bits LSI R3000 32 bits Hitachi 3DO Achievements: 1st 32-bit system Superior technology for its time Video capabilities and audio quality unmatched in 1993 Ben Feiman

3DO Achievements:

1st 32-bit system

Superior technology for its time

Video capabilities and audio quality unmatched in 1993

INDUSTRY ANALYSIS Natalie Rebot

Vying for the #1 spot Trip Hawkins, former Electronic Arts head and 3DO founder: “ My goal is to be out in the market first so I can develop an installed base in advance of them (Sega and Nintendo), drive my price down and figure out how to solve all my tactical execution problems before they even figure out they have problems, and to make it clear to software developers that they’re better off developing for 3DO, even if 3DO has a smaller installed base than, say, an IBM PC”

Trip Hawkins, former Electronic Arts head and 3DO founder:

“ My goal is to be out in the market first so I can develop an installed base in advance of them (Sega and Nintendo), drive my price down and figure out how to solve all my tactical execution problems before they even figure out they have problems, and to make it clear to software developers that they’re better off developing for 3DO, even if 3DO has a smaller installed base than, say, an IBM PC”

The 3DO Strategy To create a new business plan in the 32-bit gaming market One hardware platform that would cut the amount of time to build and write a program for software developers in half They could then spend more time crafting the game More enjoyment for the end user Unlike the other major console vendors of the day, 3DO never actually manufactured a system Instead, it licensed its hardware technology to companies like Goldstar, Sanyo, and Panasonic, which produced different versions of the 3DO

To create a new business plan in the 32-bit gaming market

One hardware platform that would cut the amount of time to build and write a program for software developers in half

They could then spend more time crafting the game

More enjoyment for the end user

Unlike the other major console vendors of the day, 3DO never actually manufactured a system

Instead, it licensed its hardware technology to companies like Goldstar, Sanyo, and Panasonic, which produced different versions of the 3DO

Strategic Move: 3DO (1)‏ Enter untapped home entertainment area Dream Team Alliances: EA, Matsushita, Time Warner, Kleiner Perkins, AT&T… Comparable with a lot of Media Formats The most advanced machine First 32bit, RISC Microprocessor CD-ROM based High-end platform 24bit Graphic Processor Expandable Peripherals and Enhancements

Enter untapped home entertainment area

Dream Team Alliances:

EA, Matsushita, Time Warner, Kleiner Perkins, AT&T…

Comparable with a lot of Media Formats

The most advanced machine

First 32bit, RISC Microprocessor

CD-ROM based High-end platform

24bit Graphic Processor

Expandable

Peripherals and Enhancements

3DO Ownership Roles & Responsibilities: Matsushita: Manufactured double speed CD-ROM AT&T: Proprietary graphics processor chips Electronic Arts: Video game software Time Warner: Largest entertainment company Kleiner Perkins: Funding from Silicon Valley venture capital firm 3DO: Put it all together

VALUE CHAIN Customer Retailer Physical hardware Components are Gathered by the Manufacturer and Prepared for assembly. Manufactures assemble The video game console Using the different Hardware components. Video game consoles Packaged and ready to Be shipped to retail Stores worldwide. Video game consoles Are sold in retail stores Along with the video Games to be played on Them. Customers first Purchase the video Game console and Then purchase the Games to be played On them. This is Usually first done at The same retail Location at least for The first video Games purchased. Blank CDs or cartridges are a form of raw materials for video game software. Computer software Engineers write codes To add sound, graphics, And function to create An enjoyable video game. The final video game Whether in CD or Cartridge format are Then prepared for Distribution to retail Stores. Raw Materials Manufacturer Distributor Raw Materials Manufacturer Distributor Video Game Console (Hardware)‏ Video Game Disc (Software)‏

VALUE CREATION PROCESS Raw Material  Software  Distributor  Retailer  Customer Price paid by customer $40 $37 $5 $31 Blank CD Buy games in bulk Reduce risk Economies of scale $3 per disc royalty to Hardware manufacturer Additional profits Markup $3 $3 Profit Value Added $20 $3 $6 $6 $7 Shelf space Own sales force Store experience Key: $2-$4 manufacturing cost Video game created Graphics, Audio, Interactive Code writing Most value added if enjoyable game $2 CD ROM Video Game

Why 3DO failed Uncompetitive price 3DO priced its machine at $700, the highest among all competitors.

Uncompetitive price

3DO priced its machine at $700, the highest among all competitors.

What Happened? There were two types of consumers: Those that previously owned a console Those that didn’t Both groups had a simple choice to make: OR Go with 3DO Spend $700 on the console Spend $75 per additional game Only 40 titles available Miss out on familiar game franchises Stick with what you’ve got Over 700 titles to choose from, new ones cost $50 Spend $150 - $300 on peripherals to increase functionality, or don’t Enjoy games with familiar characters

There were two types of consumers:

Those that previously owned a console

Those that didn’t

Both groups had a simple choice to make:

Go with 3DO

Spend $700 on the console

Spend $75 per additional game

Only 40 titles available

Miss out on familiar game franchises

Stick with what you’ve got

Over 700 titles to choose from, new ones cost $50

Spend $150 - $300 on peripherals to increase functionality, or don’t

Enjoy games with familiar characters

Summary Switching costs were too high for consumers Could spend $700 on a machine with no games, or wait for peripherals that would allegedly increase the capacity of what I already own And increase the performance of the games I already own Would not be able to enjoy new Mario, Metroid, Zelda, or Sonic games on a 3DO Might as well wait for the next Sega or Nintendo

Switching costs were too high for consumers

Could spend $700 on a machine with no games, or wait for peripherals that would allegedly increase the capacity of what I already own

And increase the performance of the games I already own

Would not be able to enjoy new Mario, Metroid, Zelda, or Sonic games on a 3DO

Might as well wait for the next Sega or Nintendo

Reasons of failure 1: Incumbent advantages Such as: Sony, Nintendo and Sega they have the advantages: ■ Economies of scale ■ Cumulative investments (Learning economies, Innovation advantage, promotional advantage). ■ Customer loyalty advantage ■ Switching costs advantage ■ Demand side increasing returns advantage

1: Incumbent advantages

Such as: Sony, Nintendo and Sega

they have the advantages:

■ Economies of scale

■ Cumulative investments (Learning economies, Innovation advantage, promotional advantage).

■ Customer loyalty advantage

■ Switching costs advantage

■ Demand side increasing returns advantage

Strategic Reaction: Sega Use its strength: Own amusement centers and Arcade games Convert them into Home Video Game Consoles Introduce CD-ROM – Earlier than 3DO Sega CD – Add-on for Genesis Announce Next 32bit machine, with CD-ROM Sega Channel – through cable network Other enhancements: Network add-on: Edge 16 Enhance add-on: Genesis Super 32X

Use its strength:

Own amusement centers and Arcade games

Convert them into Home Video Game Consoles

Introduce CD-ROM – Earlier than 3DO

Sega CD – Add-on for Genesis

Announce Next 32bit machine, with CD-ROM

Sega Channel – through cable network

Other enhancements:

Network add-on: Edge 16

Enhance add-on: Genesis Super 32X

Strategic Reaction: Nintendo Keep low pricing strategy Enhance existing system Enhance add-on: Super FX Showcase title: Star Fox Project Reality (later Nintendo 64)‏ Announce 64bit System Appeal existing system’s capability

Keep low pricing strategy

Enhance existing system

Enhance add-on: Super FX

Showcase title: Star Fox

Project Reality (later Nintendo 64)‏

Announce 64bit System

Appeal existing system’s capability

As time goes by…

WHY 3DO FAILED… Failure to Market Properly: Early launch of the system was not coordinated with the number of games available, thus making it not as desirable at that price. No real marketing campaign until after the launch (magazines, tv slots)‏ Failure to Price Properly: The 3DO system was priced at $700 in the 1990’s which was unreasonable during this time. After the launch failure, the price dropped to $500 No Real Business Model: 3DO could have created its in-house game development team before the launch so that there were more partnering games, and should have establish licensing fees and marketing plan before the launch No First Mover Advantage: There were already big name players creating similar experiences and add-ons for better prices Company Had Developer in Mind: When 3DO was created, Hawkins had the developer in mind and wanted to create ease of use for developer, rather than solely focusing on marketing to gamers Licensing Price Changes: Changing the royalty fees from $3 to $6 per disc sold, outraged developers. Hawkins believed that the “hardware” was more important

Failure to Market Properly:

Early launch of the system was not coordinated with the number of games available, thus making it not as desirable at that price.

No real marketing campaign until after the launch (magazines, tv slots)‏

Failure to Price Properly:

The 3DO system was priced at $700 in the 1990’s which was unreasonable during this time. After the launch failure, the price dropped to $500

No Real Business Model:

3DO could have created its in-house game development team before the launch so that there were more partnering games, and should have establish licensing fees and marketing plan before the launch

No First Mover Advantage:

There were already big name players creating similar experiences and add-ons for better prices

Company Had Developer in Mind:

When 3DO was created, Hawkins had the developer in mind and wanted to create ease of use for developer, rather than solely focusing on marketing to gamers

Licensing Price Changes:

Changing the royalty fees from $3 to $6 per disc sold, outraged developers.

Hawkins believed that the “hardware” was more important

Despite all the product innovation at 3DO, the company failed to envision harnessing network economies. Unlike its competitors, it did not capitalize on the biggest invention of the decade; the internet. Another way of looking at the role of network effects is that although 3DO was getting its liquidity injections, the company’s solvency was not healthy enough for it wait for the internet to play a major part in its growth; the way it did for 3DO’s competitors. Essentially, 3DO’s competitors have leveraged off the social networking aspect and grown their brands stronger through the online/multiplayer aspects of gaming which bring a whole new dimension to the human interaction – emotions. 3DO however, could not use this to its advantage the way it should/would have wanted to. At the time 3DO sought bankruptcy protection, its top competitors besides Sega and Nintendo were EA and Activision Blizzard, both companies with evolving revenue models like online gaming which were essentially changing the rules of engagement in an old industry and therefore redefining the future. my takeaway – Innovation in and of itself is not the key to success. The ability to allocate resources and create unique/uncompromising value for the consumer should be a company’s goal.

Why did 3DO fail? Refusal to reduce pricing until almost the end of 3DO’s life cycle At $700 to $800, most people steered clear of the 3DO and continued to purchase the much cheaper and more established 16-bit game consoles Goldstar released their own version of the 3DO with a far lower price tag of $399 However, the 3DO never recovered from its initial reputation as a “rich man's” videogame system This was very unfortunate as the 3DO could have easily competed with the Playstation, Saturn and future systems Because of constant delays to promised expansions like the 3DO 2nd generation design (the M2), 3DO games and systems were placed in clearance bins starting in 1996, with the ultimate death of the system coming near the end of that year

Refusal to reduce pricing until almost the end of 3DO’s life cycle

At $700 to $800, most people steered clear of the 3DO and continued to purchase the much cheaper and more established 16-bit game consoles

Goldstar released their own version of the 3DO with a far lower price tag of $399

However, the 3DO never recovered from its initial reputation as a “rich man's” videogame system

This was very unfortunate as the 3DO could have easily competed with the Playstation, Saturn and future systems

Because of constant delays to promised expansions like the 3DO 2nd generation design (the M2), 3DO games and systems were placed in clearance bins starting in 1996, with the ultimate death of the system coming near the end of that year

new product/service new process new business model K. Thakur Industry Analysis PEST Analysis Value Chain Porter’s 5 Forces Incumbency Competitive analysis Opportunity Value Proposition Target Customers Revenue Model Unique Capabilities Distinctive Activities Value Creating Activities

Super Mario Bros. (40.23 million)[39] Super Mario Bros. 3 (18 million)[40] Super Mario Bros. 2 (10 million)[40] The Legend of Zelda (6.51 million)[41] Zelda II: The Adventure of Link (4.38 million)[41] Teenage Mutant Ninja Turtles (4 million)[42] The top 10 selling Xbox 360 games. Halo 3 (8.1 million)[24] Gears of War (5 million,[25] may include PC version)‏ Grand Theft Auto IV (4.074 million approximately: 3.29 million in US,[26] 750,000 in UK,[27] 34,000 in Japan)[28] Gears of War 2 (4 million)[25] Call of Duty 4: Modern Warfare (3.772 million approximately: 3.04 million in US,[29] 78,000 in Canada,[30] 53,501 in Japan,[31] 600,000 in UK)[32] Call of Duty: World at War (3.35 million approximately: 2.75 million in US,[26] 600,000 in UK)[32] Forza Motorsport 2 (2.674 million approximately: 2.23 million in US,[19] 31,255 and 100,500 Platinum Collection,[31] 12,600 in Canada,[33] 300,000 in UK)[34] Fable 2 (2.6 million)[35] Assassin's Creed (2.285 million approximately: 1.87 million in US,[29] 60,000 in Canada,[30] 55,041 in Japan,[31] 300,000 in UK)[34] Marvel: Ultimate Alliance (2.08 million in US)[19] Guitar Hero II (2 million in North America and Western Europe)[36]

Double network effect