The document provides an analysis of the 7th generation game console industry, focusing on the major players Xbox 360, PlayStation 3, and Nintendo Wii between 2005-2013. It summarizes that:
1) Nintendo succeeded through a differentiated strategy targeting casual gamers with its low-cost and motion-sensing Wii console, outselling rivals.
2) Both Microsoft and Sony focused on hardcore gamers but struggled with high production costs, though built strong brands and game libraries.
3) The industry now faces challenges from mobile/social gaming, but console gaming remains lucrative with new revenue models and popular franchises.
1. Avijit Samanta - 01FX15MBA008 | Strategy Acumen | December 30, 2015
Research Report on Game
Console Industry
INSTITUTE OF PRODUCT LEADERSHIP
2. PAGE 1
Synopsis
Game console is a device primarily designed and entertain for playing games, with inherent features like
enhanced graphics, ease of control and human driven design. Started in 1972 with Magnavox Odyssey,
gaming console industry spans across generations, running now in 8th
generation.
Initial genre of games were mostly of Arcade types (coin operated game kiosks) on different themes like
Shooting, Racing, Puzzle, Strategy etc. targeting young crowd gathered in restaurants, bars, amusement
parlors etc. Game content evolved through electronic cartridge, e-card, chip cards, CD, DVD etc. and has to
be connected to TV monitor (before advent of PC games). The market was not matured enough to have
“home users”, but occasional, fun loving causal gamers enjoying at arcade kiosks. But it changed to “home
console” market since the success of Atari’s infamous “Pong”
game (Reference -
http://www.thocp.net/software/games/golden_age.htm).
Magnavox Odyssey, first gaming console, Ref: Wikipedia
Since, 1972 there were lot of console players tried to typical “home console” market with different
strategies like gaming content type (shooting, racing, puzzle, strategy etc.), pricing and technology
innovation (from non CPU machine to TV display to PC to CPU and high end GPU combinations and then
Internet). The unit economics of different consoles given here with timeline (See Exhibit 15).
Recent advancement of mobility, smartphones and social media, gaming console industry is facing a stiff
challenge and trying to evolve in many way, either targeting more niche segment or reaching out to larger
consumer base with integrated digital ecosystem.
Note - Due to fragile data, very early stage 8th
generation consoles of and consolidated data availability
issue, the report is primarily targeted to 7th
generation gaming consoles, specifically “Home Consoles” and
primarily the major players – Xbox360, Nintendo Wii and PlayStation 3, Period – 2005 – till 2013
3. PAGE 2
Strength and Weakness Analysis
Xbox 360 PlayStation 3 Nintendo Wii
Strength 1. Cost Advantage over PS3,
almost 300$ a unit (See Exhibit
4), though both Microsoft and
Sony were ready to sacrifice
profit to gain market share
2. Product Design and Innovation
- Introduced backward
compatible game lines, so early
Xbox gamers can play old titles
in newly enhanced Xbox 360
console along with new titles.
Introduced HD discs, online
connectivity support like Xbox
Live, later Kinect introduced for
motion sensing games as
additional kit (See Exhibit 5, 6,
7)
3. Strong brand value - approx. 5
billion dollar (USD) (See Exhibit
8), compared to PS3 (approx.. 3
billion dollar USD)
4. As a company Microsoft had
decade experience in
software/services and could
leverage that to make Xbox 360
console a strong platform for
gaming and entertaining hub
1. A decade of
consumer electronics
experience and
proprietary Technology
Knowhow –
Focused on a new level
of high end, hardcore
gamers experience
through its proprietary
Blu-Ray optical drive,
Full HD video
resolution, wireless
controller, WIFI
networking (See
Exhibit 6 and 7)
2. Envision Consumer
Behavior – As part of
Sony’s long term
strategy to change user
behavior of giving a
completely new
experience and
platform, bundled with
high end proprietary
technology. It is very
clear unit sales figure
from 2009 onwards,
along with total sales
figure worldwide (See
Exhibit 2)
3. Strong Salesforce - It
managed to sell almost
the same no. of gaming
consoles (See Exhibit
1). From 2009 onwards,
it constantly beat Xbox
360 in sales figure (See
Exhibit 2). Even total
revenue (approx. figure)
is much higher than
Xbox 360 (See Exhibit
4)
4. Business Innovation
– In 2009 Sony PS3
remodeled its console
1.Differentiator/Segmentation
strategy - Nintendo was in
gaming market for a long
time. To compete with giants
like Sony/Microsoft,
Nintendo targeted a larger but
mostly ignorant segment –
“Fun loving, Casual Gamers”
with simple, but intuitive
gaming experience. The total
sales of 101.52 million units,
surpassing both PS3 and
Xbox 360 makes it clear.
(See Exhibit 1)
Even, from 2008 – till 2011
it beat both PS3 and Xbox
360 in no. of unit sales (See
Exhibit 2)
2. User Experience – Casual
gamers wants to enjoy the
game fast, play fast with
much complexity and stiff
learning curve. Existing
gaming controllers with 10 to
15 button may not be an
option for them. Wii remote
aka “WiiMote” solved this
problem with motion sensing
gesture where gamer actually
play along game with
reduced buttons and more
focused on motion sensing
device. It became instant a hit
3. Cost Advantage – Lower
production cost. Where Xbox
and PS3 losing money on
consoles (avg. – 100$-
300$ USD), Wii makes profit
avg. 80-100 $ for each unit it
sold (See Exhibit 4)
4. Strong distinctive Brand
value - From 2011 onwards
Wii found its brand value
among Xbox and PS,
crossing 3 billion dollar (See
Exhibit 8)
4. PAGE 3
with slimmed,
lightweight, resolved
heat problems and along
with motion controller
names “PS3 Move” to
compete directly with
Microsoft Kinect and
Nintendo’s Wii Remote.
PS3 move was bundled
with console and price
not changed much,
which gave it advantage
over XBOX 360 as
value for money,
because “Kinect”
charged extra in
addition to XBOX 360
console
Weakness 1. Though beating PS3 in cost
and price per unit, but yet to
recover its cost from console unit,
so making loss
2. Narrowly focused in hardcore
gaming segment and directly
competing with Sony, which
hardly makes any differentiation
1. Cost disadvantage to
Microsoft Xbox 360 due
to its high end, premium
hardware configuration
– Hard disks, Blu-ray,
NVidia graphics etc.
2. As a company Sony
relatively less
experienced in
Software/Services
ecosystem compared to
Microsoft
1. Limited section of game
titles – Mario, Pokémon
2. Lack of Online experience,
No HD support, No disk
drive, only limited internal
flash storage of 512 MB (See
Exhibit 5, 6, 7)
3. As a company Nintendo is
much smaller and financially
less stronger compared to
Sony/Microsoft
5. PAGE 4
Porter’s Five Force Analysis on Game Console Industry (7th gen, 2005-2012)
Though Wii, Xbox 360 and PS3 were the major competitors in 7th gen gaming console market,
but we cannot ignore the advent mobile and social gaming. Invent of iPhone, Android market place and
Social Media (Facebook), becomes new threats. From 2008-09 onwards, trends in console market starts to
decline. We will look into this disruption more details using Porter’s 5 force analysis.
A. Power of suppliers – The suppliers for gaming consoles are broadly categorized into 2, Hardware
and Software (Game studios)
Hardware – Though there are few players (example - IBM, Intel, ATI, NVidia, Seagate, Sony (Blu-ray –
proprietary, reference – data tables in annexures), the bargaining power of supplier are medium (or
dynamics of this partnership can be strategic, instead of just a buyer-seller relationship) due to the major
dependency of differentiated console architecture and high switching cost.
For example GPU processors there are only 2 suppliers NVidia for PS3 and ATI for Xbox360 and Wii.
Now, e.g. if NVidia wants to switch to other player like Xbox360 or Wii, it has to understand the whole
architecture, limitation and compatibility of other components like disk, cpu, motherboard, cooling system
etc. On the other way around if Microsoft/Sony wants to switch to different vendor, switching cost will be
high due to compatibility of other components (hard drive, RAM, Motherboard, Graphic rending algorithm
etc.) in console. ATI created “48 parallel shader” GPU optimized for gaming experience on Xbox 360. It
partnered with Microsoft strategically to develop the chip where chip engineers from both companies
worked together.
Reference - http://techreport.com/review/8342/details-of-ati-xbox-360-gpu-unveiled
Software (Games) –
Developers – The developers earn money on royalty on each game title being sold from
publishers. Game developers normally interact with publishers, not console providers directly. The
bargaining power of game developers are medium, as they have options to switch to other
platforms, but have dependency on major publishers for selling, marketing and platform providers
of game titles through publishers. – Example - Remedy Entertainment, Eidos Interactive, EA
Digital Illusions etc.
Publishers - The bargaining power of these publishers (major players like Activision, EA
Sports, Ubisoft, and Sega etc.) are high. Most of these game publishers have now dozen of game
titles targeting mobile platform. At least from 2008 onwards, emerging “mobile gaming” (this is a
substitute which actually increases bargaining power of Publishers) has started eating the console
gaming market. See Exhibit 2, the worldwide overall sales of major game console makers
declining.
Game titles published by publishers are not exclusive to console platforms. Publishers are
free to switch to any platform because of high demand of the core game content, experience across
consoles and other gaming platforms (PC, Tablet, and Mobile etc.). They are intended to move
towards non console plat forms like mobile, tablet to have better revenue (by selling or
subscription based)
6. PAGE 5
B. Power of Consumers – The bargaining power of customers are medium, in the sense that the
switching cost is high (both in terms of hardware, console and software, games), but also power
of substitutes like mobile/online high (mostly casual games like angry bird, Farmville, candy crush
etc.), and certain segment customers may find value to switch. Also, most of the games of
mobility and social platform are free to download. So, price concerned buyers tend to move
C. Threat of new entrants – The entry barrier is high in terms of capital investments, economy of
scale, complex supply chain management (both hardware and software), make the pricing
attractive.
Microsoft and Sony both made huge loss of 11$ billion and 30$ billion USD respectively from
their 7th
generations game consoles (See Exhibit 4). But on the other side, it continued selling
consoles worldwide with approx. 85 million of units (approx.) (See Exhibit 1), making
improvement on hardware components (See Exhibit 5, 6, 7) and game titles (Halo, Mass Effect,
God of War, and Heavy Rain etc.). Also, later part of of 7th
generation PS3 and Xbox, both came
up with motion sensing devices (Kinect and Move) to compete with Nintendo.
These are high risks for a new entrant. Also not easy to imitate and time consuming to make into
game console market. So, to sustain in the market, initial capital required is quite high, until have
some innovation strategy like Wii followed.
D. Threat of substitutes – The threat of substitutes are high. The advent of mobile and social
gaming, made customers to download some popular games free or couple of dollars and play
directly in their mobile/tablet handset. Rather than serious story events, complex objectives and
game controls, it reply simple objectives and intuitive game control (e.g. combination of touch,
swipe, motion sensing etc.). Consumers are not required to purchase a high priced consoles.
For game developers/game publishers, it is always lucrative to find the correct platform where
people will engage more and help to monetize, instead of spending huge amount of time for
complex, high end graphic based games for consoles.
Example - The success of Rovio, Zynga are some examples, made already millions/billions of
dollars. For example –
Rovio figure - 2014 – 158.3 million eur, 2013 – 173.5 million eur, 2012 - 152.2 million eur
Reference - http://www.rovio.com/en/news/press-releases
Zynga figures – 2014 – 690.41 million usd, 873.26 million usd, 2012 – 1.28 billion usd, 2011 –
1.14 billion usd, 2010 – 597.45 million usd
Reference - http://amigobulls.com/stocks/ZNGA/income-statement/annual
E. Rivalry among competitors – Due to less no. of players in gaming console market, rivalry is
quite high between top 3 market players Xbox, PS3 and Wii.
Wii started with innovative, blue ocean strategy and was able to have a lead time from 2006 till
2010 (See Exhibit 2)
7. PAGE 6
Then Sony and Microsoft both imitate the motion-sensing technology (Xbox Kinect and PS3
Move) and tried to enter the same market (See Exhibit-4). From Exhibit 2, it is clear that from
2009, both PS3 and Xbox 360 were able to increase sales compared to Nintendo Wii till 2012 (the
start of 8th generation, makes it more volatile)
PS3 increased sales from 10.2 million units in 2008 to 14.3 million units in 2011
Xbox 360 increased sales from 10.91 million units in 2008 to 13.95 million units in 2011
Nintendo Wii sales down from 24.19 million in 2008 to 11.49 million in 2011
Conclusion –
In terms of revenue from console (See Exhibit 4) PS3/Xbox are making loss, except Wii. On the
other side we see the, very high sales volume for all the major players – PS3, Wii, Xbox all were
sold over 80 million units (See Exhibit 1). It denotes the high demand for console games. The
advent of internet, streaming service create new opportunity of revenue model from subscription,
advertisement etc. (See Exhibit 10 and Exhibit 14). Popular game titles and associated software
gives 41.4% of total gaming revenue (See Exhibit 13)
From these above viewpoints, the console gaming market seems to be lucrative in long term. This
is the reason still these 3 big players Microsoft, Sony, Nintendo are sticking in this industry.
8. PAGE 7
Drivers of Competitive Advantage in the Game Console Industry
1. Focused Differentiation – Nintendo Wii proved this point with selling 24.19 million in 2008,
compared to half of the sales of Xbox 360 – 10.91 million and PS3 10.2 million (see Exhibit 2).
Till now total gross sales till now is more than 100 million units.
a. As discussed above, instead of competing in same hard core game segment with
Microsoft and Sony, Nintendo chooses a different casual, fun loving, price sensitive
family gamers, willing to pay much less price and enjoy gaming at home
2. Understanding Human (Consumers) behavior – Nintendo understood the behavior of its
consumers and understood that engagement with its consumers – the casual gamers and people
wants to enjoy while in a group of friends or in family. These users are not hardcore gamers who
are looking for graphic, complexity and compelling storylines. They are looking at consoling
gaming as a device for more enjoyable, fun and playing with families/friends and so users can
spend more time with the console. That’s why “Wii Remote” was born, simple, user friendly
motion sensing controller, instead of complex, button driven controllers in other gaming consoles.
While Xbox and PS3 concentrated to make its consoles powerful with “Feature” driven approach,
Wii focused on its target “Consumer Behavior”
3. Strong, complementary Product Lines (Game Software) – Irrespective of target segment, it is
important to have a strong line of game titles to be played in consoles. From, razor-blade strategy
perspective, Xbox and PS3 relied heavily on games (as game publishers) for revenue, while losing
money on consoles. Though Wii was making profit (avg. 50-60$/unit) (See Exhibit 4), still it also
focused on its game genres mostly based on sports and Mario games (e.g. - Variant of Mario
games, Variant of Metroid etc.). Microsoft struggled in earlier generation (6th generation) due to
this issue, and in 7th generation both Xbox and PS3 fought neck to neck for block buster game
lineups
Xbox 360 popular game titles published by Microsoft – Blockbuster “Halo” series, Mass Effect,
Gears of war 2/3, Fable III etc.
PS3 popular game titles published by Sony – God of War III, Resistance: Fall of Man, Heavy
Rain, and Uncharted 2: Among Thieves etc.
Nintendo Wii - Variant of Mario games, Variant of Metroid etc.
4. Cost benefit – Other than differentiation, Wii sales figure above shows that both in customer base
and in revenue it is much higher than Xbox 360 and PS3. Wii total revenue is 25.27 billion usd
and cost is 10.7 billion usd, where as though Xbox 360 and PS3 revenue figure is quite high due to
(ASP/unit and improved sales volume 2009 onwards), both actually make a huge loss, see below
figure
Wii – Total revenue 25.27 billion usd, cost 10.7 billion usd
Xbox 360 – Total revenue 29 billion usd, cost 40 billion usd
PS3 - Total revenue 38.5 billion usd, cost 67.6 billion usd
Also, Wii sales figure till now is more than 100 million units, where PS3 and Xbox is far behind.
It is very clear that, cost advantage is one of key driving factor.
9. PAGE 8
Industry Value Chain
Could not find any specific figures of percentage distribution in the value chain, so tried to identify the key
players in the value chain and their contribution in that.
Content Providers – Sometime games are created based on popular movie or sports theme, which are
copyrighted, e.g., Harry Potter, James Bond, IronMan, stories based on Marvel Characters, FIFA etc. Then
game studios or the game publishers pay royalty fee to the content providers (author, movie studios, sports
association, characters being played, voice over artists etc.) for using the content in their game.
Hardware component suppliers – These suppliers play vital role to provide key equipment to make the
console run smoothly and also this key configurations like graphics chips, CPU, memory, RAM etc. and
make money on each unit being sold. Example – IBM, Intel, ATI, NVidia, Seagate, Sony (Blu-ray –
proprietary)
Software (Game) Developers – Game developers get some advance payment from publishers and
develops game and earns royalty on per unit sold. Example – Remedy Entertainment, Eidos Interactive, EA
Digital Illusions etc. – Reference - http://www.metacritic.com/
Software (Game) Publishers – On of the strongest and influential in value chain, negotiates cost with
game developers, earn major chunk of money on each game title being sold in different platforms.
Publishers can reach much near to customers through distributors or online retailers like Amazon, BestBuy
etc. with their popular gaming titles.
It is even possible that publishers can crate game titles for different consoles (game developers), and even
horizontally in cross platforms like mobile, social media, web etc.
Example – Activision, Electronic Arts, EA Sports, Ubisoft etc.
Software (Game) Developers Software (Game) Publisher Hardware equipment suppliers
Console Platform Providers
Distributors
Retailers (Online / Offline)
Consumers
Content Providers
10. PAGE 9
The major console players like Microsoft, Sony, Nintendo also plays dual role in developing and
publishing video games exclusively for their respective platforms. Example – Microsoft Game
Studios (343 industries) – Halo series, Nintendo – Mario game franchise, Sony Computer
Entertainment – God of War series
Reference - http://www.metacritic.com/
Console platform Providers – The major, key players in this whole console game industry. Microsoft
(Xbox), Sony (PS3), Nintendo (Wii) are some of the major players provides different gaming consoles and
different gaming experience. They create design spec, procure components from hardware suppliers,
assemble and build the console. Also, they negotiate with publishers in having exclusive rights on some of
the game titles, expects some revenue share from selling of game units; also tie up with distributors and
retailers to reach out to consumers. In terms of making money, strategy is different (See Exhibit 3 and
Exhibit 4). While Xbox and PS3 actually losing money on units selling and expecting revenue on game
units being sold as publishers (Microsoft Studios – Halo, Sony – God of war 3, Heavy rain etc.), Nintendo
Wii earns money on both, console as well as from popular game titles as a publisher (example – Variant of
Mario games, Variant of Metroid etc.)
Reference - http://www.metacritic.com/;
Distributors – Distributors earns commission from publishers by distributing games, resale, marketing etc.
Also, it earns commission from Game console providers in distributing console units.
Example – Digicom Solutions, Click Entertainment etc.
For a typical $60 (USD) game title distributor earn $4 (USD) approx. 7% margin (check figure 11).
On the hardware side figure is not readily available but it seems - “Although they don't provide specific
pricing to non-members, legitimate video game distributors explain that the profit margin on video game
systems in fairly slim - often only $4 or $5 dollars per unit” to be low. – Reference –
(http://www.dropshipstrategy.com/products/video-game-systems)
Retailers - Retailers (online/offline) makes money by selling games and consoles both and earns certain
percentage of commission.
Online retailer may cut down intermediary cost for both publishers and console makers and earn better
commission Example – Amazon, BestBuy, Walmart etc.
Offline Retailers – In India retailer like Croma, Reliance digital, eZone are some examples
For a typical $60 (USD) game title retailer earn $15 (USD) approx. 25% margin (See Exhibit 11).
On the h/w (console) side it seems the margin ranges from 2-5% for a retailer. (See Exhibit 12)
Consumers – Consumers decide what to pay and whom to pay for. The demand side of consumers (both
the gaming titles and consoles) impacts the top level of players in the value chain.
The game console consumers or users can be broadly categorized into 2 segments –
11. PAGE 10
A. Casual Gamers - These people takes games as enjoyment and fun way and love to spend time
playing games with other family members like kids or friends. Winning or Lose in a game not
important, rather they enjoy most excitement and fun of playing together. These people less
attached emotionally with outcome of game, but like enjoyment of game play.
Nintendo primarily target these users.
B. Serious, Hardcore Gamers – These people very emotionally attached and mostly addicted to the
outcome of the game, rather than enjoying the fun or excitement part, the prefer most on outcome
– winning or lose. These people don’t want to play games with anyone or family, but close group
of same minded hardcore gamers and cherish the achievement of winning each level or finish till
the end. Xbox 360, PS3 target primarily these users.
12. PAGE 11
PESTEL Factors on the industry
A. Political factor – Historically console gaming industry was politically targeted for several reasons
– violence, adult theme, obesity etc. In US, some states like Indianapolis and St. Louis, tried to put
ban on selling violent games. H.R. 669, the “Protect Children from Video Game Sex and
Violence Act” was introduced by Representative Joe Baca. Anyone who sells or rents a video
game to a minor that depicts nudity, sexual conduct, or other harmful content who be forced to pay
a large fine. In 2008, “Entertainment Software Association”, lobbying arm in Washington created
“Political Action Committee (PAC)” with representatives from EA, Microsoft, Sony and
Nintendo.
Reference - https://aginsberg.wordpress.com/2010/05/05/politicallegal-factors/
http://www.cnet.com/news/the-video-game-industry-goes-political-and-its-
about-time
In China till Sep, 2013, there was strict prohibition on video game consoles sales by foreign
companies. From 2013, Sep, the ban lifted on condition that the companies should create
production and sales operations in Shanghai and consoles to be examined and approved by
China’s ministry of culture before selling into market.
Reference - https://illiabusiness.wordpress.com/2014/02/28/strategic-management-an-analysis-of-
the-video-games-industry-and-nintendos-opportunity-in-china/
B. Economical Factor – Since 2005 till 2008, due to good economic condition in global economy
shows a positive growth in game industry with annual growth rate of 16.7%. In 2008-09 the global
financial crisis and recession, saw negative impact on game industry as well. In 2009, it was
negative growth since 2002, as sales fell by 8%.
Reference - http://content.usatoday.com/communities/gamehunters/post/2010/08/game-
industry-pumps-nearly-5-billion-into-gdp/1#.VoToz_l97iw
During Sep, 2013 the inflation rate in China was worse, 3.2%, and had impact on local companies’
profit margin. Yuan (RMB) was fluctuating frequently. This could have create hindrance to
foreign companies
Reference - https://illiabusiness.wordpress.com/2014/02/28/strategic-management-an-analysis-of-
the-video-games-industry-and-nintendos-opportunity-in-china/
C. Social Factor – Game consoles was introduced with a purpose of dedicated hub, where people can
test their adrenalin rush, play games hours after hours, have fun, enjoy with families and friends. It
shows that in the United States 25% of game players are less than 18 years old, 49% in the age
group 18 - 49 and 26% 50 and older (ESA report, 2010).
As game revolves and become more matured, the majority young generation wanted to enjoy this
together and felt more competitive while playing with others rather than individual. This created
multiplayer games mode, and became prominent in 7th
generation.
In 2008 to 2009, it shows 63% of gamers plays games with other players. Then people wanted the
game to be more fun not just playing but by really involved physically. This gave birth of
13. PAGE 12
“WiiMote”, Xbox Kinect and PS3 “Move”. It was great innovative breakthrough. As of 2010 ESA
data, 48% of parents participate gaming with their children.
Reference
http://ocw.metu.edu.tr/pluginfile.php/4686/mod_resource/content/0/ceit706/week5/ESA_Essential
_Facts_2010.pdf
China saw a recent development of looking at adopting gaming culture in its youth segment. As
the overall living standard being improved, the younger generation tends to move to
“westernization”. It impacts their foreign brand awareness & adoption, equality feeling and
moreover prestige. This resulted in adopting gaming consoles like Nintendo Wii, PS3 etc.
Reference - https://illiabusiness.wordpress.com/2014/02/28/strategic-management-an-analysis-of-
the-video-games-industry-and-nintendos-opportunity-in-china/
D. Technological Factor – Technology was always a driving factor for game consoles and its
associated gaming software innovation. It has come through 8th
generation since started in 1972
with Magnavox Odyssey with a long history of technology innovation. The advent of hardware,
software, graphics, and processor saw equal impact on this industry. For example, before 7th
generation games were mostly based on memory card or DVD based. 7th
generation saw
improvement in High definition graphics with NVidia graphics processor, Blu-Ray disk to hold
this huge data, and high speed Intel processor.
Being a hub of hardware and networking equipment manufacturer, China, already being a
significant influential role in technology in game console industry. In the advent of high speed
network gaming, internet gave rise to more popularity in gaming.
Reference - https://illiabusiness.wordpress.com/2014/02/28/strategic-management-an-analysis-of-
the-video-games-industry-and-nintendos-opportunity-in-china/
E. Environmental Factor– The game consoles mostly made up of hardened plastics, hybrid plastics,
aluminum, magnetics and metals. Other than metal items, mostly these components are non-
recyclable. This can cause hazards in environmental ecosystem. Technological advancement,
network connectivity made the gaming consoles more power hungry which will impact natural
resources. Console makers should go for environment friendly, alternative power source like solar
power, magnetic power, Kinect power etc. With the advent of “motion sensing” technology
(Kinect, Wiimote, Move), actually the power of kinetic energy can be harvested and reused in
certain way.
With its “Electric Power Law” in China, companies should obey electricity utilization efficiently
and protect the environment. It inherently impacts game console industry.
Reference - https://illiabusiness.wordpress.com/2014/02/28/strategic-management-an-analysis-of-
the-video-games-industry-and-nintendos-opportunity-in-china/
14. PAGE 13
F. Legal factor – Rampant piracy of popular game titles in different platforms as well as “modded”
(tampered) game consoles pose a threat to the industry. Specifically, console makers claim of high
piracy being existed in China and make manufacturers of pirated games. Also, some illegal
“modded” (tampered) chips able to make the console device compatible with pirated games.
One more issue was with content and adult theme of the game titles being played on gaming
consoles. Normally games are rated based on the content. Specifically in China, it has strict law of
censorship on games. This also impacts the game titles being released there and the popularity of
gaming consoles in the market.
Reference - https://illiabusiness.wordpress.com/2014/02/28/strategic-management-an-analysis-of-
the-video-games-industry-and-nintendos-opportunity-in-china/
Nature and degree of online business on offline business in console industry
Console industry was traditionally an offline business combining gaming consoles and game titles played
on it. The first of of 7th
generation, followed the same thing. But things were rapidly changing on online
space. Advent of mobile along with social media (orkut, Facebook) was giving consumers opportunity to
be engaged more online than offline gaming. This way it gave birth of mobile gaming and social network
gaming and threat to console industry.
(Exhibit 9. shows that in 2009 total online gaming (social, mobile, other online games) market was $23
billion and gaming console was $29.5 billion. But, as of 2014 it changed dramatically, mobile gaming itself
becomes $18 billion, social network gaming becomes $17.7 billion, other online gaming becomes $46.4
billion. Game console industry reduced to $4.7 billion.)
Both Xbox 360 and PS3 were making loss (See Exhibit 4) from their consoles and intended to make profit
from their own game titles, were eager to adopt the online trend. IN 2nd
half 7th
generation (2009 end and
early 2010 onward), both made some arrangement in their console for multiplayer online games, some
limited support of online streaming of entertainment videos. Microsoft identified the changing nature of
online business and bundled some online services with Xbox 360.
Xbox Live - It allows users play games online, download free version of games and demos, intended to
make money from subscription
Xbox Music - allows user purchase and stream music
Xbox Video – streaming television programs and videos, subscription based
Reference - www.xbox.com/en-US/xbox-360
Compared to Xbox 360, PS3 had limited focus on online business model. It created “PlayStation Now”
with limited access of PS3 games streaming online and play. It allows to purchase games online and
download and play.
Nintendo Wii, came up with several online services like “virtual console” (allowing purchase and game
download online), “Internet Channel”, “New Channel”, “Voting Channel” etc. Out of it, it also tied up with
BBC and Netflix to stream their content over Nintendo Wii.
Reference - http://nintendo.wikia.com/wiki/Wii
15. PAGE 14
One more impact was from the supply chain perspective, how the console gaming industry used to work. In
a typical console game industry, distributors and retailers had a major impact on margins from game
consoles and game titles. Advent internet and e-retailers, created an alternate channel of delivering value,
instead of going through multiple layers.
For example, Amazon can sell popular game consoles directly from console platform providers like
Microsoft, Sony or Nintendo to consumers. This also gave opportunity for game publishers of directly
reaching out to consumers and sell games online. It reduces acquisition cost and impacts pricing of those
consoles and game titles.
Strategic conclusions and directions for the CEOs of the major players
At the end of 7th
generation and beginning of 8th
generation (2012-2013), it seems there are several
opportunities and threats in the current game console industry and CEOs should look at that to make
decisions.
Threats –
A. For console makers generally profit margin is low or negative (e.g. PS3, Xbox 360, See
Exhibit 4) due to significant hardware technology investment though Nintendo Wii made
some profit.
B. Mostly rely on profits from game titles as game publishers/game developers as the margin is
quite high 45% (See Exhibit 11) and out of total revenue physical games and software
consists of 41.4% (see Exhibit 13), but the market is already crowded with lot of independent
game developers (Eidos, 3D Realms, Rockstar Games etc.), game publishers (Activision,
Electronic Arts), content providers (e.g. Disney, marvel comics, Tiger woods, FIFA, Nascar
etc.).
C. Mobile/Online gaming posing threat as substitute to game console (see Exhibit 9)
D. As per IBIS study, per capita disposable income reduced at a rate of 0.2& every year in last 5
years till 2013. This has overall impact on gaming consoles sales. Consoles are generally
expensive to buy (see Exhibit 3) and advent of new, improved version of consoles at each
generations, mostly the game incompatibility part made it difficult for consumers to take buy
decision
Opportunity -
A. As per IBIS study average hours/day spent on leisure and sports been on avg. 5 hrs./day and
to be continued at same momentum till 2018 (See Exhibit 14). On top of it
PriceWaterhouseCooper’s recent survey shows that 70% of respondents spend 1-7 hrs. and
some more, in their game console for non-game activities like video-on-demand/streaming
service like Netflix, Hulu etc.
Reference - http://media.ibisworld.com/2013/12/19/just-game-new-consoles-shift-video-
games-industrys-focus/
16. PAGE 15
Recent Nielsen study shows the trend is increasing and as per 2012 data it consumes approx.
23% of total console time (see Exhibit 10)
This creates new opportunity of “Digital Hub” or “Entertainment Hub” strategy
Microsoft
With it’s strong presence of Windows OS platform (and new Windows 10) across multiple
devices – PC, Laptop, Mobile, Tablet, Game console Microsoft can create strong digital network effect
around Xbox.
Partnering with popular streaming service like Netflix, Hulu, Pandora etc., providing subscription
based cloud gaming experience Microsoft can create overall “Digital Hub” experience.
Differentiation would be seamless content sharing (game/video/music) experience across devices for
consumers. For example, if user subscribed to “Halo” version from Windows store in his/her tablet, he/she
should be able to play the same in Xbox with all the game information synced/saved without paying extra.
Nintendo – Nintendo’s revenue solely rely on its game console and game titles. With the above mentioned
opportunity/threat analysis, Nintendo should also go into the “Digital Hub” of gaming experience and
celebration of togetherness (family/friends/get together etc.). Being a player in “casual gamers” segment
(primarily), Nintendo can bring more fun/social experience inside family or among friends with more viral
games like sports, party, festive season/occasion themed games
Sony
Being a leader in consumer electronics, Sony can create “Entertainment Hub” among devices like
its flagship TVs (Smart TV), Sound System, PS3 and mobile devices. It has also motion picture production
house (Sony pictures) and music entertainment division (Sony music). With these as bundled Sony can
create significant impact on entertainment hub experience with ease of diversified content streaming,
partnering with 3rd party streaming service (Netflix) and upcoming game demos.
Differentiation should be based on diversified, recreational content (games/videos streaming/music
streaming) etc. through internal service as well as other content providers.
Annexure:
Exhibit 1
Japan (launch year)
North America
(launch year)
Europe(launch
year)
Units
Sold(cumulative)
17. PAGE 16
Xbox 360 2005 2005 2005 84.7m
PlayStation 3 2006 2006 2007 85.9m
Wii 2006 2006 2006 101.52m
Ref: Wikipedia
Exhibit 2
Exhibit 3
Pricing
Xbox 360 PlayStation 3 Wii
Low-end model $279
(Xbox 360 Arcade)
n/a n/a
Mainstream model $349 $399 $249
18. PAGE 17
(Xbox 360) (PlayStation 3 40 GB)
High-end model $449
(Xbox 360 Elite)
$499
(PlayStation 3 80 GB)
n/a
Reference – http://winsupersite.com/product-review/xbox-360-vs-playstation-3-vs-wii-technical-
comparison
Exhibit 4
Rough Estimation of Revenue and Profit/Loss from total sales * avg. unit price available
Xbox 360 PlayStation 3 Wii
In USD Ag. Unit Price = $359 Ag. Unit Price = $449 $249
In million Units Sold – 84.7 Units sold – 85.9 Units Sold – 101.5
Total Revenue (Approx.)
in USD
29 billion 38.5 billion 25.27 billion
In USD (2006-07 data)
Cost to make/unit - 525$ Cost to make/unit – 840$
Cost to Make/unit –
158.3$
Total cost (usd),
assuming cost efficiency
improved by 10% on
average over the period
of time
Avg. Cost/unit – 472.95
Total Cost – 40 billion
USD
Avg. Cost/unit – 787.45
Total Cost – 67.6 billion
usd
Av. Cost/Unit – 105.75
Total Cost – 10.7 billion
Reference:
http://www.macworld.com/article/1048129/xbox360cost.html
http://venturebeat.com/2013/11/29/the-deanbeat-the-xbox-one-cost-
471-to-make-the-ps4-costs-381-and-why-this-matters-in-the-long-run/
http://www.theregister.co.uk/2006/12/18/nintendo_wii_profit_on_prod
uction/
Technical Comparison
Exhibit 5
Graphics processor
Feature Xbox 360 PlayStation 3 Wii
GPU Type ATI-based custom
processor
NVIDIA-based RSX
"Reality Synthesizer"
ATI Hollywood
processor
19. PAGE 18
Reference – http://winsupersite.com/product-review/xbox-360-vs-playstation-3-vs-wii-technical-
comparison
Exhibit 6
Storage
Feature Xbox 360 PlayStation 3 Wii
Optical drive 12X dual-layer DVD;
HD DVD drive
Blu-Ray Proprietary optical drive
Included storage Arcade: 256 MB
Memory Unit (MU)
Xbox 360: 20 GB
removable hard drive
Elite: 120 GB removable
hard drive
40 GB or 80 GB
replaceable hard drive.
512 MB of internal flash
memory
External hard drive
support
Yes, but limited to media
playback only.
Yes No
Reference – http://winsupersite.com/product-review/xbox-360-vs-playstation-3-vs-wii-technical-
comparison
Exhibit 7
Controllers
Feature Xbox 360 PlayStation 3 Wii
Number of supported
controllers
4 wireless (plus 3 wired
controllers via USB),
controllers will work
with Windows PCs as
well.
7 wireless and/or wired
controllers total. PS3
controller does not
feature a removable
battery.
4 wireless Remote
Controllers. Also
supports Nunchuk add-
on controller (attaches to
Remote Controller and
for many Wii games)
Motion sensor
functionality
No No Yes
Compatibility
Feature Xbox 360 PlayStation 3 Wii
Compatible with Over 300 original Xbox Both models offer Plays all GameCube
20. PAGE 19
previous generation
games
titles are currently
compatible.
compatibility with PS1
games. No compatibility
with PS2 games.
games
Reference – http://winsupersite.com/product-review/xbox-360-vs-playstation-3-vs-wii-technical-
comparison
Brand Value figures (Exhibit 8)
Reference - http://brandfinance.com/images/upload/gamesfull.pdf
Exhibit 9