Rivalry in Video Game Industry


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Rivalry in Video Game Industry

Introduction

The video games industry faces an entirely new rivalry situation. After 11 years of leadership, Sony has nearly lost its strong positions on the market, which gives the other two players – Microsoft and Nintendo - the chance to compete for the leadership. While the goal of Nintendo is to stay in the industry, Sony and Microsoft aim to strengthen their positions on the home entertainment market, which is constantly growing. The key factors, the companies need to consider in order to gain a competitive advantage, are good marketing and well developed distribution, as well as providing a huge range of games with recognizable characters. As the market segmentation increases, it is of crucial importance to put an emphasis upon the new target groups and reqruit as many new players as possible. However, there are also a lot of factors outside and inside the industry, which play a major role and have to be considered in order to become a better idea of the state of the industry, and to estimate its profitability and tendency of growing.

Summary of macro-environmental analysis

Stricter legislation both advantageous and disadvantageous for the video games industry is expected. As governments become more concerned about the increasing violence among teenagers the control of video games content is strengthened. On the other hand the laws against piracy aim to reduce the number of the illegaly copied games.

With the rise of the prices of everyday goods, petrol, etc., while salaries don’t go up as fast, the disposal income declines and for many entertainment becomes a luxury good. People are not willing to spend as much on it as they used to. However, as the average age of the video games players goes up, there are more players with own incomes, who are able to buy more games.

The industry is expexted to grow due to the fact that, as surveys of the NPD Group show, kids spend more time playing and the hardcore gamers spend an avegare of 45 hours per week playing video games. On the other hand the growth prospecst are dampened by the increasing concerns of the parents about their children being too inactive and spending more time playing video games than playing sports or taking part in other activities. However, there is also a tendency of video games being increasingly regarded as an entertainment for the whole family.

The future growth of the industry is theratened by the declining birthrates.

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Teenagers are the main consumer and less teenagers in the future means less games sold. This effect is compensated by the fact that the avarage age of the video games players goes up. Video games reach a broader audience and more adults and even elderly people start playing.

The technological progress is beneficial for the growth of the industry as the the producers are able to constantly improve the quality of the games and include new features and functions to the consoles. However, this causes higher costs and also the time needed to develop a new game grows.

The growing awareness of environmental issues has also an impact on the video games industry. The implementation of eco-friendly technologies and the constant growth of energy prices cause an increase in the cost for manufacturing of the consoles and the DVDs.

Overall, the video games industry is expected to grow faster than average industry growth rates, particlularly due to the socio-cultural trends and the constant technological progress.

Summary of industry analysis

Due to a range of factors, which make it difficult for a new company to take part in the video games industry, the threat of new entrants is low. First of all, the industry is characterized by huge ecomonies of scale, as the producers need to sell great numbers of games in order to make a profit. Second, the capital requirements are very high because of the increasing costs of games development and consoles manufacturing. It is also costly for the customers to switch to a new producer, because this would mean they have to buy a new console.

Suppliers pose a medium level of threat. The main reason is the crucial importance, which their input has for the final product. Also the costs for the input are high relatively to the total purchase. However, the concentration of the suppliers is relative low as they are many video games publisher but just three producers of consoles. Threat of forward integration exists as well, due to the fact that some of the big publishers of video games have the ressources to try to enter the industry.

Although there are some substitues for video games and the differentiation is fairly low, buyers don’t have a lot of bargaining power. Their concentration relative to the industry is low and they have to face high costs if they want to switch to one of the substitutes (buy a computer for example). To have the newest console or play the latest games is considered to be a sign of “coolness” at school, so strong incentives for buying exist.

The power of substitutes is considered to be low to medium. The biggest threat comes from computer games. Due to the fact that almost every family possesses at least one computer, computer games are a cheaper alternative to video games as one doesn’t have to buy the console. However, the lack of multiplayer function impairs their perfomance, especially when video games are regarded as a family or group activity. The switching costs are high as well and the buyer propensity to switch is fairly low, particularly for buyers, who are addicted to playing video games.

The video games industry is charaterized by medium rivalry, which is getting more intense lately. The industry grows slowly as they are three establishes players, that compete among each other and every one of them try to outsell the others and become the market leader. The rivalry is enchanced by the low level of product differentiation and the high fix costs of the manufacturing of the consoles. However, the rivalry is reduced by two major factors: the switching costs for the buyers are high and there is a lack of understanding of the technological differencies of the consoles, because of their complexity.

As a result of the stage of these five forces in video games industry, the industry is considered to show a relatively high level of profitability.

Interconnections and interrelationships between the two analyses

There are several interconnections between the macro-environmental analyse and the industry analyse that can be found. Mostly the macro-environmental trends have an impact on the forces, which determine the profitability of the industry. Sticter regulation of the video games content limits the scope of games a new company can present to the market while trying to enter the industry and make this more difficult for them. The increasing licensing fees for the exclusive rights to intellectual property of media companies or sport organisations are addtitional obstracles for entering the industry as they enhance the capital requirements.

Economical factors such as decreasing disposalble income have also an impact. People start searching for cheaper substitutes so the power of substitutes for video games grows. The bargaining power of buyer becomes higher as well, as buyers condition their purchases on the price-performance ratio of the product.

As the number of video games players goes up, the demand for a larger library of games rises. This leads to an increase in the power of suppliers due to the fact that the producers need them to develop more new games and develop them faster.

With the rapid advance of new technologies it is to be expexted that new substitutes for video games will be introduced to the market for enertainment in the near future. Thus, the power of substitutes will rise, as well as the bargaining power of buyers.

The growing rivalry in the video games industry prompts the companies to improve their products, sell them cheaper and expand their target group. As a result video games become amore attractive kind of entertainment for a broader audience.

Recommendations

With the competition in the video games industry getting more intense, the next steps of the players become of crucial importance for their positioning on the market. Due to the low product differentiation, the next market leader will be the platform provider that manages to offer much more different gaming experience. Furthermore 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. Important issue regarding the extra features is the fact that many of the users are not aware of them, so more information and communication with the customers is required.

The companies have to learn by the mistakes of the past and try to avoid making them again. 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. Another factor that needs to be considered is a better control of the games and their distribution, as well as perfectly realised marketing campaigns.

As the video games audience becomes broader, the companies should make an effort to reqruit new players from the new target groups: females and older people, by creating a greater range of games, directed towards the interests of these players, and more intensive advertising. The new image of the video games as family entertainment has to be extended as well.

The possible entrance in the industry of some of the big games publisher creates opportunities for establishing of alliances. An alliance between one of the platform providers and a major publisher will give them a very strong position on the market and a sustainable competitive advantage. Thus, they will have the best chances to become the new leader of the industry.


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