Competition in Video Game Consoles: the

State of the Battle for Supremacy

Competition in Video Game Consoles: the State of the Battle for Supremacy

*CASE STUDY 11*

Competition in Video Game Consoles: The State of the Battle for Supremacy

AUTHORS:

Christian Kostadinov 29114042

Ivaylo Baldev 29114047

Sofia 2010

Competition in Video Game Consoles: The State of the Battle for Supremacy

Objectives in front of the case study

The main objective that stands in front of our project is to clarify the present
situation on the market of video console games. To present the strategies of the
three main rival firms-Sony, Nintendo and Microsoft, to see their advantages and
disadvantages, to see what their mission statement is, to see who are their
customers and in which market segments the companies are trying to penetrate
or have already penetrated. At the end we are going to try to predict the future
development of the battle. We are also going to compare them in the above
mentioned spheres, with the help of a competitor analysis. Conclusions are going
to be derived after every paragraph. In order to do that we are going to use
different methods including- SWOT analyses, PEST analyses etc. There were two
different variants how to structure the text- first to include the PEST and SWOT
analysis in the text for every firm or second variant to add it after the analysis.
The second way was chosen because we decided that using this method it will be
easier to compare the firms. Additionally we are going to present the information
in the most understandable way by a PowerPoint Presentation.

Content:
1. Introduction page 2

1.2 Profile of the gamer page 2

2. Microsoft page 3

3. Nintendo page 4

4. Sony page 6

5. Competitors analysis page 8

6. PEST analyses page 9

7. SWOT analyses page 10

-Microsoft page 11

-Sony page 12

-Nintendo page 13

8. Sources page 14

1. Introduction

In the last years there are three competitors in the sphere of Game console
producers. Nintendo, Microsoft and Sony are all trying to dominate on the
market of game consoles by developing new products, but at the same time
looking for different kind of customers and while some of them are relying on
innovation others are trying to repeat the success from the past by keeping the
same strategy. In the beginning of video game industry games were much
simpler and the technological limitations allow neither the producers of consoles
nor the game producers to develop so big variety of so realistic games as today.
Nowadays users can play lifelike games; they can also play with friends through
the Internet. Internet became inevitable part of the last generation of video
consoles. All companies develop their sites which customers can enter through
their devices and where they can read news, see the weather forecast, download
games, music, pictures, videos etc. They can also rent all of the mentioned. Both
buying and renting products that way make it easier for consumers to get new
products which in return increase the profitability of the firms. Another new
trend among console producers is that all of them cannot produce alone all the
components needed for the newest console generation. This is why all of them
allied with the same producer of microprocessors- IBM. The three firms also
used the same technology to display HD quality and graphics and 3D effects.
Although even now the technologies used in the last consoles are quite
impressive all analyses agree that the consoles of the future will be even more
realistic and better looking. This development of the market for video games is
the result of the increase in the number of gamers in all age groups and the
increased time spend in gaming. After the release of the third generation of
consoles (which took place between Nov.2005 and Nov.2006) till July 2008 the
number of the sold units reached 64.6 million. The increase in the sales is due to
the fact that a lot of customers postponed the buying of consoles because in the
years 2004-2005 they were waiting for the new generation of games.

When we speak about the video game market, we also have to mention that it can
basically be divided in two parts- consoles and handheld devices. While all of
the rivals are taking part in the first part, the market for handheld devices is
divided between Sony and Nintendo. This feature is going to be taken in
consideration when speaking about Sony’s and Nintendo’s strategies and
markets.

2.2 Profile of the gamer

To understand the market behavior of the three firms, first we have to see who
the average player of video games is:

He is 33 years old. He is a man. He is playing 6.8 hours per week. He is playing

online 44% of the time( 130% more than he used to in 2000). If he has children
he plays with them on the video game because he is asked to 4/5 of the time or
simply because it is fun for the whole family ¾ of the time. In 2005 he was
playing 30% of the time action games 17% sport games and 11% racing games.

But as it seems this typical player is undergoing a constant change. For example
he is getting older because, (teens who used to play video games continue to do it
after they grow older). The second reason is that all video game manufacturers
are trying constantly to increase the range of gamers in order to increase their
sales and market share. The best way to do it is to try to make games more
desirable for girls, women, man in the age group above 40 etc.

2. Microsoft
Microsoft is the last company that entered the market of video games. Its product
that participates in the present video consoles battle is Xbox360. Microsoft did
not have representative in the handheld video games market. When we speak
about Microsoft as a whole their mission statement is: At Microsoft, our mission
and values are to help people and businesses throughout the world realize their
potential. When we speak about the nature, and the mission statement of the
XBOX 360, we have to mention that Microsoft has three goals in front of Xbox
360. The first goal is to gain a significant share of the quickly developing video
gaming market. Microsoft's core PC software businesses have slowed, so
penetrating a new, sizable market is very attractive to the company. Second, the
company wants to diversify beyond PCs by attracting consumer home
entertainment spending. Third, the company's reputation has suffered
considerably over the last few years as a result of the litigation surrounding its
Windows monopoly. The company hopes Xbox360 will change the feeling in a lot
of people that it is not innovative and will change the public's view of the
company. At the same time important advantage of the firm over its rivals was
the early release of their Xbox360. It was on the market one year earlier than the
others so it participated in the 2005 Christmas shopping period without real
competitor from the same generation. Microsoft was able to gain economies of
scale in the production of game consoles. So the operating profit in 2008 (for the
first time in their video console history) was positive- 426 millions. Another
advantage for Xbox 360 was the fact that even before the release of Wii and PS3,
there were 5 million Xbox 360 sold. So third-party game developers found it
more rational to develop games for Microsoft. With its early release Microsoft
puts a pressure on the other companies to release their products sooner than
they have planned to do. It created a lot of additional problems especially in front
Sony. As advantage we can distinguish the fact that Xbox Live gain big popularity
before the Nintendo and Sony were able to retaliate. The first-mover advantage
also was important precondition for the success of Xbox360.

Microsoft sets a lot of objectives in front of its product from last generation. The
company is trying to attract the average hard-core player (who is defined in
point 1.2 on the previous page). by offering the most powerful console for
gaming. However, the company is also following Nintendo's strategy of
broadening the appeal of consoles to unusual demographics. Specifically,
Microsoft is targeting women who live with male gamers by incorporating
multimedia features. It can play DVDs and CDs; it can also play media stored on
its own hard disk, the hard disk of another computer accessible over a network.

We can assume that the unusual decision Microsoft has taken is to sell two
versions of Xbox 360 at the time of initial release is one of its most specific
strategic moves. The $300 Core System is more traditional console with wired
controllers and no hard drive, making it unable to play original Xbox games. A
better $400 version includes a wireless controller, a headset, a remote control,
and connection cables. The Core System has the same price as the original Xbox
at the time of its first release, while the $400 version hits a new price record for
gaming consoles. Important fact that will affect how long Microsoft will keep this
high price is the price of SonyPlaystation3. Typically over the lifespan of a
console, significant price drops eventually occur as the technology ages and the
manufacturers try to attract more casual users. Though both packages provide
everything you need to begin playing right out of the box, but the Premium Pack
is geared towards a more serious gamer, including cables to connect to a HD
display and the hard drive to play older games as well as to store pictures, video,
and music. New feature was the option to download television programs and
motion pictures. In this way a completely new feature was added to the present
video games capabilities as well as a new source of revenues. To strengthen its
position Microsoft invested enormous sum of money in advertising- alone as
well as together with retail partners. Looking for a game with a huge appeal
among children the company invested in creating a television show based on
Viva Pinata character. It even created an electronic action figure which is able
to interact with Xbox Live and to download or upload “special powers”.

In future more important factors that probably will affect the firm are the
growth in interest in video gaming and in home theater-multimedia. This
interest in the acquisition of gaming consoles that can also act as multimedia will
give a new trend in the development of console games. Concerns about violence
and sexual content in games is creating the threat of regulations. The continued
advances in technology and decreases in hardware costs make it possible for
each generation of console to provide an even better experience. However, the
rapid development brings the possibility to make a mistake when planning the
next generation of consoles, resulting in disastrous loss of market share. The
increase in consumer demand and the need to manage technological change are
both extremely important influences. It is unclear whether or not regulation will
play an important role. To sum up with sales of over 20 million as of July 2008
and with a huge range of games for their console Microsoft looks stable and
reliable developer that can easily increase if not its market share at least the
number of its customers.

3. Nintendo

Nintendo proved to be the most innovative of the three manufacturers.

Beginning as playing card manufacturer back in the year 1889 the company
completely changed its industry. Actually Nintendo is probably the firm with the
biggest historical achievement among the three video game producers. During
the 80s of the last century the game industry was in a decline, the future did not
look optimistic- but exactly then Nintendo saved the industry with its Nintendo
Entertainment System (NES). Nintendo often design the games is such way that
they are played because of their easiness and innovation rather than their
technological superiority. Wii has never pretended to be so technologically
developed as Xbox360 or PS3. Nintendo’s main goal has always been to sell its
products to “new types of gamers” which were not traditionally interested in
video games.

Nintendo’s mission statement is: “At Nintendo we are proud to be working for the
leading company in our industry. We are strongly committed to producing and
marketing the best products and support services available. We believe it is
essential not only to provide products of the highest quality, but to treat every
customer with attention, consideration and respect. By listening closely to our
customers, we constantly improve our products and services”. This describes the
values, services and the company's Mission for the future. To analyze the
statement we have to decide what the core of its vision is. They want to produce
the best products- all companies want exactly that but in Nintendo important
also is to treat every customer in the best possible way. Nintendo statement
leads us to the conclusion that in the company prior goal is to manufacture a
product which is best suitable exactly for that customer, not only for the hard-
core gamer but also for a woman or the an old first time playing gamer. They
listen to their customers and develop the products in that way to be more
adapted for their lifestyle.

During the present battle in Game industry Nintendo is taking a good advance in
front of its competitors due to different reasons. As an advantage we can add the
fact that the company is concentrated only in the video game industry- it does
not have production in other industries so it cannot afford itself to accumulate
losses because nobody is going to cover them. The only way to achieve this is to
be really flexible. You have to be to searching for innovations and trying to
expand the potential market for your product all the time. While Sony and
Microsoft are giving huge amounts of money for more and more graphically
realistic, lifelike games, Nintendo is investing in search of new outlook. Their
Wii’s hardware technology is at the same level as the original Xbox which was
released in 2001 but with the wand on their side the battle does not look lost. In
fact Nintendo registered the biggest net income in the year 2008- $2,573 million.
The objective in front of Nintendo is to add new traditionally not interested in
the video game types of consumers. The next sentence describes in the best
way the ideology of Nintendo. New intuitive controller options will result in
innovative game play that will bring new gamers into the fold. Objective is also to
differentiate their Wii from the other hard-core competitive consoles. Nintendo
can derive a huge benefit if it could succeed in presenting Wii not as a similar
product to PS3 and Xbox360 but as a product from a different kind. In that way
customers of the other company may buy Wii as a second console in order to
play the new games which Wii’s wand allow them to, and which are not playable
with the other products.

As we have already mentioned the Strategy which Nintendo adopt is to invent

new things in gaming. Nintendo pursued a different strategic approach than that
used by Sony and Microsoft. The company is trying to earn profit from the sale
of game console rather than from the sale of game software. It is a reasonable
decision, because the target customer of the company is not so hard-core and in a
recently held research it was discovered that Nintendo’s customers are buying 1
game less every year than SP3 and Xbox360. Taking a closer look at the company
behavior we can agree that it does really feel interest in people’s attitude toward
even the smallest details. In developing Wii the product development team takes
in consideration the fact that most moms do not love wires all around the room,
as well as do not want tens of different consoles on the floor. So Wii is wireless
device. The other huge advantage of Wii ahead of Xbox and PS3 is the fact that
on Wii you can play all games available for the previous products of the
company plus games originally made for other consoles including Sega.

Not only gamers can play all the old games but they can experience completely
new types of video games due to the revolutionary new type of game controller-
the wand. Third-party game developers can develop a completely new range of
games in which you can play-golf, guitar, baseball etc. in the most realistic way
ever achieved. Additionally the cost for developing the Wii games is much
cheaper, the number of Wii devices sold is bigger than PS3 and Xbox360 and the
most rational decision in front of developers is to produce games for Nintendo.
Wii also can be connected to the Internet and with the help of the site Wii
Connect24 gamers can not only read, learn all the news but can also download
games, pictures, videos and so on. The “Mii” personalized interface is another
interesting feature which allow all members of the family to have their own
profile which is designed just the way the want it to be.

Nintendo also offers a product in the handheld video console industry.

Nintendo DS is the newest generation released in 2004. This segment of video
games market is in a stagnation period with decrease in the size of money spent
by consumers. This is due mostly to the development of mobile phone industry.
Nowadays more and more phones can be used for playing games which are
getting more complicated and realistic. However Nintendo DS has its advantages
and a lot of people still prefer it as a handheld console. The price is one of the
pluses. It costs $130 in comparison to $170 for Sony PSP. Nintendo concentrated
its efforts on the girls by releasing games which are definitely going to be played
only by girls. There is also a special design for DS which is for the girls. During
the “game boy era” very good move was the constant change of the outlook of the
product. This change made the impression in children (which were Nintendo’s
primary target group) that Game boy is a fashion accessory and they bought
more than one. This good idea from the past may be will be part of Nintendo
future strategy.

Nintendo’s main goal is to prove to the customers that it is a product of a

different niche than Microsoft and Sony. If we have to describe the company
with two words it is going to be innovation and differentiation.

4. Sony

Sony is the third manufacturer of video console games that we are going to
review in our case study. The products which it offers are PlayStation3 and
PlayStation Portable. Thought Sony was the main producer in this sphere with
its previous generations of PS2 and PS nowadays the company is relatively
falling behind due to the not so successful third generation PlayStation.
During PS2 was produced the market share of the company reached 70% of the
video game market with sales of over 120 million.

Main drawback for PS3 was the fact that Xbox360 was released one year earlier
than Sony’s product. That forced the company to be in a hurry not to miss a
second Christmas holiday period in 2006. Sony had to give the best it has to
release PS3 as fast as possible. Production problems followed the company but at
the end everything was fine. As advantage for Sony we can consider the fact that
a lot of people have chosen PS2 so as a habit it makes sense that satisfied users
will prefer the next generation rather than choosing something new. At the same
time customers who have just bought the PS2 before the release of PS3 were not
going to change it so soon. The period before the release of PS3 offered Sony the
same problem as for Nintendo and Microsoft. People didn’t buy so much because
they were waiting for the next generation. It leaded to decrease in sales of
hardware as well as for software. There were not new games released with a few
exceptions. Disadvantage of the games for PS3 was the high production cost of
the games developed by third-party companies. Due to the relatively low
number of PS3 sold, game developers preferred not to produce the games until
more consoles are sold which at the same time decreased the number of games
sold because people were offered too few games. In addition some of the hits
from PS and PS2 did not go with the new one. Even if they do the graphic was the
same as before. Another unexpected drawback for Sony was the extremely high
capabilities of the consol. They offered hard-core gamers with enormous
possibilities to enjoy their favorite games, but at the same time required gamers
first to buy an HDTV to enjoy the full capacity of the game. At the same time as
we have already mentioned it made the cost for game developers even higher,
because it is expensive to produce a game that could fully make use of the
console’s capabilities.

The objective of Sony PlayStation is "To experience the joy of advancing and
applying technology for the benefit of the public.” Its main target group has
always been a little older user than Nintendo who can play a little more
complicated games. While Nintendo is concentrated on the little children, Sony
prefers teens as well as young adults. This kind of customers is capable to
operate harder for use devices.

Due to the success of PS2 Sony expected to repeat it by simply copying the
previous strategy. PS3 also expected success because of the Bly-ray HD optical
driver and Internet connectivity. All this advantages made PS3 too expensive
compared with the Xbox and especially with Wii. According to Sony’s experts this
was not going to be so decisive because the included technologies actual price
was much higher than the PS3 retail price and the gamers were expected to
realize that and prefer PS3. Another strategic decision of Sony was the fact that it
offered two different types of PS3 on a different price with different hard drive
disk. Sony also created online site where people can watch T programs, picture,
read news, play trailers and so on, but according to a lot of experts the
capabilities of the site are less than with Nintendo and Xbox.

Sony also decided to enter the handheld system marker by releasing

PlayStation Portable. By now only Nintendo offered products on this market.
Again Sony chooses to produce more expensive and graphically better products
for more hard-core orientated gamers. The LCD screen allows gamers to play 3D
games, to watch TV programs, to connect to Internet. But the price of their
product was much higher than Nintendo DS.
As a result the operating profit of Sony for 2007 and 2008 was negative. From
this said above we can say that Sony’s main target is to produce more
expensive but better technologically products.

5. Competitors analysis

Key factors | Significance of factors | Microsoft | Nintendo | Sony |

| | Mark | Result | Mark | Result | Mark | result |

Popularity of previous products | 0,1 | 1 | 0,1 | 3 | 0,3 | 5 | 0,5 |

Number of sold consoles (newest generation) | 0,05 | 3 | 0,15 | 5 | 0,25 | 3 | 0,15 |

Available games | 0,15 | 4 | 0,6 | 5 | 0,75 | 3 | 0,45 |

Price of the console | 0,25 | 3,5 | 0,875 | 5 | 1,25 | 2 | 0,5 |

Game prices | 0,1 | 4 | 0,4 | 5 | 0,4 | 3,5 | 0,35 |

Advertising | 0,2 | 3 | 0,6 | 4 | 0,8 | 5 | 1 |

Technical features | 0,15 | 5 | 0,75 | 3 | 0,45 | 4 | 0,6 |

| ∑=1 | | ∑=3,475 | | ∑=4,2 | | ∑=3,55 |

Scale 1-5 (1-low; 5-high)

Note: The key factor advertising is the most subjective. For giving final mark we
made a small research in the internet and made a small inquiry among our
friends.

6. PEST Analyses

Political Economical Social Technological Analysis

7.

Situation being analyzed:

Competition in the Game Consoles Market

Political
No political restrictions in developing and producing Game consoles, developing
games and software should be conformed with the age regulations concerning
violence and inappropriate content. Meeting demand throughout holiday periods
and the market pressure should be taken in concern.

Economical

In economical aspect the producers should take in consideration whether they

are aiming at power players which are willing to pay more in order to get the
fastest most advanced console or at casual gamers which are satisfied with a
relatively good one. This is important for forming the price. The better the
console, higher the price, which may end up in a serious price tag and not that
serious sales. Taxation is not a serious concern for this kind of products.
Seasonality on the other hand should be taken in consideration since during the
holiday periods, the demand for consoles as a "must have" gift might overwhelm
the supply resulting in losses for the company |

Social

The social aspect in this particular market is of great importance. Perfect

technological qualities and consoles capabilities along with innovativeness are
not enough. Catching the people interests and needs is of great importance.
Consumer research should be done constantly in order to understand how to
appeal to all ages, lifestyles, ethnical and demographic groups of people. Image
and company brand are everything. Having the most appealing characters might
make up for what you lack in technology. Consumer buying patterns should be
exploited as much as possible. Making a console a fashion accessory might prove
to increase sales. Advertising and proper marketing are essential in order to keep
up in this kind of competition. |

Technological

In the game consoles market technology is the aspect where you might kill your
competition or fail catastrophically. The core level of the race for supremacy is
right here. The amount of revenues invested in research and development should
be carefully calculated. Having a sister division that can make up for your initial
losses might prove to be really successful since if you can live through this losses
you might end up having huge profits once you take over the market with your
innovativeness and advanced technology. Developing a great character and
having the intellectual property over it, making it your trademark would give a
huge lead to the producer. It should be well thought of in order to have potential
to be used and constantly upgraded in the future. Having a superb gamer hero
especially for your console might persuade people to buy it just for that. |

8. SWOT Analyses

Strengths Weaknesses Opportunities Threats Analysis

Competition in Game consoles market: Microsoft, Nintendo, Sony

Microsoft

Strengths * Spending 15% of revenues on research * Most important software

company * Xbox - the most advanced console until 2005 * Launched the Xbox
360 in 2005, ahead of competition. Gained a lot of influence. Game developers
have little choice but to produce for them. * Xbox 360 - really powerful processor,
amazing graphics Wi-Fi, competitive price compatible with previous versions *
Xbox Live - Microsoft had time to develop it, a large variety of services offered to
customers, IPTV, downloadable television programs. * Xbox 360 - entertainment
amplifier for the living room. * Huge amount of money and capital owned, able to
invest a lot in development |

Weaknesses * Slightly less developed console than the PS3 * Entered the market
later than other competitors |

Opportunities * Viral marketing: Perfect Dark Zero * Viva Piñata - huge appeal
amongst young children * Early launch of the console allowed Microsoft to use
economy of scale * Early launch also might allow them to take advantage of their
lead if they persist bringing interesting games to the market * With its operating
profit increasing, Microsoft should invest further in upgrading the Xbox360 |

Threats * The PS3 might become more attractive than the Xbox if it reaches a
bigger installed basis and developers start producing more and more games for it
* Might not produce exciting enough games to compete with the Wii's easy to use
strategy |

2. Sony

Strengths * PlayStation - huge success, large experience had been accumulated

during the development of new consoles * Large diversity of game categories *
Aiming at older gamers enabled special, more complicated features to be added
to the PS2 * PS2 had the fastest processor until the introduction of Xbox *
Blockbuster Game titles * Sony achieved 70% of game consoles market share *
Keeping the PS2 in production * PSP - large variety of functions, technologically
advanced, big success |

Weaknesses * Spent too much money on developing the PS3 * Sluggish sales of
the third generation console * Large net losses * Large production cost * PS2
outsells PS3 * Early launch of the PS3 causing compatibility problems * Not
enough developed games for the PS3 console * Consumers have to own an HDTV
in order to use the PS3 * Not able to supply enough PS3's for North America,
delaying its European start * Game developers could not achieve full usage of the
PS3 capabilities due to the early launch |

Opportunities * Making the PS3 a cheaper alternative to the Blu-ray home

entertainment, adding the bonus of gaming abilities * PlayStation Network
satisfying consumers until new games are developed * Compatibility between
PS3 and PSP in movie transferring * Developing a Life network that would enable
gamers to create avatars to meet, chat and play online |

Threats * Developers delaying developments of new games until game base

installed expand. * Too much money required to develop a game that can exploit
the console's capabilities * PlayStation Life might not be a match for Xbox Live |

3. Nintendo

Strengths

* Early entrance of the market, a large amount of experience

* Huge success of the "Donkey Kong" video game

* Dramatic success of the Wii and the Nintendo DS handhelds system

* Intuitive and easy to operate systems and games

* Influenced strongly the casual gamers and children with fun to play, cinematic
free games

* Huge success of the Game Boy and Game Boy advanced handheld systems

* Making cosmetic changes to the Game Boy, prolonging its life cycle and making
it a fashion accessory, thus achieving more profit at low cost

* Nintendo DS - intuitive, voice recognition, touch pad, Wi-Fi

* Developing new games for the DS that appeal to people who had never shown
interest in video games: Expanding their market to new groups of consumers
with Brain Training games, aiming at girls as well

* DS cheaper than the PSP

* Nintendo Wii - easy to use, not a power drainer, no wires all over the place,
simpler than the PS3 and the Xbox360, aimed at non-gamers

* Wand controller of the Wii - intuitive and brilliant to use with motion sensors

* Modest price for the Wii |

Weaknesses

* Not having sister divisions to cover losses

* Not being able to achieve technological levels of Microsoft and Sony, thus losing
the hard-core gamers

* The Wii is unable to compete with the much more powerful and technologically
advanced PS3 and Xbox360 |

Opportunities

* Low cost of developing a game for the Wii presents opportunities for
developers to make profit from Nintendo's console until the PS3 base grow

* Wii Fit enables Nintendo to expand their market to Oprah crowd, enabling
them to earn more profit from selling the wireless Balance Boards needed to play
the game

* Expanding the market for Wii's to nursing homes as well, because of the
success it made in recreational programs |

Threats

* Utilizing the non-gamers market may cause losses for Nintendo because of the
tendency that this consumers buy less games than the Sony and Microsoft's ones

* Inability to meet the demand causing losses

* The Wii wand controller might bore the gamers, causing them to move to
another console |

9. Sources

In order to prepare our task we used the following sources of information.

* Case 11- Competition in Video Game Consoles: the State of the Battle for
Supremacy

* Internet sites:

* http://managementhelp.org/mrktng/cmpetitr/cmpetitr.htm

* http://uk.playstation.com/ps3/

* http://www.microsoft.com/about/en/us/default.aspx

* Wikipedia