Competition in the Video Game Industry

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Competition in the Video Game Industry
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AGEC 599
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Ryan Engle
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Starla Borg
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Jeremy Sundgren
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Andy Armbruster
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April 23, 20011. Competition in the video game
industry is currently very competitive. However,
it has not always been this way. From 1985 to
1994, Nintendo and Sega dominated the industry
worldwide, with a combined market share of around
90 percent.
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Nintendo started the market domination in 1985
when it introduced its Nintendo Entertainment
System (NES) in New York. Nintendo ignored
analysts who felt that the video game business
was a fad whose time had passed. By 1988,
Nintendo had an 80 percent market share of the
2.3 billon U.S. video game industry.
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Sega entered the U.S. video game market in 1986.
Sega only achieved a 15 percent market
share-stymied largely by Nintendos high level of
brand awareness and more extensive library of
games. Sega, however, remained committed to the
U.S. market and, in late 1989, introduced its
16-bit Genesis system. While sales of Genesis
were respectable, Nintendo remained the dominant
player, with a market share of approximately 85
percent.
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In the early 1990s, Nintendo lost its lock on the
video game market due to complacency and slowness
in reacting to Segas competitive moves. Sega
began to build market share in the next 3 years
and by 1993, had 51 percent share of the market.
From 1992-1996 periods, Nintendo and Sega split
the U.S. market fairly evenly. However, in the
fall of 1994, Sony entered the video game
business with the launch of the Sony Playstation.

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By the spring of 1997, Sony was sitting atop the
industry with the most market share in the video
game industry. This industry continues to be
very competitive and requires large amounts of
capital to remain competitive.
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The strongest competitive force of this industry
is the competitive rivalry among competing firms.
There are three major players in the video game
industry. Each one is trying to outperform the
other. Another strong competitive force could
also be considered the high barriers to entry.
Research and development of game-players and
games require million of dollars to develop.
This is a major disadvantage to the small
producer trying to enter this industry.
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One of the weakest competitive conditions is
substitute products. The sales of substitutes
are not growing. The substitutes that are
available, do not offer the same high quality
products that the three existing firms can
provide. There is no evidence that producers of
substitutes are planning to add new capacity or
that their profits are going up.
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2. Overall, there are several factors that make
the video game industry both attractive and
unattractive to a video game provider. In this
industry, individuals with a specialized creative
talent who are capable of using sophisticated
technological tools can succeed. The competition
for skilled video game providers is intense, and
has resulted in companies offering increasingly
attractive compensation packages to employees.
Another factor that makes the industry attractive
to providers of video games is that of the
proving grounds available through the prevalent
use of coin operated machines. Before further
investment a provider can have a fairly accurate
assessment of a new games potential based on how
well it is received via these machines. Video
game providers are also able to maintain platform
independence. They are able to produce games for
multiple platforms and do not have to be
dependent on any one platform for a paycheck.
Also, if a provider experiences success with one
development, they may have the ability to exploit
it through franchising and the library value of
the title. Last, there is an immense amount of
new technology available to video game providers,
which enhances the potential new games they are
able to provide.

• Nintendos strategy seemed at a disadvantage to
  Sony. Their next piece of hardware was expected
  to be a magnetic storage device called an optimal
  disk drive and a bulky drive. This unit would
  connect to the N-64, allowing consumers to store
  certain games on writable disks, which would be
  useful for complex strategy games. One problem
  was that only N-64 owners could use this new
  technology, and add-ons did not have a history of
  selling well in the video game industry. The
  price of the bulky drive was expected to be
  unattractive compared to the competition.
  Nintendo did have over 4 billion in cash,
  however, and was not planning on sitting idly by.
  

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Nintendo
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Falling behind in R D Their N-64 only takes
cartridges, which are highly expensive

• Opportunities
• Threats

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Sega Enterprises, Ltd.

• Weaknesses
• Opportunities
• Threats

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Sony Corporation

• Strengths
• Weaknesses
• Opportunities
• Threats

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After conducting a SWOT analysis for Nintendo,
Sega, and Sony, the strongest industry leader
clearly rose to the top. Sony is definitely the
company currently with the most strength. The
companys diversification into other ventures
besides the video game industry has spread out
its risk factors. Sony Playstation clearly gives
Sony the competitive edge in the video game
industry because of its technological
capabilities and qualities. The financial
performance of Sony exemplifies the companys
strengths and its success.
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As for the weakest company of the three, Nintendo
fell into that category. Nintendo has clearly
worn out its welcome in the video game industry
through lack of innovative product development,
other than the N-64. The company has suffered
tremendously because it has not introduced the
concept of using a CD instead of game cartridges.
In addition to Nintendos lack luster
development, the company has zero diversification
into other industries. Video sales and
production make it or break it for Nintendo.
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5. Sega needs to take a more proactive approach
in their strategy. First of all, launching the
Dreamcast should be the top priority of the
company. Advertising should play a key role in
creating a high demand for the Dreamcast system.
To compete with Nintendo, Sega needs to begin
strengthening their financial position. They can
strengthen their financial position through the
low production costs of producing CD-ROMs.
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Secondly, we believe Sega should invest more
finances in research and development for the
creation of the next up-and-coming game console.
If Sega could introduce the newest, highest
technologically advanced product, they would set
the standards for Nintendo and Sony. Because
Sega would be at the beginning of the cycle, they
would have the advantage of being the first mover.
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Finally, Sega needs to continue to build on their
relationship with Microsoft. The company needs
to further explore the PC and online market. The
affiliation with Microsoft aids in Segas pursuit
of business opportunities in these two areas that
are unavailable to Sony and Nintendo at the
present time. Sega could greatly benefit being
associated with Microsofts strong brand name.