Porter’s Five Forces
Porter’s Five Forces is a model named after Michael E. Porter
that takes into consideration five market forces that play out
on any given company or industry. The five forces are: power
of buyers; power of suppliers; threat of substitutes; threat of
new entrants; and industry jockeying.
This model examines these forces thereby helping to
determine a given company’s strengths and weaknesses.
Porter’s Five Forces is also a way to view the potential risks to
which any given company may be exposed.
Porter’s is a valuable yet somewhat subjective tool. It is a
starting point meant to encourage further discussion.
What is Porter’s Five Forces?
Please note there is no official method to score the model.
This method is simply a way to further categorize companies.
Each market force is scored on a scale of 1 – 5 with 1
representing the lowest threat and 5 representing the highest
All five forces are totaled for a final score. The lowest possible
score is 5 and the highest possible score is 25.
implies a lower threat rating.
implies a medium threat rating.
implies a higher threat rating.
Power of Buyers
Estimates are that 17% of the global
population are gamers. That breaks down to
about 1.2 billion; purely discretionary.
Mobile means many games are living much
Of the global Internet population 44% plays
online games (about 700 million).
Digital distribution has changed the game;
power is shifting more directly to the
Even powerful franchises like World of
Warcraft don’t last forever.
New titles with long lives is huge. The
subscription model may be in big trouble.
Score – 4
Power of Suppliers
Suppliers in this case are the talent that
churn out the hits. The company also pays
licensing fees for the various distribution
Digital distribution is bringing the cost of
production down margins expanding.
There are plenty of substitutes in the gaming
world. Attracting and keeping the best talent
is important meaning the suppliers hold some
of the cards here.
ATVI has a reputation as having the resources
and distribution for producers to get their
games out to the largest audiences as well.
Score – 3
Threat of Substitutes
Think back to the day of the Atari. Video
games have come a long way since then.
There are plenty of substitutes where gaming
is concerned. Particularly with the
proliferation of mobile devices.
Gaming is more than just gaming though; it’s
entertainment and there are more forces out
there competing for our entertainment
dollars today than ever before.
Partnerships in and out of the industry can
help mitigate the threat of substitutes.
Consoles today are virtual entertainment
centers offering much more than just gaming
Score – 5
Threat of New Entrants
Of course there is always the threat of new
entrants. But how will new entrants affect
ATVI? Will gamers leave ATVI to try other
options out there? Is there any kind of brand
loyalty toward ATVI? (Thanks Paul C!)
King Digital and Zynga are examples of two
companies that have taken advantage of
public market mania to raise capital.
Economic barriers for new entrants are low,
at least in the beginning. ATVI has
traditionally held an advantage in distribution
over any new entrants. HOWEVER…
App stores and mobile are changing the
landscape in a big, big way.
Score – 4
IBISWorld projects annual growth of 3% in
the US sector over the coming five years.
Video games are purely discretionary
purchases. As the consumer recovers, there
should be more opportunities in the space.
Mobile technology is opening up the space as
well, changing the dynamic from a traditional
IBISWorld pegs 60% to 70% of downloadable
mobile games as free, raising the hurdle for
purchasing and/or subscriptions.
Game development is becoming more global,
more revenue realized internationally.
Score – 4
Power of Buyers – 4
Power of Suppliers – 3
Threat of Substitutes – 5
Threat of New Entrants – 4
Industry Jockeying – 4