Environment and Planning A 2006, volume 38, pages 1843 ^ 1861

DOI:10.1068/a37205

Industry evolution and cross-sectoral skill transfers:

a comparative analysis of the video game industry in Japan,
the United States, and the United Kingdom

Hiro Izushi
Economics and Strategy Group, Aston Business School, Aston Triangle, Birmingham B4 7ET,
England; e-mail: h.izushi@aston.ac.uk
Yuko Aoyama
Graduate School of Geography, Clark University, 950 Main Street, Worcester, MA 01610-1477,
USA; e-mail: yaoyama@clarku.edu
Received 28 June 2004; in revised form 7 December 2004

Abstract. In this paper we explore the interrelationship between technological progress and the
formation of industry-specific skills by analysing the evolution of the video-game industry in three
countries: Japan, the United States, and the United Kingdom. We argue that the cross-sectoral
transfer of skills occurs differently depending on national contexts, such as the social legitimacy
and strength of preexisting industries, the socioeconomic status of entrepreneurs or pioneer firms in
an emerging industry, and the sociocultural cohesiveness between the preexisting and emerging
industries. Each country draws on a different set of creative resources, which results in a unique
trajectory. Whereas Japan's video-game industry emerged out of corporate sponsorships in arcades,
toys, and consumer electronics industries and drew skills from the comic book and animated-film
sectors, the video-game industry in the United States evolved from arcades and personal computers.
In the United Kingdom the video-game industry developed bottom-up, through a process of skills
formation in the youth culture of `bedroom coders' that nurtured self-taught programmers in their
teens throughout the country.

1 Introduction
Previous research on the evolution of the video-game industry revealed that Japan's
video-game industry prospered by drawing on rich creative talent nurtured in the
comic book and animated-film industries, and technological expertise developed in
the consumer electronics industry (Aoyama and Izushi, 2003).(1) Questions remain as
to why such a successful fusion of creative resources across the industries was observed
in Japan, and whether similar patterns of cross-industry transfer of skills also occur
elsewhere. Comic books and animated films existed in North America and Europe
before they did in Japan. Does the presence of a preceding industry necessarily lead to
the emergence of a new industrial sector, and what are the conditions and mechanisms
through which the fusion of creative talent occurs?
In this paper we explore the interrelationship between technological progress and
the formation of industry-specific skills by analysing the industry evolutions of three
major video-game markets: Japan, the United States, and the United Kingdom. Our
aim is to provide insights into the process of formation and subsequent evolution of new
industries. Accounts that outline cross-sectoral fusion of skills and knowledge at the
birth of a new industry remain limited, which is surprising given its long-recognised
importance in economic growth at the local, regional, and national levels.

(1) In this paper we use the term `video game' to refer to those games that present some kind of

interactive visual display on a screen, involving pixel-based imaging. These include console-based
games (for example, Sony PlayStation 2, Microsoft Xbox), handheld games (for example, Nintendo
Game Boy), computer games, and video arcade games.
1844 H Izushi, Y Aoyama

We first discuss issues of industry evolution and explore the literature on

evolutionary and institutional approaches, and conclude that few studies analyse
transfers and fusions of skills from existing industries at the birth of a new industry.
To demonstrate an important role of sociocultural factors in industrial evolution, we
take the case of the video-game industry in three countries and assess how cross-
sectoral links with existing industries shaped their evolutionary paths. We then
analyse the role of technology in shaping cross-sectoral skill transfer as well as the
changing competitive positions of the industries. We argue that the process of cross-
sectoral skill transfer in a newly emerging industry is shaped by socioeconomic as
well as sociocultural cohesiveness between the existing and emerging industries.
Concurrent peaks and social legitimacy of existing industries also influence the
flow of skills between old and new industries. Also, patterns of skill transfers depend
on national contexts and vary both from one country to another as well as on
the particular state of technology which determines creative skills relevant for the
new industry. The interplay of economic, social, and technological factors in turn
develops a particular techno-industrial path dependence, thereby affecting a country's
global competitive position.

2 Interpreting industry evolution: a technological or an institutional change?

Research on industry evolution is underpinned by three theoretical literatures: evolu-
tionary economics, national systems of innovation, and industrial agglomerations. The
Schumpeterian evolutionary approach has its distant predecessors in early studies
which are largely neglected in modern industrial economics and macroeconomic
growth models (Lundvall et al, 2002; Malerba and Orsenigo, 1996), and include
analyses of emergence and decline of leading industries in industrial economies
(Kuznets, 1930; Schumpeter, 1939), stages of economic growth associated with the
shift (Clark, 1940; Fisher, 1935; 1945), radical changes caused by new entrepreneurs
(Schumpeter, 1934) or by large established firms with research and development
(R&D) laboratories (Schumpeter, 1942), as well as interdependencies among related
industries (or technological, economic, and other factors) as driving forces of eco-
nomic development (Dahmën, 1970; Hirschman, 1958; Perroux, 1969). According
to the Schumpeterian evolutionary approach, three processes drive changes in an
economic system: varieties in products, firms, and organisations; their replication;
and their selection (Malerba, 2002; Metcalfe, 1998; Nelson, 1995). These three pro-
cesses are stylised in the industry life-cycle model (Abernathy and Utterback, 1978;
Klepper, 1996; Utterback, 1994; Utterback and Abernathy, 1975), although empirical
evidence suggests wide cross-sectoral variations in industry evolution as well as
incompatibilities with the predictions of the model (McGahan, 2000; Malerba and
Orsenigo, 1996). The questions of how a new system emerges, and of how the old
and the new are linked, remain unanswered by the Schumpeterian approach (Malerba,
2002; Malerba and Orsenigo, 1996).
A new industry does not emerge de nouveau (Jones, 2001, page 914): it has to draw
skills and knowledge from preexisting industries or else create them on its own.
Whereas firms build on their existing competencies in their evolution (Teece, 1988),
countries tend to innovate and create new products in sectors or technologies close to
their existing strengths (Archibugi and Pianta, 1992; Dosi et al, 1990; McKelvey, 1997).
In this sense, the formation of a new industry involves two contradictory but equally
essential aspects of innovation: continuity with existing elements, combined with
radical change (Lundvall et al, 2002). Yet, what remains unanswered is the question
of how processes of ``integration and fusion of previously separated knowledge
Industry evolution and cross-sectoral skill transfers 1845

and technologies'' (Malerba, 2002, page 259) occur, and which factors shape such
processesöparticularly at the outset of a new industry.
The Schumpeterian evolutionary approach is fundamentally a disequilibrium
theory, in which learning by individuals or organisations is viewed as taking place
under the constraints of bounded rationality (Dosi, 1984; 1988; Nelson and Winter,
1982). In contrast, the literature on systems of innovation has as its central concerns
intangible factors and interactive learning. Early growth models acknowledged techno-
logical progress as an essential driver of long-run growth but, nonetheless, placed their
analytical focus on the accumulation of tangible input factors (that is, physical capital
and labour) (Solow, 1956; 1957; Swan, 1956). The system-of-innovation approach evolved
with the increasing recognition of intangible capital (Carlsson and Stankiewicz, 1995;
Edquist, 1997), such as human capital (Becker, 1964), research capital (Griliches,
1964; 1979), and social capital (Knack and Keefer, 1997). Most notably, unlike the US
tradition of science and technology policy studies which focus on formal institutional
mechanisms (that is, knowledge creation and diffusion from research institutions), the
European approach to national innovation systems (Freeman, 1987; Lundvall, 1988;
1992) places greater emphasis on the importance of tacit knowledge and its learning
through routine-based activities (Lundvall and Maskell, 2000).
Studies of national systems of innovation (for example, Nelson, 1993) therefore
incorporate the role of institutions, and find significant cross-country differences in
their shaping of business-to-business interactions, which are in turn reflected in differ-
ent evolutionary trajectories in different national contexts (Andersen and Lundvall,
1997). The institutional approach analyses the role of formal as well as informal
institutions in economic growth (Amin, 1999; Gertler, 1995; 2004; Saxenian, 1994),
and provides insights into the causes of differences in economic growth at the regional,
national, and cross-national levels. Institutionsöunderstood as norms, routines, habits,
and conventions, as well as laws and standardsöto a great extent influence how people
relate to each other and learn or acquire knowledge (Lundvall et al, 2002; Storper and
Salais, 1996).
Research in economic geography on creative industries suggests a role for agglom-
erations and clusters (Bathelt and Boggs, 2003; Power, 2002; Power and Scott, 2004;
Pratt, 1997a; 1997b) in shaping specialised labour markets and in developing a social
division of labour within them (Christopherson and Storper, 1989; Coe, 2000; Scott,
1996; 1997; Storper and Christopherson, 1987). Unlike traditional views of industry
evolution, which focus on the company as their principal unit of analysis, literature in
economic geography acknowledges that the presence of communities of practice
(Wenger, 1998), which arise from shared obligations and commitments to a particular
practice, is of equal significance, linking individual careers and corporate developments
with industry evolution (Arthur et al, 2001). Such communities are often found in
spatial clusters of related firms. Networks of individuals and firms linked both through
business relations and through social ties are seen to have a major role in determining
an industry's evolution and competitiveness. As institutions shaping such networks are
deeply ingrained in each society, and vary across countries, industry evolution is a
process embedded in a specific context. This is suggested by sector-based studies
such as those on multimedia (Preston and Kerr, 2001; Scott, 1995) and film (Jones,
2001), as well as the `varieties of capitalism' approaches of institutional theorists (Hall
and Soskice, 2001). Yet the primary focus is either on the intraindustry mobilisation
of resources or on the interactions with external socioeconomic environments. As a
result, we remain largely uninformed about the conditions and mechanisms through
which the transfer and fusion of skills take place from old to new industries.
1846 H Izushi, Y Aoyama

We contend that the creation of industry-specific skills is a complex process which

juxtaposes social and economic forces. Before an industry becomes a recognised sector
of activities, the necessary skills identified, and a formalised job description developed,
its attraction of labour force relies on a variety of social networks, such as hobby clubs,
meetings at shops, trade shows, and conventions, alumni of ground-breaking firms in
existing industries, and the contacts of an emerging industry's pioneering entrepre-
neurs. Although economic incentives such as high wages and growth prospects
undoubtedly play a role, social acceptance and the legitimacy of an emerging industry
and existing industries with potentially relevant skills, as well as the sociocultural
cohesiveness between them, facilitate the transfer of skills, affecting entrepreneurial
motivation and skills aspirations. The concurrent presence of existing industries within
the country and their relative strengths affect the degree to which skills are drawn
from the old to the new industry. Social and economic status attached to pioneering
entrepreneurs or firms in the emerging industry in turn exerts a powerful influence
upon its ability to draw skills from existing sectors. Furthermore, the sociocultural
cohesiveness between old and new industries lowers the barrier to skill transfers.
If either of these conditions is lacking, an emerging industry may find it difficult
to draw on other sectors, forcing it to rely on an internal accumulation of human
capital. Once the industrial sector is established, a specialised labour market emerges
through formal education programs specially designed to cater to the skill require-
ments of the new industry. Linkages to existing institutions (for example, universities,
government agencies) are either newly formed or reorganised both at the firm and at
the industry levels (for example, through trade associations). This whole process gives
rise to different patterns of cross-sectoral fusion of creative talent in the same
industry in different countries. The different trajectories of skill formation also in
part shape the competitiveness of the emerging sector.

3 Evolution of the video-game industry

Since its emergence in the 1970s the video-game industry has quickly become a
formidable industry of significant size. The worldwide market for video games was
estimated at US $23.2 billion in 2003 (M2 Communications, 2004). In the United States
alone, more than 239 million games were sold in 2003 (ESA, 2004). The United
States, Japan, and United Kingdom provided 94% of all game-software production
sold worldwide (by volume) in 2000. The same three countries constituted 65% of the
world's game-software market, with the United States being the largest (36%), followed
by Japan (20%) and the United Kingdom (9%) (DTI, 2002).
We have previously (Aoyama and Izushi, 2003) detailed how the video-game
industry comprises large console manufacturers, video-game publishers, and video-
game development firms, large and small. Because of this complexity the industry
demands a variety of skills, ranging from technically oriented computer programming,
to scenario writing, and graphic artistry. Production processes have shifted from
one-person craftsmanship to an intricate division of labour: today, the production of
game software involves a team of professionals and a number of stages, starting with
planning for blueprints (game titles, missions, themes, key characters, target platforms,
market, and the budget), scenario writing, designing of character details and accessory
items, and developing plans for background settings. This is followed by production of
graphic materials (from drawing to digitisation), sound materials, and programming
(movements and backgrounds), which are assembled by programmers importing
graphic and sound materials into an `alpha version'. After game testers have conducted
debugging, a beta version is made available öfirst to critics and mass media for
Industry evolution and cross-sectoral skill transfers 1847

prerelease evaluation and marketing. The production is complete when a `golden

master' is issued and sent for mass production.
Because of the historical nature of the evidence used for this research, we have
adopted a business-history approach to understand how the video-game industry in the
three countries emerged using skills from different sets of existing industrial sectors.
Because no comprehensive data have been compiled on cross-sectoral skills transfer,
evidence used for this research included tracing the origins of firms and interfirm
collaborative projects, as well as the backgrounds of entrepreneurs and key profes-
sionals with creative talent who contributed to the development of video games in the
three countries. As the subsequent sections show, the video-game industry in the three
countries evolved in quite distinctive manners.
3.1 The case of Japan (2)
Japan's video-game industry drew its creative as well as its technical talent initially
from the toy industry. Nintendo (founded 1889), formerly a producer of toys and play-
ing cards, began experimenting with electronic toy products, which were still widely
ignored by the mainstream toy industry. Nintendo, however, took a particular interest
in acquiring knowledge of electronics and produced shooting games in which optical
censors were used. To develop in-house technical skills, from 1964 Nintendo hired
experienced electronics-hardware engineers who came from well-known consumer
electronics firms, and conducted joint R&D with Sharp and Mitsubishi Electric. One
of their experiments resulted in a licence in Japan to produce the Magnavox video-
game system that offered a variation of Pong in 1975. These engineers, who were
initially hired to develop baseball pitching machines and toy transceivers, were subse-
quently reassigned to develop arcade games. Nintendo's first fully fledged home video
game in 1983, Famicom, was in fact a latecomer in the home video-game market behind
products made by competitors including Tommy and Bandai, both major Japanese toy
companies. Nintendo's eventual success over its competitors is attributed to price
competitiveness, its ability to deliver original mega-hit software such as Super Mario
Brothers (1985), and its initial alliances with best-selling arcade video games. In con-
trast to the troubled relationship that existed between Japan's computer hardware and
software industries, Nintendo has been fully aware of the importance of software,
and has nurtured talent both in-house as well as through third-party publishers.
By 1990 Nintendo was a household name in Japan, the United States, and Europe.
Technological development in the 1990s altered the logic of competition, however,
which undermined the monopoly of Nintendo and increased the share of PlayStation,
made by Sony Computer Entertainment (SCE) with CD-ROM technology (Yamashita,
1998). By 1999 SCE had a 70% market share in Japan and a 55% market share in the
United States. Again, the success of SCE is attributed to their ability to forge alliances
with major software publishers.
Japan's video-game industry drew artistic creativity from the country's well-developed
cartoon and animated-film industry. Cartoons and animated films have a pervasive
influence upon Japan's culture and society, far greater than in the United States or Europe.
Japan's comic book market is seventeen times the size of the US comic book market today,
and comic books (or manga) constitute over one third of all books and magazines sold in
Japan. In 1999, 2192 new manga book titles were published, in addition to 280 manga
magazine titles, with an annual circulation of 1.1 billion copies (Dentsu Soken, 2001).
Of the 280 comic magazines in circulation in 1999, 215 were magazines targeting adultsö
with an annual total of 727 million copies printed constituting 53% of all comic magazines
(2) For an expanded version of the study of Japan's video-game industry, see Aoyama and Izushi
(2003).
1848 H Izushi, Y Aoyama

(Dentsu Soken, 2001). The subjects covered by comic books range from romantic to
educational, humour, sports, adventure, sex and violence, and include how-to manga
(for example, cooking, finance), `manga-fied' classics, and sociopolitical satires. Comic
books gave rise to animated films and television series in the 1960s and the 1970s, further
reinforcing the strength of manga as an integral part of popular culture in Japan. Today,
animated films account for a significant portion of Japan's market for films, and earned
40% of the revenues grossed by the top-ten films released in 1997 (Dentsu Soken, 2001).
Cartoons and animated films provided an important foundation for the emergence
of Japan's video-game industry. The core of game-software production involves
scenario writing and drawing, and the cartoon and animated film industries provided
the necessary skills and expertise for character production and graphic design. Skill
transfer from manga and animated films to video games was clearly one of the con-
sequences. The higher incomes offered by the video-game industry encouraged the
migration of skilled designers and illustrators. In the animation industry the hierarchical
structure, with a series of small subcontractors, tends to suppress wages, and project-based
fees often reduce hourly wages. The video-game industry, which enjoyed a rapid market
growth in the 1990s, managed to employ workers at higher wages, and even caused a
shortage of labour in the animation industry (Nikkei BP, 1999).
The sharing of artistic talent between cartoon or animated films and video games
in Japan has led to a number of common features which can be observed in the two
forms of art. Many in the video-game industry refer to their interest in cartoon or
animated films as being the primary motivating factor for pursuing their current
occupation. For example, Nintendo's innovation of incorporating human and animal
characters and stories in its video games was attributed to an individual designer with
a strong influence of manga: Shigeru Miyamoto, Nintendo's chief game developer and
the creator of Donkey Kong and Super Mario Brothers, first became interested in
manga in junior high school, and he led the cartoonist club at school. When he was
assigned to develop an arcade game for the US market in 1980, he studied the then-
popular Space Invaders and Pac-Man. Upon realising that the objective of these games
was simply to erase objects from the screen, he decided to create a game with a storyö
just as in cartoons or animated films. Donkey Kong is built upon a detailed manga-like
character, with an elaborate story that resembles those from animated films (Aida and
Ohgaki, 1997). Miyamoto developed the lead character of Donkey Kong to be a blue-
collar construction worker, who kept a gorilla as a pet and had a pretty girlfriend. The
same lead character was employed again, appearing as Mario in Super Mario Brothers.
Video games have since become far more complex and elaborate. Role-playing
games, in which players can choose and assume a character and typically go on an
adventure or treasure hunt, enjoy broad popularity in Japan and often feature charac-
ters from manga and animated films. This also suggests that drawing techniques and
character design are directly transferred from the manga or animated-film industries.
Furthermore, the three media övideo games, cartoons, and animated filmsöare
increasingly linked with one another through marketing to boost sales of one another.
For example, several popular classics in animated films have been adapted for video
games. These games include video clips from the original films and use the same voice
actors to capture those grown-ups who used to watch the originals. Yet, the best known
example of the integration of the three media is the success of Pokëmon. Pokëmon was
first developed as a video game for Nintendo's Game Boy. Shortly after its unremark-
able debut in 1996, the character began to appear in monthly manga magazines for
children. This ignited its popularity, resulting in a television series in 1997 which was
followed by a couple of blockbuster films. The appearances of Pokëmon in a variety of
media reinforced one another, facilitating the growth of the market for video games.
Industry evolution and cross-sectoral skill transfers 1849

Japan's video-game industry is thus linked to a historically embedded foundation of

creative skills based on vibrant cartoons and animated films in various ways. The
presence of a competitive consumer electronics industry in Japan provided the founda-
tion of the necessary technical labour pool, and socially accepted, growing, comic and
animation industries have served as a foundation for game creators and designers.
These foundations, combined with the timely entry of platform developers such as
Nintendo and Sony, played an important catalytic role in the emergence of the video-
games industry, and resulted in a vertically disintegrated industrial complex with
hardware manufacturers as well as a plethora of small game-software developers. The
sharing of creative resources in Japan was in part possible because of the contem-
poraneous and overlapping development of manga, animated films, and video-game
industries.
3.2 The case of the United States
It is well known that the video-game industry had its origins in the United States (see,
for example, Kent, 2001; Kline et al, 2003; Sheff, 1993). The video-game industry
emerged with close ties to the country's budding computer industry in the 1950s and
the 1960s, and drew creative talent from its computer-hardware industry emerging from
Massachusetts Institute of Technology (MIT) and environs and, later, Silicon Valley.
The first video game, Space War, was developed in the early 1960s at MIT's laborato-
ries by Stephen Russell and others using DEC's then new interactive mainframe
computer, PDP-1. DEC was an MIT spin-off headed by Ken Olsen, a former engineer
from MIT's Lincoln Laboratory. MIT generated spin-offs that served as foundations
of the video-game industry, such as General Computer (founded in 1981, a hardware
subcontractor which grew along with Atari) and the software publisher Infocom
(founded 1979, later acquired by the video-game software firm Activision).
Nolan Bushnell, the founder of Atari (founded 1972), is known as the first entre-
preneur to commercialise video games successfully. Bushnell played Space War at the
University of Utah's computer laboratory, before moving to Silicon Valley and devel-
oping a simplified version of the computer game that did not require a fully-fledged
computer. Undoubtedly, Atari benefited from the nation's top labour market in electron-
ics hardware and software in Silicon Valley. According to Kent (2001), Atari recruited
by simply placing an ad in local newspapers and created their new Video Computer
Systems (VCS) division. The video-game industry grew to become a $200 million
business in 1978, and to $1 billion in 1981, of which Atari accounted for half of the
revenue.
Beginning in the mid-1970s the growth potential of video games attracted a wide
and incoherent array of entrants, ranging from new start-ups run by game developers
to old, established firms from traditional industries. These last included those special-
ising in toys (Mattel, Parker Brothers), arcade games (Midway, Bally), home swimming
pools (Coleco), film and broadcasting (Warner Communications, which acquired
Atari), and electronics and semiconductors (Magnavox, National Semiconductor,
Fairchild, General Instrument). The rush of start-ups in video and computer games
around 1980 in Silicon Valley was a phenomenon akin to the dot.com boom of the late
1990s. However, the industry faced a quick downturn during 1982/83, known as the
infamous `video-game crash', and the rapidly growing yet infant video-game industry
faced a sudden market collapse. Analysts blame the oversupply of game software,
along with dwindling quality, which turned away consumers, and caused significant
losses to be incurred by retailers and wholesalers. By 1984 Mattel and Coleco had
withdrawn from the business, and Atari lost many of their top talents to spin-offs
and competitors.
1850 H Izushi, Y Aoyama

Throughout its prominence and demise, however, Atari played an important role as
a seedbed for entrepreneurship in the video-game industry. Spin-offs from Atari accel-
erated after Bushnell was replaced by Ray Kassar; he was formerly a textile industry
executive who was sent in by Warner, and had little knowledge of technology, pro-
gramming, games, nor West Coast culture. Atari spin-offs include the first independent
(third-party) software publisher in game history, Activision (founded 1979), which in
turn produced other spin-offs such as Accolade (funded 1984), Acclaim (founded 1987),
and Absolute (founded circa 1987). Other Atari spin-offs include Imagic (founded
1979), which was the second third-party publisher after Activision; Learning Company
(founded circa 1981); Arcadia Corporation (founded 1981, subsequently changed its
name to Starpath); as well as hardware manufacturer Amiga (founded 1982). In addi-
tion to spin-offs, Atari created a cadre of video-game professionals in and around
Silicon Valley. As Sheff (1993) noted, ``there were Atari alums in high-level spots at
Electronic Arts, Lucasfilm and LucasArts, Apple, Microsoft, and a number of other
companies'' (page 140).
Another firm that played a seedbed role for the US video-game industry was Apple
Computer. This was in part because of the personal ties between Steve Jobs and
Atari (Steve was an Atari employee at one point), and in part because of the contem-
poraneous evolution of video games and personal computing in Silicon Valley. When
multiple video-game consoles competed for market share in the late 1970s, Apple was
one of the potential platforms for digital media, including video games. Electronic Arts
(founded 1982), the top video-game publisher in the United States today, was founded
by Trip Hawkins, who was a Harvard graduate, a Stanford MBA, and also the 68th
employee of Apple Computer. Electronic Arts (EA) subsequently produced a number
of spin-offs and firms with personal ties with Hawkins, including Westwood (circa
1980), Dynamic (founded 1984) which was later purchased by Sierra On-Line (founded
1979, now part of Vivendi Universal), and Strategic Simulations, Inc (SSI) (founded
1979).
Thus, an examination of core talent in the early video-game industry reveals that
the industry evolved along with the personal computing industry, with its roots in the
`creative computing' tradition nurtured through the interface between computing and
arcade games. There was a degree of cultural coherence between Atari and Apple,
both of which attracted highly qualified engineers in Silicon Valley who, unlike the
computer-hardware-oriented industry, were not interested in associating themselves
with either large firms or military contracts. The US video-game industry offered
creative yet alternative opportunities for engineers and programmers, many of whom
had been trained in close association with the country's defence interests under the
Cold War regime. Bushnell was quoted as saying:
``we provided a place for creative people to be part of something completely new. These
were people who wanted to create something intellectually stimulating and fun. They
wanted to put their talent into making games, not bombs'' (Sheff, 1993, page 140).
Active spin-offs from Atari and Apple meant a geographic shift of the video-game industry
from Greater Boston to Silicon Valley, along with the rest of the computer industry.
There is little evidence linking the transfer of creative skills from comic books and
animation films to the video-game industry in the USA. This may be thanks to the
combined consequence of historical and geographical contexts. Although comic books
were an important part of national culture in the early 20th century, the industry
was largely overshadowed by television cartoon programmes by the time the video-
game industry emerged. Comic art evolved along with the newspaper industry centred
in New York City, first in the form of editorial cartoons and later comic strips
(Gordon, 1998). William Randolph Hearst, the publisher of New York Journal and
Industry evolution and cross-sectoral skill transfers 1851

San Francisco Examiner, used comic strips as a tool to attract advertisement revenue
when it became apparent that its regular use increased circulation. Subsequently, comic
book publishers emerged in New York City in the 1930s. Detective Comics, published in
1937, was one of the first genre-based comic books and was filled with mysteries and
detective stories. By 1943, 95% of American children were reading comic books (Pustz,
1999). However, the publication of Frederic Wertham's Seduction of the Innocent
sparked controversies over comic books, and the subsequent creation of the Comics
Code Authority in response to an examination by the Senate Subcommittee of Juvenile
Delinquency led to widespread concern over the role of comic art as a societal vice.
The number of comic book titles declined from 630 in 1952 to 250 in 1956, and
circulation almost halved (Pustz, 1999), leading many publishers to leave the industry
or be forced into bankruptcy. Most US comic book publishers today earn more profits
from licensing characters than from selling comic books (Pustz, 1999). Marvel, a New
York-based comic book publisher since 1939, for example, has transformed itself into a
`character-based entertainment company', and has sold licenses to video-game firms to
use Marvel Comics characters. The US comic book market today is a mere 6% of the
size of its Japanese counterpart.
The US animated-film industry also preceded the video-game industry by decades.
Like comic books, New York City was the centre of the animated-film industry until
the 1930s. The phenomenal success of Walt Disney caused a migration of talent to
Burbank, California, leading to the relocation of the industry from the East to the
West Coast. Disney's move to California was serendipitous, motivated in part by a
business failure in Kansas City, and in part by the presence of a family member, his
elder brother Roy, who became his business partner for life (Allan, 1999). Nonetheless,
the origins of Disney's core talent were the synergetic outcome between comic art
nurtured in the US East Coast and animated-film techniques that had originated in
and were centred in Europe until World War 1. Many of Disney's founding members,
known as the `Nine Old Men', studied in New York, Chicago, and Europe.
In spite of the powerful presence of comic books, animated films, and video games,
the three sectors did not follow the same process of synergy in the United States as
occurred in Japan. Whereas Japan's comic book publishing peaked as recently as in the
mid-1990s, in the case of the United States, the influence of comic books and animated
films in popular culture peaked in the immediate postwar period and had already
waned by the time video games emerged (Bendazzi, 1994; Wright, 2001). Few historical
links are found between comic books and animated films on the one hand and the
video-game industry on the other. One piece of documented evidence of interaction
between the animated-film and video-game industries which occurred before the
`video-game crash' is what has been described as an `unconventional move' by Don
Bluth, a Disney inner circle animator, to Cinematronics, one of the oldest arcade
firms, which resulted in the release of Dragon's Lair in 1983. Instead, more transfer
of talent is observed between the video-games and the film industries. Film producer
George Lucas collaborated with Atari to launch the game firm LucasArts (founded
1982) in Marin County, just north of San Francisco. There have also been numerous
adoptions of film titles for video games in the United States, including Atari's Superman
(1979), Raiders of the Lost Ark (1982), and E.T. the Extra-Terrestrial (1982) for its
console systems as well as Bally Midway's Tron (1982), Atari's Star Wars (1983), and
Indiana Jones and the Temple of Doom (1985) in an arcade-game format. Some even
argue that an unsuccessful joint project between Atari and the filmmaker Steven
Spielberg amplified the Atari fiasco: driven by deadlines and a delivery time suited to
release of the film, but unrealistic for video-game development, the video-game version
of E.T. the Extra-Terrestrial allegedly did not meet the expectations of consumers.
1852 H Izushi, Y Aoyama

3.3 The case of the United Kingdom

As with the case of the United States, the video-game industry in the United Kingdom
originated in computing. British mathematicians have long been regarded as pioneers
in conceptualising computing and software. Among them was Alan Turing, who wrote
on the application of computers to games in 1953 in an article entitled ``Digital
computers applied to games''. In the 1970s UK books (see, for example, Bell, 1972)
and computer magazine articles began to feature algorithms and `how to' in building
simple electronic versions of traditional card and board games (Wolf and Perron, 2003,
pages 2 ^ 3).
This long tradition did not put the UK video-game industry ahead of the US
counterpart, however. The UK video-game industry began with clones of Atari's
Pong, introduced in the UK market in 1975, and trailed behind the US and Japanese
counterparts; it had no prominent international firms until the 1990s. Unlike the UK
video-game industry, few early UK game-software developers had academic qualifica-
tions and links to the then fledgling personal computer industry. Instead, the UK
video-game industry was founded on the accumulation of skills among `bedroom
coders' in the 1980s, which in turn led to its subsequent take-off in the early 1990s.
The term `bedroom coders' refer to a whole generation of self-trained programmers,
mostly teenagers still in school, who programmed and ran businesses out of their
bedrooms. Bedroom coders started to thrive in the early 1980s, when games were still
relatively simple and platforms were unsophisticated. The rise of bedroom coders was
ignited by a new generation of cheap programmable home computers which became
widely available, primarily led by Sinclair products (the ZX80, ZX81, and ZX Spectrum)
with fierce competition from the Commodore VIC-20 and C64, as well as Atari ST
and Commodore's Amiga machines (Burnham, 2001, pages 292 ^ 293). Although these
computers were designed and marketed as general purpose machines, they served as
platforms on which to develop and play video games. Six to seven thousand titles
were estimated to have been produced for the Sinclair ZX Spectrum, and more than
ten thousand titles for the Commodore 64 worldwide (Parkinson and Kitts, 2001,
page 370).
Most contemporary UK video-game firms emerged out of this cadre of freethink-
ing, independent programmers who subsequently helped the emergence of professional
programmers. The firms range from current major video-game developer firms, such
as Codemasters (founded 1986) and Rare (founded 1982 as Ultimate, and acquired by
Microsoft in 2002) to small studios such as Interactive Studio (founded 1991, although
active since circa 1981, and renamed Blitz Games in 1999), Optimus Software (founded
1988, active since circa 1981, and renamed Atomic Planet in 2000), and Sensible Software
(founded 1986, acquired by Codemasters in 1999).
Codemasters is, in many ways, a typical example of a firm that grew out of the
bedroom-coder tradition. Brothers Richard and David Darling began as teenagers
operating Galactic Software, a mail-order business, out of their bedrooms. They
advertised their games in computer magazines, and also worked as contract program-
mers for Mastertronic (founded 1983), a specialist distributor of budget video games.
In the first fifteen months of their partnership with Mastertronic, nearly 750 000 copies
of games written by the Darlings were sold, netting them »85 000, which they used
as the initial capital to establish their own firm formally in 1986. In less than a year
Codemasters had a string of top-ten titles to its name. One of their early games, BMX
Simulator, a motorbike-racing game released in 1987, went on to become one of the
world's best-selling games. However, Mastertronic, another major firm in the early
foundation of the UK video-game industry, is an anomaly as it was founded
as a distributor and never employed in-house programmers, with the exception of
Industry evolution and cross-sectoral skill transfers 1853

debuggers and testers. Nonetheless, the firm played a pivotal role in coordinating
small software houses and a large pool of bedroom coders and freelance authors,
and distributed games developed by early game developers such as Codemasters and
Mr. Chip Software.
Bedroom coders were loosely connected by networks of various channels. Video-
game enthusiasts developed informal social networks through chance encounters at
local software stores, and exchanged information on how to win games and shared
programming codes. Computer magazines, such as C&VG (founded 1981), Sinclair User
(founded 1982), Your Spectrum (founded 1983), Computer Gamer (founded 1984), and
Input (founded 1984), also helped bedroom coders to develop contacts, advertise
games, and exchange machine codes. Trade shows and conventions provided another
venue for information exchange between amateur programmers and professional
developers. Codemasters's first encounter with brothers Philip and Andrew Oliver,
programmer-hobbyists, was at the European Computer Trade Show. The Oliver brothers
subsequently became regulars at Codemasters, and wrote games for them before
founding Interactive Studio in 1991. Another duo, brothers Darren and Jason Falcus,
also started out as contract programmers for Codemasters before establishing Optimus
Software. The cohort of bedroom coders nurtured in the 1980s became the springboard
of the industry's rapid growth in the 1990s, writing games for Japanese consoles such
as Famicom and PlayStation.
Bedroom coders gradually disappeared from the scene with sophistication of hard-
ware and software technologies in the 1990s. The entry of the Nintendo and Sega
consoles into the UK market (both in 1987), and an increasing US interest in the
UK market, meant that bedroom coders faced competition from the increasingly
large-scale, formal operations of Japanese and US firms. The introduction of Sony's
PlayStation in 1995, along with Sony's purchase of the highly respected UK game
developer and publisher Psygnosis (now Sony Interactive) had a decisive impact.
The first batch of PlayStation games boasted high-quality titles such as Destruction
Derby and WipeOut (Hayes and Dinsey, 1995, page 137). With its advanced technology,
and the need to purchase expensive development tools, video-game software develop-
ment increasingly required capital and a team of developers, and therefore could no
longer be coded by lone programmers. The skills accumulation of self-trained teenage
programmers has been replaced by the foundation of courses on video-game design
and programming by higher and further education institutions as well as the entry of
graduates into the industry from relevant academic subjects such as computer science
and mathematics.
The growth of the UK video-game market in the early 1990s coincided with its
increasing integration into the US market. The lucrative US market attracted UK
firms, while the US firms were drawn by the programming skills of the UK firms
supported by a pool of thousands of bedroom coders and crackers. Acclaim (US), for
example, entered the UK market through a merger with Optimus Software founded
by the Falcus brothers. Optimus, in turn, partnered Iguana Entertainment (US) in 1993
to gain a foothold in the US market, which led to the development of NBA JAM, and
subsequently merged with Iguana UK. The sale of Iguana USA to New York-based
Acclaim Entertainment in 1995 resulted in Iguana UK becoming part of Acclaim's
internal development team. Subsequently, the Falcus brothers left to establish another
start-up, now called Atomic Planet Entertainment (founded 2000).
As with the case of the United States, there is little evidence connecting the comics
and animated-film industries to the emergence of the video-game industry in the
United Kingdom. A lack of contemporaneous evolution of the comic book industry
deprived it of the ability to influence game developers whereas the elite status of
1854 H Izushi, Y Aoyama

animators deterred them from collaborating with the video-game industry in its
infancy. In the United Kingdom the first comic boom began in 1890 with the publica-
tion of Comic Cuts by Alfred Harmsworth, setting the style of comic drawing by the
turn of the 20th century. Comics had been established as quality entertainment aimed
at children by 1930; this was followed by the publication of three formula-breaking
comic magazines, The Dandy (founded 1937), The Beano (founded 1938), and Magic
(founded 1939). The post-World-War-2 boom came with publication of the magazine
The Eagle (funded 1950) and British original comic books such as Marvelman
(founded 1954). Subsequently, however, the UK comic industry experienced a gradual
decline, with circulations shrinking from the quarter-million and half-million marks
in the booming 1950s (Gifford, 1985). Today, old favourites The Beano and The Dandy
have a combined circulation of a quarter million (Mintel International Group Limited,
2000), less than one fifteenth of the circulations of leading weekly comic maga-
zines in Japan. Furthermore, with their readership largely confined to children up
to 14 years of age, comics have never achieved a mainstream status in the British
cultural scene such as that enjoyed by their counterparts in Japan and the United
States.
Whereas comic art has never been accepted as an art form, the UK animated-film
industry has been highly acclaimed. Its international recognition as an art form,
however, contributed to its talent being isolated from the then-obscure, subculture-
status, video-game industry in the latter's infancy. The UK animated-film industry
dates back to 1900, with the founding of the production firm Vitagraph by an English-
man, Stuart Blackton, in the United States. Having studied the techniques used in
Blackton's short film Humorous Phases of Funny Faces (1906), Walter Booth made
the first British animated filmöThe Hand of the Artist (1906)öwhich was followed
by the first British full-length feature worköThe Story of the Flag (1927)öand the
first British colour animated film öOld Sam (1936)öboth produced by Anson Dyer
(Gifford, 1987). With creators such as John Halas and Joy Batchelor (Animal Farm
1954) and George Dunning (The Yellow Submarine 1968), the United Kingdom had
become the centre of animation in Europe by the 1960s. Its work received acclaim from
critics and industry insiders, including a number of Academy Awards (for example,
Bob Godrey's Great in 1976, Nick Park's Creature Comforts in 1991, and The Wrong
Trousers in 1994, and Daniel Grieaves's Manipulation in 1992). However, the industry
tends to cater to the educated public of film festivals and elite television stations
(Bendazzi, 1994, page 275), with a weakness in the production of long-form television
series for family and children's viewing. The elite status of animators in the UK
cultural scene, and the lack of sociocultural cohesiveness between them and bedroom
coders, further hampered their active involvement in the video-game industry in its
early phase. For instance, in spite of the accumulation of skills in computer animation
at Halas and Batchelor (founded 1940), as evidenced by such titles as What is a
Computer (1969), Contact (1974), Autobahn (1979), and Dilemma (1981) (Bendazzi,
1994, page 154), no evidence points to the transfer of skills from animation to
video games. Only since the early 1990s have we observed some animation companies
undertaking contract work for video-game developers (PACT, 2002); that is, since
the video-game industry has established socioeconomic legitimacy in the country.
This has also coincided with the stagnant period of the UK animated-film industry,
which faced increasing competition from firms in North America, Japan, France,
and Spain.
Industry evolution and cross-sectoral skill transfers 1855

4 The role of cross-sectoral skill transfer in global competition

As the preceding section suggests, the cumulative nature of industry evolution often
reinforces distinctiveness in industry formation and evolution. Whereas compatibility
between skills and product development changes over the course of an industry's
evolution, we contend that technological progress determines which existing industries
contribute creative skills to emerging industries and in turn influence competitive
positions in the emerging industry. Dominant skills in an industrial sector and phases
of technological progress interact with industrial evolution in a complex manner. In
this section, we divide the history of the video-game industry into three broad phases
by the dominant firm and the dominant technologies associated with the period
(figure 1, see over).
Phase 1 spans the period from the birth of the industry in the early 1970s to the
market crash that took place in the early 1980s in the United States and the United
Kingdom. During this period, Atari established the four key elements that made the
video game of today a unique medium öan algorithm, player activity, interface, and
graphics (Wolf and Perron, 2003, page 14)öand also developed home video-game
consoles. Phase 2 began in 1983 with the introduction of Nintendo's Famicom console
system, first in the Japanese market. During this phase, Nintendo achieved monopoly
in Japan, played a major role in reviving the US home video-game market, and laid the
foundation for the UK market revival in the early 1990s. A number of software
developers emerged as their licensees, first in Japan (for example, Namco, Capcom,
Square), and then elsewhere (for example, Electronic Arts and Acclaim in the United
States, and Virgin Interactive and Ocean in the United Kingdom). Phase 3 began in
the early 1990s with the introduction of the CD-ROM in computer games and console
systems, including Sega's Mega CD (1993), Sony's PlayStation (1995), and Sega's
Saturn (1995). The introduction of CD-ROM systems coincided with innovations by
North American firms both in software and in hardware.
In phase 1, video games were transformed into a viable commercial venture, as the
venue of game playing shifted from university laboratories to bars and arcades and,
eventually, to the home. Concurrently, the objective of game development shifted first
from satisfying a group of technology-savvy hobbyists to the general public, and
second to console-based home-system users who expected to entertain themselves
longer in order to justify the cost of their purchase (the Atari 2600 video game console
cost about US $200, and a game cartridge $25), unlike arcade games which were
designed to last for no longer than a few minutes. The longer duration expected of
home-based console games made storylines ever more important (Robinett, 2003),
which in turn led to the use of character-based player surrogates. From typical early
games, which were relatively simple with players controlling either tools (for example,
paddles) or vehicles (for example, spaceships, planes, cars, tanks), developers began
to design identifiable player surrogates such as human figures and animals (Wolf,
2003, pages 50 ^ 52): for example, Atari's Adventure (1979), for the 2600 console,
created a new genre of action ^ adventure games, notable for their much longer
play time (Robinett, 2003).
These shifts in markets and objectives in game playing altered the demand for
creative talent. In the early days, game development was done by a programmer taking
on the entire task: writing a story line, designing characters, as well as programming
(Robinett, 2003). However, the US video-game industry, with its origins in computer
programming, was not well positioned to develop the artistic skills necessary to create
elaborate stories and characters. Developers sought to compensate for this weakness
by licensing characters from filmsöwithout much success, as evidenced by failures
such as Atari's Raiders of the Lost Ark (1982) and E.T. the Extra-Terrestrial (1982).
1856 H Izushi, Y Aoyama

Figure 1. Three phases in the history of the video-game industry.

Industry evolution and cross-sectoral skill transfers 1857

Moreover, the limited capacity of microprocessors and storage media at that time
permitted only rudimentary characters ^ drawn in a small number of pixels, often
differentiated by colour onlyöwhich failed to replicate the characters from which
they were licensed. This failure of synergy between video games and licensed charac-
ters contributed to the rapid decline of consumer interest, and the subsequent US
market crash.
The emergence of the Japanese video-game industry in phase 2 can in part be
explained by their effectiveness in developing story lines and characters through sourc-
ing artistic talent from the comics and animated-film industries. It is no accident that
the first cartoon-like characters with names and identities of their own were designed
in Japan: Pac-Man (1980) and Donkey Kong (1981). The first division of labour between
game designers and programmers also took place in Japan, the best known being the
role of Shigeru Miyamoto, a pioneer game designer of Nintendo, whose assignment
was confined to developing storylines and characters (Sheff, 1993). Here, technological
limitations worked to their advantage: characters from comic books and animated
films are far more suited to video games than are their more realistic counterparts
from films (Wolf, 2003, page 52). Early cases of licensed characters in Japan include
Taito's arcade game Lupin III (1980), which was based on the popular Japanese comics
and animated film series (Burnham, 2001, page 340).
The mainstream acceptance of comic books and animated films as forms of enter-
tainment for children and adults alike, and the presence of a large reserve army of
artistic talent, facilitated the transfer of talent to video games in Japan. In contrast,
in the United States and the United Kingdom, comic books had become locked in
a `ghetto location' in the cultural scene by the 1980s (King and Krzywinska, 2002,
page 21). The cultural cohesiveness of the three sectors in part explains the success of
the Japanese video-game industry in phase 2.
During phase 3 the strengths of the Japanese video-game industry were gradually
undermined as new technologies removed some of the earlier constraints. Although
laser-disc-based high-volume storage media had existed since the early 1980s, the
technology did not mature until the introduction of the CD-ROM in 1992. This medium
allowed exponential growth in storage capacity, which in turn led to the incorporation
of more detailed graphics and full-motion video clips (Burnham, 2001, page 360; Wolf
and Perron, 2003, pages 6, 22). North American specialist graphic-chip manufacturers,
nVIDIA (founded 1993) and ATI Technologies (founded 1985) emerged in the video-
game industry, and a breakthrough in software technology, the 3D engine, appeared in
the early 1990s. The early games which used a 3D game engine öHowertank One and
Catacombs 3D (both id Software, 1991) and Wolfenstein 3D (id Software, 1992)öwere
quickly followed by a series of 3D blockbuster games such as Doom (id Software, 1993),
Quake (id Software, 1997), and Tomb Raider (Eidos, 1996), all of which were developed
in the United States or the United Kingdom (Lahti, 2003, pages 160 ^ 161). These
games were characterised by their more realistic graphic representation and simulation
of the physical world. Furthermore, a realistic graphic representation became an
important marketing tool as both consumers and developers began to judge the
quality of games on it. Game developers in particular began to judge programmers'
achievement and status based on graphic details and game complexity (Wolf, 2003).
Skyrocketing costs of development meant greater dependence on licensed characters
from films and other entertainment sectors as a means of controlling costs and
increasing the chances of the games becoming top-sellers.
Technological progress which allowed detailed graphic representation therefore
prompted the US and UK video-game industries to begin exploiting creative talent
from their film industry more aggressively. This trend is most evident in the US
1858 H Izushi, Y Aoyama

video-game industry, where substantial technological expertise in special effects

already existed in the film industry. Video games began to borrow certain forms of
plotting or point-of-view structures from films, and films in return increasingly
adopted game-software tools to create special effects (Bolter and Grusin, 1999; King
and Krzywinska, 2002). For example, video games include `cut-scenes', or prerendered
video clips, which are often used to establish the initial setting and background story-
line, and some Hollywood studios have begun to diversify into the video-game market
through licensing and sharing of storylines and characters such as the James Bond
franchise (King and Krzywinska, 2002). Sports games are also being developed in
collaboration with professional teams, as evidenced by FIFA (Electronic Arts) and
Championship Manager (Eidos) which simulate management of professional football
leagues.
Today, large US and UK publishers (such as Electronic Arts, Eidos) consistently
produce best-selling games that emphasise realistic graphics and feature major enter-
tainments in both countries. The current trend suggests that the industry's centre of
gravity is moving back to the United States with the United Kingdom gaining some
prominence, exclusively in software, which has emerged as an increasingly important
source of revenues for the industry.

5 Conclusion
What emerges from this research on the origins and the evolution of the video-game
industry is a new hypothesis on the interplay of economic, social, and technological
factors that influence the process of cross-sectoral skill transfer. Skill formation is
embedded in specific social contexts and shapes the trajectory of industry evolution
in a manner unique to each country. Japan's video-game industry evolved through
corporate sponsorships in arcade games, toys, and consumer electronics industries
and drew skills from the comic book and animated-film sectors, both of which were
contemporary growth industries and were accepted as mainstream entertainments.
In contrast, in the Untied States, the video-game industry has its origin in computer
games at university laboratories and evolved to arcades games with links to the then-
fledgling entrepreneurial personal computer industry. The industry developed with few
links to comic books or animated films, which had reached their peaks decades earlier.
Similarly, the video-game industry in the United Kingdom had few links to comics and
animated films, in part because of the lack of concurrent evolution and in part because
of the elitist culture of the animation industry. The lack of an entrepreneurial culture
in the UK video-game industry, and the informal nature of `bedroom coders' with
few links to risk capital may have played a role in delaying the take-off of the UK
video-game industry.
Therefore, creation of industry-specific skills out of the cross-sectoral fusion of
creative talent in the formation of a new industry is a combination of market con-
ditions, social legitimacy, cultural cohesiveness, and the state of technologies. Although
economic incentives such as high wages and growth prospects undoubtedly play a role,
they do not always lead to cross-sectoral fusion of skills. Not only does the evolution
of existing industries affect how and from where the emerging industry draws skills,
but also the socioeconomic status attached to pioneering entrepreneurs or firms in
an emerging industry in turn influences its capacity to draw skills from other sectors.
The sociocultural cohesiveness between old and new industries further lowers the
sectoral barrier for skill transfers.
Finally, the state of technologies can also influence cross-sectoral compatibility of
skills. The ascendance of the Japanese video-game industry in the late 1980s came
at a time when microprocessors had relatively limited power and storage media had
Industry evolution and cross-sectoral skill transfers 1859

limited capacity; these limitations were overcome by mobilising creative talent in comic
books and animated films. Technological change gradually eroded these advantages,
however, as the technological expertise of the US and UK video-game industries in
manipulating more powerful microprocessors and larger capacity storage media, com-
bined with creative talent from a contents industry which is more cohesive to it, helped
them to regain their competitive strengths.
The hypothesis on industrial evolution therefore pertains to the role of cross-
sectoral social cohesiveness and technological progress influencing industry evolution.
This hypothesis incorporates historical, technological, economic, and social factors to
give a better understanding of how a new industrial sector draws its skills from existing
industries. Our future research agenda includes conducting a broader study to examine
a variety of new industry formations in different national contexts.
Acknowledgements. We would like to thank those who granted interviews for the research, and
three anonymous reviewers for providing useful comments and suggestions. Financial support of
Clark University with Faculty Development Grant along with excellent research assistantship
provided by Monica Stephens, Clark University, is also gratefully acknowledged.
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