Strategic Management Project

Term IV | PGDM 2013-15

Great Lakes Institute of Management, Chennai

Group 11 | Section 2
Keerthi Purushothaman
Rachit Bhatnagar
Sarvagya Nayak
Seerat Ghuman
Vaibhav Agnihotri

DM 15267
DM 15244
DM 15250
DM 15251
DM 15264

Table of Contents
INDUSTRY OVERVIEW..........................................................................1

Geographic Scope:.......................................................................................... 1
Industry Life Cycle:......................................................................................... 1
Consumer Market:........................................................................................... 2
INDUSTRY CHARACTERISTICS..............................................................2
Size of the industry:....................................................................................... 2
No. of Competitors:........................................................................................ 3
Market shares of the competitors:...............................................................4
Most Profitable Player:................................................................................... 5
Lowest Cost Structure:..................................................................................6
Supplier Industry Characteristics and Power:............................................6
Buyer Power:................................................................................................... 6
Product Substitutes:...................................................................................... 6
PESTEL ANALYSIS...............................................................................8
Political Factors:.............................................................................................. 8
Economic Factors:........................................................................................... 8
Social/Demographic Factors:.........................................................................9
Technological Factors:.................................................................................... 9
Legal Factors:.................................................................................................. 9
Environmental Factors:................................................................................10
PEER EVALUATION............................................................................10
Products:........................................................................................................ 10
Markets:.......................................................................................................... 11
Growth:........................................................................................................... 11
Financials:...................................................................................................... 12
COMPETITIVE ADVANTAGE.................................................................15
REFERENCES....................................................................................18

INDUSTRY OVERVIEW
From being just a curiosity in the mind in 1970s to grow into a focused mainstream
market, the video game console industry has come a long way since its modest
beginnings in 1964. Only in 2007, the industry stood at USD 9.5 billion which has reached
USD 45 billion in 2012 according to ESA.
Advancements and innovations like graphics card, sound card, 3D accelerators,
dedicated processors etc. have shaped the industry as it is seen today.
The industry had initial players like SEGA, Atari etc. but as of today it is dominated by
three major companies namely Sony with its PlayStation range, Nintendo with its Wii and
Microsoft with its Xbox range of gaming consoles.
The breakup of sales in terms of number of gaming console units sold till date (as of
2014) for these companies are
Sony PlayStation (1, 2, 3, 4, Portable, Vista) 441.23 million
Nintendo (WII, WIIU, DS, 3DS) 303.8 million
Xbox (360, One) 86.8 million
Geographic Scope:
While Microsoft is based in USA, Nintendo and Sony are based in Japan. Video Game
industry's biggest market is USA (40%) followed by Japan (12%) and others at 48%.
If we look company wise, half of Microsoft's market is based in USA. It is worth nothing
that Japan only contributes 3% to its market. For Sony, 36% of its sales are in USA, 17%
in Japan while rest are in others. Nintendo shows similar statistics to Sony having 40%
market contribution from USA, 12% from Japan and rest from others.
Industry Life Cycle:
The video game industry has been around for over 50 years now, thus it would be easy
to assume it is almost in the maturity stage of its life cycle. However, analyzing industry
growth rate with respect to GDP growth, it shows the video game industry is still in the
growth phase. PWC in 2011 stated that video game segment of the entertainment
software industry would continue to have "above average growth rate" in the coming
years.

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Consumer Market:
The video game industry is majorly segmented on the basis of age. 36% of the market is
represented by the casual gamer, someone who does plays games for fun but it is not
their primary source of entertainment. Majority of these casual gamers are in the age
group of 18 to 24.
While Nintendo is working aggressively to target the other segments, especially the nontraditional group in order to increase the industry size, Sony and Microsoft on the other
hand are looking to target the hardcore gamers, which form 11% of the market and
expecting sales to trickle down to other segments. They have been focusing on the
hardcore gamers and continuous technology improvements in PlayStation and Xbox are a
testimony to that.
Each company's marketing campaigns and advertising is also based on these target
segments. As a result, Nintendo is seen as a family-oriented console company known for
having user-friendly consoles. Sony, due to its brand name and advanced technology is
seen as the best video gaming console in terms of product quality. This also gives them
an edge among its competitors and gives them a chance to charge a premium. Microsoft,
a new entrant in this industry is seen by some as an inferior product while others rate it
on par if not above Sony products.

INDUSTRY CHARACTERISTICS
Size of the industry:
The Video Game Consoles Industry is being analyzed in this study and the scope of the
study is the global industry. Only three major system producers have been taken into
consideration for this study as together they account for 90% of the global video game
console sales. Thus, it is valid to establish that the three competitors Sony, Microsoft
and Nintendo make up the industry. This analysis only includes video game consoles
which are the hardware used to operate gaming software.
A video game console is an interactive entertainment device that produces a video
display signal such that it can be used with an output display like a television or monitor.
A video game console is different from personal computers and are designed for playing
video games. In this study, we take into consideration the Sony PlayStation, Microsoft
Xbox and Nintendo Wii as these are the latest products available.
The size of the global video game industry is estimated at $27 billion in 2014 1. The table
below further justifies our basis for taking Microsoft, Sony and Nintendo as representative
of the whole video game console industry:

1 Released by Market for Computer and Video Games

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Video Game Console Revenues

In USD Billions

$35
$30
$25
$20
$15
$10
$5
$-

2014

2013

Nintendo

Sony

2012
Microsoft

2011

2010

Total

Of the $27 billion dollar industry, the three companies together account for $25 billion of
the sales. Y-o-y growth in the industry:

Y-o-Y Growth (%)

20.0%
10.0%
0.0%
2010
-10.0%

2011

2012

2013

2014

-20.0%
Y-o-Y Growth (%)

From the graph it is clear that

there has been a lot of fluctuation in the sales growth in this industry. However, it is
interesting to note that Sony performs very close to the industry average. Nintendo has
been performing below industry average in the last five years and this is cause of
concern for the company. Microsoft has been performing above industry average since
2011 and has performed significantly well in 2014 which can be attributed to the success
of the XboxOne.

Market Performance
20.0%
0.0%
2010
-20.0%

2011
Sales
Growth

2012

2013

2014

Margin
Change

The market performance of the

industry for the last five years shows a disappointing figure. Sales growth has been an
averge of -1.2% and the margin change has been -1.8% appox. This indicates that
despite companies pushing for revenues, their costs have remained significantly high
thus keeping their margins very low.
No. of Competitors:
As mentioned earlier, Microsoft, Sony and Nintendo are the significant competitors in this
industry. However there are about four other firms that represent the remaining 10% of
global sales of video game consoles. These are, Atari, Sega, Mattel and Magnavox.
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Market shares of the competitors:

Market Shares
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%

2014

2013
Nintendo

2012
Sony

2011

2010

Microsoft

The market share data

shows an interesting trend. While Sony has managed to consistently grow its market
share except for a small dip in 2014, Microsoft and Nintendo have changed drastically.
From merely 20% in 2010, Microsoft has managed to capture close to 40% of the market
in 2014, giving strong competition to Sony. Nintendo, on the other hand, was riding high
on the success of its Wii in 2009. It had a market share of more than 40% in 2010 but it
has fallen to almost 13% in 2014 as it finds itself struggling to compete against the new
generation Xbox and PlayStation. This changing market share signifies intense
competition in the industry.

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Most Profitable Player:

The industry average profitability is given in the following graph:

Industry Profitability
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2010

2011

2012

Industry EBIT/Industry Sales

2013

2014

Industry EBTIDA/Industry Sales

The industry shows a declining trend in profitability. This has resulted from the various
platforms that are available now for gamers. There is an increasing trend in the number
of users of smartphones and tablets for gaming. This leaves the industry with hard-core
gamers as casual gamers shift to other platforms. Thus, the industry needs to focus on
innovative ways to retain and bring back its users.
Of the three, Microsoft is the most profitable player as is evident from the graph below:

Net Profit Margin

Gross Profit Margin

40.0%

100.0%

30.0%

80.0%

20.0%

60.0%

10.0%

40.0%

0.0%
2010
-10.0%

2011

2012

2013

2014

20.0%
0.0%
2010

-20.0%

2011

2012

2013

Industry Ratio

Sony

Industry Ratio

Sony

Microsoft

Nintendo

Microsoft

Nintendo

2014

Microsoft has significantly higher gross profit and net profit margins compare to the other
two. Microsoft has been successful on tapping the right features with the Xbox and its
Kinect. This has been a big success among hard-core gamers and casual gamers due to
the superiority of the features involved and the user-friendly interface that make its easyto-use. Another smart move by Microsoft that has helped it remain more profitable is that
it rightly identified the scope for online gaming and made seamless play possible.

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Lowest Cost Structure:

Nintendo Wii follows a cost leadership strategy. The system is the least expensive to
produce and then is sold for lowest price. Consequently, the system is most accessible to
people. The company has always been the cost leader, and this advantage has really
helped the Wii take off in sales. Beside this, Nintendo also innovated with new controllers
that include nun chucks, motion control, using the remote as a pointer device, a wireless
motion-control steering wheel, a wireless light gun, and a balance board. They have also
released innovative and interesting games like Wii Play, Brain Age, Wii Sports, Wii Music
and Wii Fit etc.
Supplier Industry Characteristics and Power:
The supplying industries are fragmented and highly competitive, enabling console
manufacturers to exert their power. In contrast to R&D process, manufacturing is more
standardized process. This is the reason due to which it is difficult for hardware suppliers
to lock-in console manufacturers who can alter their suppliers with low cost and relative
ease.
In certain specific cases suppliers of some important parts (like NVIDIA in case of the
graphic card or Intel in case of processor of Xbox) might have somewhat more power but
these producers have a much stronger interest in keeping a good relationship with
Microsoft cause of their much more vital dependence on Microsoft in the PC business. Inhouse production of crucial parts at Sony and Nintendo reduces interdependence and
standard; less important parts can be bought from different, competing sources which
will reduce supplier power.
Buyer Power:
With a few large console manufacturers, much fragmented distribution and many
individual end consumers, buyer power is weak. Consumers usually purchase a specific
console because of the games available for it. The uniqueness of virtual universes and
game characters coupled with the relatively high price of consoles lock in customers.
In order to have a substantial access to retail consumers, console manufacturers should
have a controlled and balanced relationship with retail channels.
Product Substitutes:
1. Ouya

The fundamental concept of Ouya is that it brings the open platform of the Android to the
television. It accomplished this feat by providing a very cheap box that has the guts of a
smartphone but dont depend on touch-screen controls. On the other hand, it comes with

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a physical controller which has analog sticks, buttons and everything else that gamers
need to run consistently in an ever-scrolling world.
The console plays the Android games, most of which are not designed for controller, so
Ouya is as well a digital-distribution platform that will also showcase original games
optimized for platform.
2. GameStick

This thumb-drive-sized HDMI device also uses Android. It has components similar to
smartphone. It also comes with a physical controller. It also has its own digitaldistribution platform.
The main difference between GameStick and Ouya is that PlayJam, the company which is
behind this tiny device, is primarily a game developer. This could mean that the
GameStick will have better software support. It is also possible that though it is less
powerful than Ouya, but still both can probably control similar software.
3. Nvidia Sheild

It looks like an Xbox controller with a TV attached into it. It portrays the companys nextgen Tegra 4 processor with a 5-inch touch screen that flips during gameplay.
Its yet another controller-focused take on Android based gaming. It has an HDMI port, so
that it can be plugged into televisions and used just like Ouya. Developers are going to
have a lot of alternatives if they are willing to make mobile games that support physical
buttons.

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But Nvidia Shield has something that Ouya and GameStick do not have: The ability to
stream games from PC directly to a portable unit.
4. Razer Edge

It is a 10-inch Windows based gaming tablet with great hardware. The basic version
starts with a Intel Core i5 1.7 GHz processor that can be increased to 2.6 GHz. It has 4 GB
RAM, 64 GB SSD, and a GeForce GT 640M graphics card with an overall size not more
than standard tablet. The Pro model upgrades the system to a Core i7, 8 GB RAM, and
128 or 256 GB SSD.
It also has a keyboard dock for the traditional gaming as well as a living-room dock with a
multitude of inputs and outputs. It can connect to TV, work with the wireless controllers,
and replace console.

PESTEL ANALYSIS
Political Factors:
Industry Regulations This plays a vital role in the growth and the success of an
industry that is primarily technology driven. The country code of regulatory law
specifies the industry regulations that impact the production and manufacturing
cycle, not only within the country but also across borders.

Government Authority As video games tend to influence people or affect their

emotions, the impact of games promoting violence can threaten the peace and
law of a country. Thus, the Government has sufficient authority with itself to
control the content that is present in the video games.

Other political factors that affect the video games console industry are the
taxation policies, social welfare policies, foreign trade regulations, restrictions etc.

Economic Factors:
Household Income An increase in the average household income has a positive
impact on the video games industry as it leads to a significant increase in the
market share. Studies have shown that for the video games console industry to
occupy a share of 15% in the overall industry of a country, 60% of the population
need to be earning an income of more than US $15,000.

Business Cycles Business cycles play an important role as the affect the
consumer buying patterns. Inflationary and recessionary pressures affect the
sales as there are changes in the buying pattern of the consumers due to the
perceived decrease and increase in their disposable incomes. However, this has a
short term impact and in the long run, there is a negligible impact on the sales as
business cycles eventually revert back to a favourable position.
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Demand Elasticity This industry has a price elastic demand, which further
combined with the availability of substitutes, makes it susceptible to changes in
the prices of the competitors that impacts the market share. Thus, it is important
to consider the factors that lead to a change in the cross price elasticity.

Social/Demographic Factors:
Age This is the main demographic factor that affects the video games console
industry. Contrary to common belief that it is teenagers who constitute the market
for this industry, there are young adults too who form a major part of the market.
Some studies have established the average age of the video gamers as 34.

Generation This is an important aspect in terms of gamers who purchase more

than one console and are up to date with the latest versions well into their
adulthood too. In recent years, a trend has been observed in the consumers who
were teenagers when the gaming culture started and they have maintained their
games status well into their 40s and 50s and are open to adapt to new products.

Gender Though the video gaming console industry is largely dominated by male
gamers, females too form a large portion, close to 40% of the total.

Factors such as income distribution, changes in the lifestyle,

consumerism, social mobility etc. also have an impact on the industry.

literacy,

Technological Factors:
Innovation/R&D This is an extremely critical factor in the gaming console
industry, as leading players such as Sony, Microsoft and Nintendo have been
investing significantly in R&D to improve the technology. Product improvements
form an important part of the product development process to ensure success.

Compatibility This is related to hardware issues that may arise due to the
compatibility with the existing hardware and the relative east and switching cost
to the use of a new set of hardware.

Software Development The attractiveness of the industry is affected by the

different licences and partnerships with software developers, which also has an
indirect effect on the sales generated. At times, the revenues that are generated
via licences and contracts depend on the success of the software publishers.

In recent times, in the form of disruptive innovation, the market of video game
console has been hit by the latest smartphones and tablets that have the option
of installing games via the app store and do not require a separate hardware
setup.

Legal Factors:
Copyright Laws Copying games or counterfeit of gaming software is strictly
prohibited in most countries. Several authorities, governments, organizations etc.
are collaborating with one another to prevent and capture the counterfeit. It is
expected that in the coming years, these laws are going to become more effective
with advancements in technology.

Other legal factors include trademarks, licensing, ownership, revenues,

intellectual property rights etc. Another factor that can be considered in this
industry is product and health safety. A practice that has become common in
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recent times is the console manufacturers end up incurring a loss on the

hardware and they tend to cover it up by over charging the gaming publishers
and developers.
Environmental Factors:
The video gaming console industry consumes a lot of plastics. Also, the long
duration that is spent on the computer or the television for playing video games
has an impact on power. Thus, the top manufacturers have started focusing on
using technology that can aid in creating games that use low power.

Another important aspect is that with the growing awareness about protecting the
environment and adopting sustainable and green practices, a lot of top players
have started creating video games targeted at children that educates them about
the importance of improving the environment through a fun and challenging
game.

PEER EVALUATION
Products:
A comparison of the latest product offerings of the three companies looks as below:
Feature

PlayStation 4

Xbox One

Wii U

Price

$399.99

$399.99

$349.99 / 299.99

RAM

8GB GDDR5

8GB DDR3

2GB DDR3

Cloud Storage

Yes

Yes

No

Play As You
Download

Yes

Yes

No

Remote Download

Yes

Yes

No

Subscription
Service

PlayStation Plus

Xbox Live

No

USB

USB 3.0 (2 ports)

USB 3.0 (3 ports)

USB 2.0 (4 ports)

External Storage

No

Yes (USB)

Yes (USB)

If we look at the products of the three competitors we observe that although Sonys
PlayStation4 and Microsofts Xbox One are similar in terms of offerings and price,
Nintendo has decided to place itself at a different price point.
Nintendo is $50-$100 cheaper as compared to its competitors (Sony and Microsoft) and
therefore some of the features that are present in the competitors offerings are missing
in its product. For instance, Nintendo has cut down on RAM and value added subscription
services (similar to Xbox live) in order to keep its product economical.

Sony PS4: Sonys (the Umbrella Brand) Net profit was 25.7 billion yen ($250m) in
the three months to 30 June. This has been up from 3.1 billion ($30m) yen a year
ago. This has largely been attributed to increasing sales of its gaming console
division (sales rose almost 96% during the period).
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Nintendo's Wii U: The Japanese Company posted a 9.9bn yen ($97m) deficit for
the April-June months as compared with an 8.6 billion yen profit during the same
period last year. Sales of Wii was 8% lower in the 2013, despite the release of the
highly popular Mario Kart game which was expected to boost sales.
Microsoft Xbox: Microsoft has reported profits of around $5.66 billion for the
third quarter of its fiscal year 2014 which ended on March 31 st. Sales of Xbox rose
by 50% over July as a result of their 'Buy a Console, Get a Game Free' promotion .
This evidently is not a bad performance considering the shrinking market of
gaming consoles. Microsofts consistent sales over the years have largely been
due to a loyal customer base which simply refuses to buy any other product in the
market.

Markets:

Nintendo

Japan

Europe

Americas

Sony

Japan

Europe

Americas

The following chart shows the

geography-wise market presence of the three dominant players in the gaming console
market.

Microsoft

Japan

Europe

Americas

By looking at the above graph it can be established that

Sonys PS and Nintendo Wii have similar distribution in terms of global market presence.
Major chunk of their sales come from Europe, which is followed by America. In addition,
Japan is also an attractive market for these brands.
On the other hand, if we look at Microsoft Xbox, it is pre-dominantly present in America
and Europe and finds minimal presence in Japanese markets (or Asian markets for that
matter).

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Sales Growth (%)

60.0%
40.0%
20.0%
0.0%
2010
-20.0%

2011

2012

2013

-40.0%
-60.0%
Nintendo

Microsoft

Sony

Growth:
Revenue growth of the three companies has been captured in the graph given below. It is
evident that Microsoft has seen the most drastic growth owing to the success of the
Xbox. Sony shows a reasonably stable growth trend except a slight decline in 2012.
Nintendo has seen a declining trend since 2010 which is not good for the company.

Worldwide Vide Game Consoles Sold (In Units)

40
35
30
25
In Millions 20
15
10
5
0

2011

Nintendo

2012
Sony

2013

2014

Microsoft

Following chart shows the worldwide sales (in million units) of gaming consoles by major players in this market. Productwise sales history from 2011 to 2014 has been covered in the chart. It is evident from the
above chart that Sonys PlayStation stands right at the top as far as world-wide sales of
gaming consoles is concerned. Sonys PlayStation recorded sales of 18.7 million units
during the last year (April 2013 to March 2014) while its nearest competitors Nintendos
Wii and Microsofts Xbox sold 16.3 million units and 11.5 million units respectively.
Moreover, if we look at the previous years data (2011 to 2013), we notice that
Nintendos Wii had been a leader in terms of sales volume. However, now with the launch
of eighth generation consoles PlayStations sales in the shrinking console market are
considerably higher than those of Wiis.

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Turnover Ratios
15.00
10.00
5.00
0.00

2010

2011

Inventory Turnover

2012

2013

Total Assets Turnover

2014

Fixed Asset Turnover

Financials:
The inventory turnover ratio is at ~8x and all three companies compare alike in this
respect. This indicates that the companies are able to turnover inventory efficiently and
sales are not very poor. Asset turnover in the industry is quite poor at ~0.75x. This
indicates that the revenue generated per dollar is low. However, the ratio is improving in
2014 which is a positive sign. The fixed asset ratio is quite high indicating the assets in
the industry are efficiently being utilised to generate sales. However, the ratio is
declining in recent year which is a negative sign for the industry.

Collection and Payment Period

150.00
100.00
50.00
0.00

2010

2011

2012

2013

2014

Operating Expense Ratio and ROI

0.40
0.30
0.20
0.10
0.00

2010

2011

2012

2013

Average Collection Period

Operating Expense Ratio

Average Payment Period

Return On Investment

2014

The operating expense ratio is quite high within the industry at ~20% which is not a good
sign. Return on investment has been declining significantly that is also an alarming trend
in the industry. Average collection period is less than 50 days which shows the industry
has significant bargaining power with its buyers. The average payment period is higher
at almost 90 days which again is indicative of a higher bargaining power with suppliers.
This is a favourable position to be in for the industry.

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Solvency Ratios
2.00
1.50
1.00
0.50
-

2010

2011

Debt-to-assets ratio

2012
Debt-to-capital ratio

2013

2014

Debt/Equity Ratio

Debt to assets ratio is quite low in the industry at ~50%. Sony has a much higher debtto-assets ratio compared to the industry average at ~75%. This indicates the company
has high leverage. Debt-to-capital ratio is very low for the industry at ~10%. Sony lies
close to the industry average in this regard at ~20%. This indicates the company is
slightly more prone to debt financing as compared to competitors in the industry.
Debt/Equity ratio for the industry is less ~1.7x. Due to the higher leverage at Sony, the
D/E ratio for Sony is much higher and stands at ~4x.

Profitability Ratios
80.0%
70.0%
60.0%
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%

2010

2011

2012

Gross Profit Margin

Net Margin

ROA

ROE

2013

2014

The industry is characterised by high gross profit margins and low net profit margins as is
typical of the Video Games Industry in general. The cost of sales and operating costs
tend to be lower than the heavy marketing, selling and distribution expenses. However
the margins show a declining trend which is alarming. Return on Assets is quite high but
ROA too shows a declining trend. This ratio indicates that the assets are being managed
efficiently within the industry. Return on Equity on the other hand is not very high and
lies around ~10%. ROE indicates the profit generated with shareholders money. A low
ratio shows that value created for shareholders is unsatisfactory.

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Liquidity Ratios
4.00
3.50
3.00
2.50
2.00
1.50
1.00
0.50
-

2010

2011
Working Capital Ratio

2012
Quick Ratio

2013

2014

Cash Reserve Ratio

The working capital ratio for the industry is quite high and is above 2 which indicates that
there is a lot of excess asset in the industry. The quick ratio for the industry is also quite
high ~3x which indicates that there is high liquidity within the industry and the ability to
meet short-term obligations is strong. A satisfactorily high cash reserve ratio also
reinforces the liquidity within the industry and ability to meet short-term obligations.

Export Intensity
80%
70%
60%
50%
40%
30%
20%
10%
0%

2010

2011
R&D Intensity

2012

2013

Export Intensity

2014

40.00
35.00
30.00
25.00
20.00
15.00
10.00
5.00
-

RORC

The percentage of revenues spent on R&D is approx. 10% within the Industry and
Microsoft invests the highest at 13%. There is an absolute need for these companies in
the industry to invest in R&D as consumers are constantly seeking newer technologies
and rapid updates and advancements. The Return on Research Costs shows a declining
trend towards the current year which is alarming. The percentage of exports is also very
high in this industry at almost 65%. This is because two of the giants, Sony and Nintendo
export a large share of their output to Europe and US as discussed earlier. Even Microsoft
earns a significant chunk of its revenues from exports to European and Asian countries.

COMPETITIVE ADVANTAGE
When the launch of the seventh generation gaming console (PS3) was not able to revive
growth of Sony PlayStation and the company suffered heavy losses it seemed that it was
game over for Sony in the gaming industry. Nintendo Wiis surprise success had
overshadowed the more powerful but costlier PS3. However, with the launch of the
eighth-generation consoles the picture has completely reversed. Some of the key
strategies adopted by Sony to gain competitive advantage are listed below:
Resolving the Price Predicament
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PS3 ($499-$599) was significantly more expensive than its predecessors and other
seventh-generation consoles. Xbox 360 was priced at $299-$399 while Nintendos Wii got
sold at $249. Despite its impressive specs, the PS3 was widely viewed as a bit too
expensive.
Surprisingly, despite its high price Sony sold PS3 at a loss at its launch. This was due to
the inclusion of a Blue-ray disc player (Sonys new technology competing against
Toshibas HD-DVD format). The strategy here was to introduce a technologically
advanced disc player into consumers homes and leverage that market penetration to
drive content sales once the player becomes a standard in the industry.
The inclusion of Blue-ray DVD player did allow for better, faster games but what Sony
missed was that gamers cared more for Quality/variety of games and Sonys line-up of
games at the time of launch was poor (many game developers considered PS3 as a
difficult system to develop for). This coupled with the high price of the console was the
primary reason of its dismal sales.
With PS4 (eighth generation console) Sony is trying to atone for its mistakes. PS4 not
only has a better line-up of games (Sony roped in some well-known game
developers) but its price is also $100 less than the new Xbox One. With
competitive pricing Sony PS4 has been able to garner higher sales as compared to its
predecessor.
Targeting and Positioning
When Sony launched PS3 the message was quite clear. With the inclusion of Blue-ray disc
player the company wanted to increase its target market. Sony marketed it as the
ultimate home entertainment device. While the strategy was to appeal to a larger
segment, the smaller gamer segment was not targeted appropriately. According to
many marketing experts its precisely due to this confused messaging that Sonys PS3
received a lukewarm response from hardcore gamers.
But interestingly, Microsoft has positioned its Xbox one on a similar premise as used by
Sony with PS3. One major difference that separates the two competitors in eighth
generation gaming console market is that Microsoft wants the Xbox to be an all-inone entertainment system while Sony is sticking to making games the main
feature of the console (Source: The Washington Post).
However, if we look at the current market performance figures (especially sales volume)
it becomes quite evident that Sonys focused targeting has been much more effective
than Microsofts attempt to increase its target base.
Fighting the external threat
Despite the fierce competition within the gaming console industry, major threat remains
external. The industry faces challenges from the upsurge in mobile and tablet games, not
to mention cloud-based gaming. Both cloud based gaming and tablet/smartphone based
gaming are substituting gaming consoles in the industry. Nintendos Wii, given its focus
on more casual gamers, is believed to be the most vulnerable as a result of this shift.
Cloud based gaming is the biggest threat to the casual gaming console market as it
allows consumers to stream and play relatively complex games over simpler, cheaper
devices.

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Historically, all the players in the gaming console business have been very reluctant to
embrace cloud gaming. This is due to the fact that the wide-spread adoption of cloud
based gaming could lower the barriers to entry in the gaming industry and subsequently
crush the profit margins that the incumbents currently enjoy.
However, Sony has felt the need to move towards cloud right now rather than chasing
competitors later. As a result, Sony has launched PlayStation Now, which is a cloud-based
gaming service and will allow gamers to play PS3 titles (seventh generation games) by
streaming them over the internet.
This move is wise considering the fact that it not only allows gamers to play old
titles but also acts as a gateway into various other avenues in the
entertainment industry. With the entertainment industry poised to converge
into an all-in-one entertainment-hub, Sony has most definitely got a head start
over its competitors.
By looking at the current market performance it will be safe to assume that Sonys
strategy has translated into results. The market share that the brand is currently enjoying
proves that.

In addition, recent strategic moves have catapulted Sony way ahead of its competition in
terms of Sales Volume. In early 2014, it surpassed Nintendos Wii which used to be a
leader in terms of sales volume.

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Since PS4 offers additional benefits such as game rentals, used game playback and
offline play all at a competitive price point as opposed to Xbox or Nintendo, it has
established a comfortable market leader place for itself. Moreover, it also provides value
added services through PlayStation Now which allows for cloud-based gameplay. With
the world rapidly moving towards cloud-based services this certainly gives a sustainable
competitive advantage to Sony.
Now if we look at the two closest competitors of Sony PlayStation, the threat seems to be
minimal. Nintendos perfectionist approach to software, which has been its biggest
strength for long, is now its biggest foe as it limits its release schedule and angers
console buyers. Also, it faces both external and internal competition. The brand is
hemmed in by tablets and smartphones on one side and by more powerful consoles on
the other. Nintendo will now have to conjure nothing less than a miracle in order to
reclaim its past glory.
Microsoft does come close with cutting-edge technologies like Kinects (it comes built in
with Xbox One and creates $100 difference). Kinects provides Controller-free
Gaming and advocates increased physical activity while playing, as opposed to
sitting-on-the-couch-all-day-long kind of game play. But considering the shrinking
market of gaming consoles, its efforts may prove futile once there is a tectonic shift to
cloud based gaming as is widely expected. Also, voice and motion control is not what
hardcore gamers look for in their consoles. Therefore, this new technology that
Xbox One is offering may be a novelty but PS4 is doing a better job by focusing
on games (which consumers actually want).
Therefore, Sony does have a sustainable competitive advantage over its competitors in
terms of:
a) Exciting and exclusive games - By providing a better system for game
development and luring in some great developers Sony is able to provide more
variety/quality in its gaming spectrum.
b) Services offered Value added services like PlayStation Now not only provide
gamers with a wider array of options but also keeps gateways open for
diversification. This makes its market position more robust as compared to the
competitors.
By looking at various ways in which PS4 differentiates itself from its competition (as
discussed above), it is safe to assume that Sony PS4 will be able to sustain its
competitive advantage in the long run.

REFERENCES
All charts used in the document are taken from data provided in the attached excel
sheet. The excel sheet has been populated using data from annual reports of the
respective companies.

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Windows Phone, and enterprise sales | ExtremeTech.
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Davidson, J., Davidson, J., Frederiksen, E., Duwell, R., Davidson, J. and Duwell, R.
(2013). PC Gaming Dead? Hardware Market Size Doubles Console Gaming.

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Management, Chennai

(http://www.technobuffalo.com/2014/07/17/pc-gaming-dead-hardware-market-size-doublesconsole-gaming/)

Financial Times, (2014). Sony outplays Nintendo in game console sales - FT.com.
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siteedition=intl#axzz3FITXOgQ6)

Microsoft.com, (2014). Financial Review.

(http://www.microsoft.com/investor/reports/ar12/financial-review/index.html)

Nintendo.co.jp, (2014). IR Information: Annual Report.

(http://www.nintendo.co.jp/ir/en/library/annual/index.html)

Roughlydrafted.com, (2013). Nintendo Wii vs Sony PlayStation 3 vs Microsoft Xbox

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Siegal, J. (2013). Would Nintendo's death drag the entire gaming industry down with
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(http://bgr.com/2014/02/10/nintendo-analysis-video-game-industry-3038923/)

Sony.net, (2014). Sony Global - Financial Highlights.

(http://www.sony.net/SonyInfo/IR/financial/fr/highlight.html)

White, M. (2014). Game Over? Why Video-Game-Console Sales Are Plummeting |

TIME.com. (http://business.time.com/2013/02/11/game-over-why-video-game-console-salesare-plummeting/)

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