Video Game Console Industry Analysis: Competition, PESTEL & Five Forces

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Table of Contents

Video Game Console Market: Introduction
Gaming Console Industry: Structure
Video Game Console Industry Analysis
Macro Environment
Nintendo PESTLE Analysis
Five Forces Analysis of Video Game Console Industry
Video Game Industry Competitive Analysis
Cultural Capability Organization
Skills, Competencies, and Core Competencies
Gaming Console Industry: Recommendations

Video Game Console Market: Introduction

The video game industry has become very competitive over the years. Though the initial market was teenagers oriented, it has developed to include young adults in the age bracket of twenty-five years to thirty-three years. This development has seen a major boost in the video game industry. This, in extension, has broadened the demographic base of this industry and has been the major factor pushing the competition in the industry to high levels. The major players in the industry have continuously developed new-generation games in order to capture the growing market, in addition to making competition fair in the industry (Gamble 2007).

Gaming Console Industry: Structure

It is worth knowing the different segments of the video game industry. This is vital because they represent the areas of concentration and specialty for different video game manufacturers. The first and major segment is Consoles. They are most popular because of their higher profit margins and its less diversity in game types.

They are the largest segment of the video game industry and are contested by fierce competition by the major players in the industry. Three major manufacturers, Nintendo, Microsoft, and Sony, are the controllers of the industry, and stakes are high since the software and hardware levels are controlled in an oligopolistic market structure the examples in this segment are Xbox 360 and Wii by Microsoft and Nintendo respectively (Williams, 2002).

Handheld video games are the segment that is marketed mainly to pre-teens and feature simple games. In Contrast, to the console or PC systems, the handheld systems are targeted for the large market of the small young kids who are mainly influenced into becoming gamers and are starters. This makes the handheld systems have a high volume of sales. They are portable and easy to learn. The handheld segment is a near-perfect monopoly dominated by Nintendo although other manufacturers have tried to break this trend, it has proven quite difficult to oust Nintendo from this segment. The example of game in this segment is a popular Game Boy by Nintendo, and Sega also produced various games, but they must have been kicked out by competition (Williams, 2002).

Lastly but not least is the PC Games. They are common because the gamers in this segment are mainly gamers of the consoles. They share similarities, but they are quite different in their structure and market. To begin with, this segment is free because of the universal knowledge of the computer platform. This makes the manufacturers for PC games be imaginative programmers who are not restricted by any kind of manufacturers licensing fees. The development fees are relatively lower, thus making this segment open to risk-takers. This analysis of the structure enables us to understand the economics behind the gaming industry and the battle of supremacy in the industry (Williams, 2002).

Video Game Console Industry Analysis

The market for games is well understood by the vertical stages of the industry. This stage is where Production of the games takes place and in which games are conceived created and programmed. It is followed by the publishing stage, where there are rights-holders for the games. The game is delivered by a developer (internal or external), then the publisher is given the responsibility for marketing the products launch and the manufacturing process.

Distributors are the custodians of the finished game products and usually lay the ground for the sales effort. The distribution stage is very vital for its role in the growth process of the game industry. They established exclusive contracts with the major retail chains to be their game suppliers, and this played positively for the growth of the video game industry (Williams, 2002).

Microsoft was the first company to venture into the video console games market. This was in November 2005. It was followed by Nintendo and Sony in November 2006. These companies developed games with interesting features and visual effects that were the factors that influenced the market for both traditional and contemporary gamers. It was projected that the sales would shoot from $3.9 billion in the year 2005 to $5.8 billion in the year 2010.

The three major players in the industry are involved in a fierce competition that is aimed at acquiring a greater share of the projections of the year 2010. The companies have employed different strategies and business models to generate profits and also to gain a competitive advantage in the market (Gamble 2007).

This competition has resulted in Micro-soft setting the trend with 10 million Xbox360 units sold by the end of January 2007. On the other hand, Sony developed Play station 3, with units standing at just over 2 million within the same period. Nintendo, on their side, had been able to sell more than 243 million units of Wii video game consoles between November 2006 and January 2007 (Gamble 2007).

An analysis of the video game industry reveals a steady growth in business, marked by, among other things, the steady growth in the customer base. Nintendo, Sony, and Microsoft had a major challenge that they had to overcome, a challenge emanating from their position in the video gaming market. This is the challenge of keeping up with the market demand and, at the same time achieving high sales.

They had to come up with strategies to address this challenge. One such strategy adopted is the introduction of online games (Gamble, 2007). This had a significant effect on console-based games. Nintendo Wii launched the new wireless controller. There was a decline in the sales of console-based games and an increase in online-based games (Gamble 2007).

This was an indication that there was a major shift in the methods used to meet demand in the video game industry. This model of using digital distribution was successful in making the sales of video games to grow by a huge margin. This has led to the development of online gaming and mobile gaming. The development of online games emanated from enabling consoles to have Ethernet ports and the increased broadband access in homes. These remain the major contributors to high revenue generated by the video game industry. Microsoft transformed from Xbox 360 to Xbox Live, and they realized huge turnouts (Gamble 2007).

The marketing strategy was coupled by partnership with Burger King, who availed the Xbox 360 game to the customers who purchased a burger. There was also a partnership in advertising with Kellogg Company. This was a cooperative advertising strategy. These activities made Microsoft generate huge profits from video games. This was especially so given the fact that the company was one of the earliest in the industry. They are factors that contributed to Microsofts lead in the industry.

Sony launched Play station one and Played station 2 in 1995 (Gamble 2007). These two games registered instant success. They were able to attain sales close to 100,000 units in their first weekend in the stores and 1 million units within six months. This was an extremely good and encouraging market response. Nintendo launched 64 bit Nintendo a year later, but it never survived the competition because it had limited game categories (Gamble 2007).

The target market of Sony enabled the product to ride in the market successfully. Its game specifications were suited for preteens, teens, and young adults. This is as opposed to Nintendo, which was focused on small children. With this competitive advantage, it was able to add more features that developed the PS2. It played DVDs and could connect to the internet. After successful control in the consol based systems, the company also developed the Play Station Portable.

They were also successful in marketing the handheld devices because they had many features. It was noted that they were just a replica of the consoles. They developed the Play Station 3, which had far better and special features. But the launching was not well-timed as the game was launched earlier than planned. This resulted in many complications in its marketing and distribution strategy. It did not make it to the market on time. The production and supply chain problems complemented with the high costs associated with the production of the games hindered the success of the Play Station 3 (Gamble 2007).

Nintendo could not venture into the already consolidated market of other products. They chose to stick to game consoles, handheld systems, and game software. This was to enable it to operate at break-even or even profitability. The company produced gamed suitable for their target market; the children. The primary goal of Nintendo was to increase the gaming population.

It was not successful with the Game Cube since it had no appealing features as compared to Play Station 2 and Xbox 360. Nintendo did not make a lot from the Game Boy and DS. It developed the WII, which was targeting to come up with an interesting but cheap console. It would have features that would be appealing to no gamers. The strategy Nintendo used in developing this game was the low cost incurred in development. Game developers were interested in developing games for this platform, and they made it sell than it was anticipated (Gamble 2007).

The cooperation in advertisement and merging of retailers and producers in the making of online games and marketing with the use of platforms such as Facebook, My Space, and other websites enabled more sales to be realized. The companies also made revenue from adverts on their online pages. This is the vertical system of marketing employed, and it was successful, especially for Sony and Microsoft (Gamble 2007).

The video game industry is influenced greatly by competition. Michael Porter explains an approach to understanding a framework of business models. He says the industry is influenced by five forces. This model can help a business manager to have the edge over his competitors by understanding the industrys dynamics. The five forces shaping the industry in relation to the video game industry are outlined below.

Macro Environment

The macro-environment is the general fabric of the industry environment. It is consistent with the environmental factors which influence the industry. The PESTEL framework, on the other hand, is used to identify the future trends which are likely to have adverse effects on the video gaming industry. It, therefore, identifies the key drivers of change in the industrys environment. Porters five forces framework helps us to understand the competitive dynamics in the video game industry and their likely impacts on the companies (Cipd 2008).

Nintendo PESTLE Analysis

This identifies the environmental factors influencing the industry. They are mainly political, economic, social, technological, environmental, and legal. Using PESTEL analysis on the video game industry, the factors were found to have the following impacts;

Political

Taxation policies by the government, trade regulations, and social welfare policies influence the industry. Video games are for entertainment, and they influence the emotions of the people. This can create a problem of incitement or violent situations because of the scenes in the games. This threatens the peace and law of a country. Therefore, the government can decide to put checks on the contents of the video game industry and impose a ban on unfavorable games (Cipd 2008).

Economic

Countries with large video game businesses enjoy a favorable contribution of this industry to economic development. The consumers buying behavior is controlled by their incomes. Low-income earners may not be able to enjoy the pleasure of video games. Microsoft and Sony products are often quite expensive, whereas Nintendo incurs low manufacturing costs, and it makes it possible for it to sell its games at an affordable price. This increases Nintendos sales (Cipd 2008).

Social

The social factors include population, demographics, religion, and income distribution. There are games that people who are Muslim can not play because of their faith. The size of the population influences the video game industry. For example, a large population means a greater market niche. It is also important if the large section of the population is able to spend on games. They should have a moderate income. Games also have an influence on peoples culture; they may incite aggression. The video game industry is mostly affected by the population and income distribution (Cipd 2008).

Technological

Technology is the backbone of many industries. Video gamers look for more innovative and indulging games, and this fact makes the technology very vital in this industry. Companies in this industry benefit from competitive advantage, and it is mostly as a result of technological efforts to develop unique features. Every new feature uses new technology. Nintendos development from playing cards to videogames, the improvement from Xbox 360 to Xbox live, all required technological innovation. There are factors that limit this innovation, such as high costs of hardware. The online capabilities of many game types are the major leap in technology for the video game industry (Cipd 2008).

Environmental

The video game industry uses components that have an impact on the environment. It requires a lot of power since they are played on television. The video game industry has to find a way of reducing power consumption by game consoles. The environment is a great concern for many. It is important to try and conserve the environment. The inclusion of games that are environmental concerned is an aspect the video game industry needs to consider (Cipd 2008).

Legal

The legal factors that affect the video game industry are simple and important to understand. They include trademarks, copyrights, licensing, online ownership, revenue recognition, and demands of intellectual property. These are factors that guide the companys existence in the business and protect it from unnecessary lawsuits (Cipd 2008).

Five Forces Analysis of Video Game Console Industry

This helps one to analyze the industry and identify the source of competition in the video game industry. These tools of the analysis indicate the video game industry to be very competitive. It is also profitable as the returns are high but subject to other factors like competition in the industry, which is a fierce battle to control the market. Big players like Sony, Nintendo, and Microsoft try to battle it out for domination. The threat of new entrants into the industry is not a big influence since there are main players, but electronic arts is also coming up strongly (Dibb 1991).

There are no substitutes for video games. The power of buyers in the industry is low, explaining the few successful companies in the video game industry. This results in having a small variety of video games available to the buyers compared to the power of suppliers, which is very high. This is so because there are more suppliers available to a handful of companies in the video game industry (Cipd 2008).

Competition in the video game industry is a cut-throat level. Each company has a product that rivals another companys product. The competition is also as a result of the difficulty in product differentiation. They all develop game consoles, which are only differentiated by their features. The concept is the same, and this is a source of fierce competition. The firms ensure they have a competitive advantage over their competitors in order to outdo the levels of competition set by the market (Cipd 2008).

A case in point was, for example, when Microsoft had a one year head start with the next-generation technology. This was an advantage over the other companies. By the time the other companies launched their products, Microsoft had already consolidated the market, and it was hard to catch up with them. This one year head start was an advantage for Microsoft. It got the best out of the market. Another case of competitive advantage is the development of the Wii by Nintendo. It was developed at a very low cost, and it had features that attracted non gamers (Dibb 1991).

This was a field Sony and Microsoft had not targeted. The lack of wires was a factor likely to attract many. Targeting the non gamers is Nintendos competitive advantage. This enables the different companies to consolidate their market share and compete for the small niche that is not yet taken. Consumer power has an impact on a companys product (Cipd 2008). Consumer power gives an opportunity for buyers to influence the prices downward.

The influence lies in the buyer mass and the role of every individual buyer in the market and the cost of their choice for another product by a competitor. In most cases, few buyers with a high purchasing power influence the prices of a commodity. The customer base of the video companies does not dictate the price (Dibb 1991). They are quite many and scattered. They do not influence the prices of video game consoles. They do not have power.

The supplier power is the direct opposite of consumer power. This is the capacity suppliers have to influence the level of prices in a market. This is influenced by the number of suppliers of the inputs, such as labor, components required in production, and other supplies. This coupled with other factors such as their strength above the buyers, the product identity, and their ease of changing from one market to another, gives them supremacy to influence the price. A narrow source of suppliers gives them more influence than when they are many. The video game companies have many suppliers of their resources for production, yet there are few companies in the industry (Cipd, 2008).

Video Game Industry Competitive Analysis

Opportunities

Microsoft Xbox 360 has partnerships with Hollywood studios. It has an opportunity to penetrate the new markets and untouched markets in the economy. The product launch was great and well covered. These two products have nearly the same opportunities since they have the same trends. Wii is focused on new gamers (Royalty Universe, 2007).

Threats

Sony and Microsoft games face a threat of a low-cost competitor, which is from Nintendo. Wii is developed at low cost and thus sold at a low price, whereas the Xbox 360 and Sony Play Station3 have expensive hardware. It is also faced with the weakness of having very expensive games. Sony Play station 3 faced a threat of delay in production, and the distribution was also poor. The price was high, making it not to sell. Wii faces a threat of a lack of interesting features. It is blank and not sophisticated (Royaltyuniverse, 2007).

Survival and Success Factors

The factors that support the industries survival are the absence of substitutes of video games and the lack of threat of new entrants. These factors contribute a lot to the survival because the industry will maintain its big players, and there is no new entrant into the industry to bring competition. The video games customers have no substitutes. The success of the video game industry can be attributed to the innovations and new technologies involved, together with the lack of power by the buyers. This is the pillar of the industry towards success. (Gamble 2007).

Microsoft Xbox 360 has a financial strength because it has a lower price than most comparable competitors like Play Station 3. The latter is expensive in terms of hardware and software. Nintendo is developed cheaply; thus, it is affordable. The industry, in general, requires a good investment to manage the development of the game consoles. Nintendo has a top expense of joysticks (Gamble 2007).

Value Chain

The increase in levels of technology and innovation in the video game industry has changed the trend of the value-chain. The game developers are asking for more money and time for game development. This has made publishers develop their own studios.

Comparison of other Competitors

There are other competitors, such as Electronic Arts and Konami. They also hold a significant position in the Video Game Industry. They are among the biggest market shareholders compared with Sony, Microsoft, and Nintendo. There are other competitors who seek to enter the video gaming industry from other industries. They are likely to become a challenge in the long run.

Cultural Capability Organization

The video game industry has few companies. These companies are competing on a global basis, and thus, they require huge amounts of capital. They enjoy specific advantages from economies of scale in manufacturing, marketing, distribution, and advertising. The industry has the same trends as those followed by other industries, such as controlling the retail and distribution chains and also marketing sites on the web. This ensures total product visibility and availability. The industrial analysis in performance may be doctored to imply there is growth potential in the industry. It is usually important to forecast changes in the industry. Family income- levels translate to their spending power, and it is a factor that is important in the planning of a marketing campaign to identify these income levels.

Skills Competencies and Core Competencies which Electronic Art Needs to Succeed

The key skills and competencies that Electronic Art needs to succeed can be, for example, acquiring content creation capabilities and combining it with the core competencies. These core competencies are, for example, technical expertise, proper marketing, and securing the vital distribution channels. Electronic Art needs to apply its strengths to the video gaming markets that have the potential to grow and seek to control a venture of Multiplayer gaming, which is not yet dominated by anyone (Ching-Ping, Wensi, and Chang-Chien n.d).

Gaming Console Industry: Recommendations

Recommendations to Microsoft

Microsoft should launch a new type of console and increase features such as better hardware, one which can download and play high definition videos. It should be strategically targeting a particular group of customers. They should also try to check on their prices. They should also try to expand their markets to areas where there is the potential growth of the gaming population. This will represent the potential growth of the industry.

Recommendations to Sony

Sony should try to make their play station available and do away with the weaknesses associated with the production and distribution of Play Station 3. This was what made them lose out in the market. Venturing to untapped markets will also increase volumes of sales. This will lead to their supremacy.

Recommendations to Nintendo

Nintendo needs to improve on their videos and feature. They should be able to involve a bit of the new technology and move from simple games. This will create a better customer base since everyone will be interested to see their new product. More technology and expansion to untapped markets and winning new gamers may be a path for Nintendo. They should develop game consoles that have less peripheral features.

References

Ching-Ping, J., Wensi, X., Chang-Chien, G., n.d. Electronic Arts,[online]. Web.

Cipd. , 2008. Pestle Analysis, Cipd [online].Web.

Dibb, K. P., 1991. Marketing Concept and Strategies European Edition, Houghton: Mifflin Publishers, 567-598.

Gamble, J.E, 2007. Competition in video game consoles Sony, Microsoft and Nintendo battle for Supremecy, Alabama: University of Alabama, 284-299.

Royaltyuniverse 2007, SWOT Strength Weakness Opportunity Thread of Gaming Industry: Royaltyuniverse, Web.

Williams, D., 2002. Structure and Competition in the U.S. Home Video Game Industry, The International Journal on Media Management, vol.4, no.1, pp. 41- 51

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