Video Games: An Industry Expanding its Generational Appeal
The video game market is an extremely competitive industry that continues to grow year after year. According to The NPD Group, a consumer and market research company, in 2009 U.S. retail sales for non-PC game software, hardware and accessories aggregated to a total of $19.66 billion. This reflected an 8% decline from 2008’s total of $21.4 billion. Together, Sony, Microsoft and Nintendo, each with their own individual video game consoles, aggressively compete for first place in video game console sales in an effort to establish continued sales of the video games themselves. While the majority of the supply of consoles remains concentrated with these top three video game companies, the end-user demographic continues to grow and evolve. In 2009, the Entertainment Software Association (ESA) reported that 68% of American households play video or computer games and that approximately 42% of households in the U.S. own video game consoles. Several supply and demand factors are of importance to the industry including: industry concentration, manufacturing costs, media delivery, demographics and innovation.
SUPPLY
Competition fierce and not likely to change
The video game industry is mainly controlled by three main players. Sony, Microsoft and Nintendo have a firm grip on the market, and have the ability to hold the licensing and publication of software from developers. The fact that these top three consoles (PlayStation 3, Xbox360 and Nintendo Wii) can sell video game titles in the millions attracts developers to these specific gaming systems. This makes it extremely difficult for new video game systems to breakthrough. Several other factors including customer brand loyalty, cost of design and manufacture and high software development costs also hinder new manufacturers from competing in this industry. Smaller startups cannot compete with the larger, more established competitors who are able to absorb these costs. As an example, in 2008 Microsoft’s Entertainment and Devices division reported approximately $8 billion in operating expenses. These types of expenses are infeasible for smaller and newer operations.
Consoles manufactured overseas; sold at a loss
A significant amount of manufacturing of video game consoles and accessories has moved overseas. Countries such as China, Japan and Vietnam have seen an increase in the amount of manufacturing of video game consoles and accessories over recent years due to lower production costs. Cost effective manufacturing is key for video game companies, especially in production of gaming systems, as these are generally sold to consumers at a loss (despite their high price tags). The video game consoles are used as the medium to generate sales for their higher margin products, such as video game software and accessories. An example of a long standing video game console which continues to reap the benefits of continued software sales is Sony’s PlayStation 2. While the console was originally released in the U.S. in October of 2000, sales have continued to be strong as the system transitions into a more economic alternative to the new generation consoles.
Gaming systems no longer just for games
Delivery of media for video game consoles has changed in the past few years. Consoles have expanded well beyond being a vehicle for video games, instead, becoming household multimedia stations. Video game companies have continued to increase the amount of online content available via their video game consoles and their individual “online marketplaces”. New generation consoles such as the Xbox360, Nintendo’s Wii and the PlayStation 3 have made several different media products available for direct purchase and download. These include: TV series episodes, movies, video game titles and add-on content for video games already owned by the consumer. Video game companies have also made agreements with other service providers to integrate third-party services with the video game consoles. One example of this is Microsoft’s Xbox360 incorporation of Netflix’s streaming video service in the fall of 2008. Additionally, Netflix announced in January of 2010 plans for implementation of their service with Nintendo’s Wii. These arrangements have changed the way in which video game companies supply their end-users with products and, in some cases, have decreased the need for physical media (i.e., DVDs and CDs).
DEMAND
Video gaming is not just for kids
Determining who plays video games is critical for video game corporations in order to identify demand and target markets for their consoles and video game titles. In 2009, the average game player age, according to the ESA, was 35 years of age. The majority of video game players are males, representing 60% of the video game population. The demographic for video games continues to change with the expanded genres created by the video game developers in combination with the different mediums for video gaming. Some of these mediums include: handhelds, online gaming, cell phones and PDAs. Secondly, video game systems have moved towards attracting a more family oriented customer base. The ESA reported that the overall interaction with group play has increased. In fact, the amount of gamers who play games with other gamers in person increased to 62% when compared to 59% and 56% in 2008 and 2007, respectively. This is a result of the increasing amount of group and family oriented video game titles. According to the ESA, approximately 82% of parents who play video games with their children stated that the number one reason for participating in gaming is “it’s fun for the entire family”. As multiplayer gaming becomes more popular, video game developers have to adapt and create newer titles which involve more group play to take advantage of this growing trend.
Innovations in physical interactivity driving increased demand
Video game companies have created additional demand for their consoles by integrating and combining motion and exercise with gaming. In May of 2008, Nintendo released the popular title Wii Fit. Using their Wii consoles’ new technology in combination with game specific hardware, Nintendo innovatively created a video game title that ties exercise with gaming. While the game’s success as a replacement for other forms of exercise has received mixed reviews from several critics, the game sold over 22.56 million copies within 18 months of being launched. In fact, the previously mentioned sales figures made Wii Fit the second best selling video game in history. Current gamers and newcomers to the hobby have clearly shown that there is a large demand for this type of video game genre. This response has motivated other top video game companies to develop competing options. During 2009’s Electronic Entertainment Expo (E3), Microsoft unveiled their “Xbox Project Natal” for the Xbox360 which provides gamers with a hand’s free gaming experience to compete with Nintendo’s Wii technology. The hardware included in “Xbox Project Natal”, a motion detecting camera, face recognition and built in microphone, was demonstrated with several games including racing, skateboarding and martial arts. “Xbox Project Natal” is scheduled for release during the holiday season of 2010.
Customers expected to demand video games keep up with 3D television advancements
Video games have evolved from users simply playing against the game-specific computer enemy to users playing at home with friends and ultimately playing online with multiple international opponents. With the arrival of the first 3D televisions sets due summer of 2010, it is pretty obvious that video games will have to further evolve by utilizing this new technology. Historically, gamers have been the initial “early adopters” to the most current technological advances in televisions. As an example, new consoles once fueled gamers to update their television sets with high-definition capabilities. While high-definition compatible consoles, such as the PlayStation 3, did not require a new television, they did present a tempting reason for gamers to upgrade. This may very well be the trend with the release of 3D televisions sets. Developers of video games and suppliers will have to keep up-to-date with the technological advances to remain competitive. In fact, Sony has already declared upgrades to the PlayStation 3’s firmware in 2010 along with the announcements of other video game publishers in the process of making new 3D titles. For more information on 3D televisions and their effects on video games, as well as the television industry, please refer to the industry insight on 3D TVs.
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