Executive Summery Any major invention has a humble beginning and the video game industry is no exception.

Pong was the first invented game, and it was created by coincidence by a defence contractor making electronics for the military (CNBC, 2011). Since then the gaming industry has grown to a multibillion dollar industry and has experienced several power shifts, but today three major players dominate the industry; Nintendo, Sony and Microsoft (See appendix 1). This oligopoly of console producers each has their weaknesses and strengths. What has constituted them as market leaders are all for various reasons (source). However, today they are facing The only true original game developer is Nintendo

Table of contents

1. Introduction This report is an investigation into what sets successful console developers apart from other companies. In particular, a look at how these companies are able to maintain growth by continually inventing new markets and pushing new products, while also being sensitive to changes in its customers perceived value of specific products. The gaming industry is inherently unstable because it is constantly affected by new developments and constraints both internally and externally (CNET, 2008). Therefore, in addition, this paper will examine how the current market conditions, changes and developments impact the companies performance, including identification of issues and opportunities video developers are facing. This data will be collected through the use of quantitative data collections. In this paper, the author will use macro- and microenvironment analytical tools in order to analyze the video game console industry, with the aim of assessing the industrys environment and analyzing the companies strategic actions. 1.2 Focus The paper will use a theoretical framework consisting of three theoretical parts. As this report is written in a short period of time first section of the report will only scan and not monitor the macro environment through the framework of PEEST. Subsequently, the author will forecast and assess the analytical findings, which will subsequently reveal the opportunities and threats of the external environment (Volberda et al., 2010). The last section of this report will analyze the microenvironment through the work of Porters 5 Forces, which will subsequently reveal the strengths and weaknesses of the console developers in the industry (Jobber, 2007). Consequently, the author will utilize the analytical findings of the report to create a TOWS analysis framework to illuminate the key factors, which shape the industry (Volberda et al., 2010). Finally, the author will draw conclusions and make recommendations for the future of the gaming industry. External Analysis/PEST Political According to Kalning (MSNBC, 2006), there has been a lot of controversy regarding the violent and sexual nature of video games and the impact it has on players and especially children. Recent studies evolving MRI scanning of the brain reveal that games of such nature activate certain centres in the brain, which involves emotional arousal (MSNBC, 2006). Since the hardware console

developers used to license the rights to software game developers with small scrutiny, they suffered from bad publicity, lawsuits and even protesting grassroots organisations (Mavav.org, 2007). This led to tighter restrictions from the console developers. Regulatory bodies have tried several times to stop the flood of violence and sexual content found in video games but has all failed (NY Times, 2007). That however, does not entail that in the gaming industry, they should be oblivious to these rulings. The fact that there are so many law suits pending signifies there is a focus problem. It appears, despite the fact that we have been exposed to violence and sexual content in other media e.g. television, people have not taken in that video gaming is a growing media and that it does not only serve children or young male teenagers. According to Zackery P. Morazzini (NY Times, 2007), a California deputy attorney general, argued that the main focus is merely extending the protection of children from sexual content to violent content. As argued earlier there has been a reluctance to rule against video game developers. One could argue that lobbyist may have influenced law-making, that this huge and growing industry has the collateral to influence a country like the US, who normally regulates very hard against this sort of content. However, one could also argue that in this volatile financial climate, governing bodies will be more reluctant to rule against and disadvantage a huge industry, which is projected to grow vastly in the future and subsequently contribute to our bleeding economy (theguardian, 2009). This development is vital for the console developers in the industry due to the revenue model they acquire; the razors and blades business model. Consoles are sold with a loss and profits are gained from the licensing deals they have with the game developers (Casestudy). Thus, the regulating of games has a great influence on the game developers revenues. The most eyebrow-lifting restriction comes from no other than the Chinese Government. The incentive of a decade ban of the $5.8 billion gaming industry was to protect children after a parental outcry (ChinaDaily, 2011). However, Lenovo a Chinese hardware producer, has recently launched a console with multiple functions. This has opened a lot of questions from competitors, especially considering the Chinese favouring of Chinese companies (NYTimes, 2010). Representatives from both Sony and Microsoft are opportunistic with regards to this development. They argue that this may very well open the market, which will subsequently boost revenues even more.

Economic Most economies had since the mid-1990s experienced substantial economic growth, however that trend ended with the recession starting in 2007 (Jobber, 2007). When considering the economic forces that may influence game console developers it is vital to evaluate the segments and markets in which they perform. The problem in the meanwhile is that this recession is so vast and extensive that only very few industries goes free. Businesses are struggling, the unemployment rate is rising and consumers have less money between their hands. The issue of unemployment and job creation plays a central role in the upcoming presidential election in the US (theguardian, 2012), and for console developers this is vital as the US is their largest market. However, empiric studies show that there has been a tendency in recessional times seeing growth in the entertainment business (CNET, 2008). So does this mean that the console developers play in a recession proof industry or even an industry benefitting financial downswings? To a certain degree it may be so According to Euromonitor (2011) hardware sales has been declining since 2010, with exception of Xbox 360 and Playstation 3. It however stated that it was more likely due to the stagnant development than the interest for buying consoles. The future of consoles depends on new releases, which will be discussed later on. The state of thought is that despite having less money to juggle with, there are certain things consumers will not trade-off. The first observation is that in recessional times people want entertainment to get rid of the depressing reality they live in (source). The second phenomenon is an extension of that and is called the lip-stick effect (source). The lip-stick effect is a need for people to still look good despite having less money to spend. With a bright red lip-stick coloured set of lips a woman can portray a million dollar for something she bought at Tescos for 1.50. For the console developers this entails that the customers still want to entertain themselves, but are willing to trade-off more technological advancements. This is why Nintendo is market leader (See below model).

Nintendo has targeted consumers with a cheaper console, lesser advanced games and their strategy has paid off. One could also argue that their success is due to capturing a whole new segment of players, which will be discussed later on. Furthermore, a real potential threat to the game developers is the volatile financial market. The exchange rates have influence on the revenue, especially the US Dollar and the Yen has dropped to levels not seen in decades (The Economist, 2011). However, there is also a positive flip side to that coin. China has been experiencing great economic growth for more than a decade now (source), and with a strong Yuan this not only has a positive effect on the revenue stream, it furthermore entails that China has grown to surpass Japan as the 2nd largest console purchaser in the world after the US (Case Study). Social/cultural To be able to stay in front of competition several factors are vital; technological development, innovation, being upfront with gaming trends in the industry etc. But all of the above changes with demographic trends as age distribution, lifestyle changes, and even household structures (Jobber, 2007). Despite the fact that the growth rate of the global population is declining, the population is expected to grow steadily to 9.1 billion by 2050 (IMF, 2006). There are two important factors to evaluate within this number; the first is the age distribution, second is the median age the age at which 50 percent of the population is older and 50 percent is younger. The age span between developed and developing countries is increasing. The elder population in the developing countries are getting older faster than in the developed countries. Despite this being a problem for the developed countries it is not out of proportion as in the developing countries (See below model).

Source: IMF (2006) This entails that a country like China are facing great problems, since the younger population in the future will have to support a disproportionate number of elders (TheEconomist, 2011). This may affect the societal, lifestyle and household structure going into the future. Subsequently, the younger segment may prioritize differently and choose not to spend their time and money on video games. Should they spend their time and money on video gaming, there is the danger that the Chinese Government again may regulate video gaming, if it interfered with societal agendas. In the more developed countries, with US as the industrys largest consumer, they face some of the same problems. Although they may not regulate as seen in China, lifestyle changes and household structures may be affected. According to John M. Guilfoil (The Boston Globe, 2008) elders are too sensitive to advanced high-tech gaming and take in much better lesser advanced technological games in which they at the same time can exercise without hurting their aging muscles. This development will only increase in the future as the elder segment will rise. Technological The way in which technology advances today makes it vital for companies being innovative, aware of changing trends and thus being responsive to it. With the internet a new generation of handhelds allows us online access 24/7 (Daft, 2010). This has opened new possibilities of online gaming on video consoles connecting players around the world into the virtual playground. When players are entering this virtual world, it is very much aligned with the network phenomenon of Facebook. The more people are displayed or available on the platform, the more other wants to join in (TheEconomist, 2011). According to a Mintel (2011) report over six out of ten console owners agree that games are more fun when played in a social context. Thus, constructing licensing deals

that ensures royalties from software developers has become an important income source as mentioned earlier with the razors and blades business model, because if the console developers are able to lock in a franchise they may reap the same success as has been the case with the billion dollar income videogame World of War Craft (TheEconomist, 2011). Kaz Hirai, a representative from Sonys Playstation division, was quoted by the Wall Street Journal saying, We are not creating any (PS4) announcements at E3. Ive regularly pronounced a 10-year life cycle for PS3, and there is no reason to go divided from that. When recognizing the pace of change in technological developments, one could argue whether the 10 year product life cycle, which console developers pertain should be re-evaluated (MagIssue, 2012). However, this statement could either be a cover up from a lack of progress and to create the illusion that Sony is very much in control, or on the other hand Sony may have something up its sleeve and it is merely a marketing trick to postpone excitement to the very last. Lastly, heavy ongoing debates from players have spurred an interesting viewpoint on how controllers limit them in certain games (TechCrunch, 2009). Certain games as the popular CounterStrike are better controlled with a mouse and keyboard. This entails that good players, and probably the ones you would find in a virtual network, will refrain themselves from playing these sorts of games on consoles. One could argue that for Microsoft they have not been interested seeing a fusion between handheld controllers and mouse/keyboard because they have the PC gaming market to themselves. If that fusion where to happen, it would seriously threaten their monopoly. However, for especially Sony who provides technological and high solution games, this transition serves a huge possibility and could potentially steal market share from Microsoft. Sony has in fact introduced a mouse and keyboard, but the response from gamers is that the keyboard is too expensive at $127 and the few keys on it still limit their play (Gameranx, 2011). So one could argue that the fusion is still a weak attempt, but Sony is at least now aware and willing to compete with Microsoft on this market. Micro environmental conditions 3. Competitive environmental analysis In this part, I will discuss the competitive environmental threats the video game console industry is facing. The model includes the competitive threats, Bargaining power of buyers, Bargaining power of suppliers, Threat of substitute, Barriers to entry and Rivalry among existing

competitors (Porter, 2008). The Global video gaming industry including software and hardware divisions was in 2009 estimated to be worth approximately $72,2bn. In addition, Business Insights forecasts that the global video gaming will continue its fast growing revenues and thereby reach $92,5bn in 2014 (Data Monitor, 2011). Furthermore, the industry is undergoing major technology and business model transitions, due to the explosion of smartphones and tablets is opening up games to the masses. Several statistics and surveys confirm that the industry will be facing a consistent growth, as stated by Fabrizio Biscotti, researcher at Gartner; This large market siz means that many consumers embrace gaming as a core piece of their entertainment budget and will continue to play as long as game publishers deliver compelling and fun games (Gaudiosi, 2011). 3.1 Bargaining power of buyers The demographic segment of gamers is radically changing, with the entry of more middle- aged women and older men. Thus companies in the gaming industry have been forced to adapt to the new market conditions in order to continue to stay competitive (Data Monitor, 2011). In fact, this generation has created new business opportunities of providing digital game-based e-learning (Chaudhary, 2008). As pointed out by Dr. Barbara McCombs, Research Director for The Center for Human Motivation; The present generation of youth has grown up on a diet video and PC games. Todays youth are more adept at using the Internet rather than peruse the pages of books for their learning (Chaudhary, 2008). Thus, the author states that traditional educational methods have little appeal to todays digital generation who possess visual literacy skills and want their learn to be fun. Therefore, it has also forced companies to adapt to the new market conditions in order to not be outcompeted by competitors. According to Porter (2008) this tendency confirms that consumers in the video gaming industry are directing the video developers. In addition, the Internet offers price comparisons and easy access worldwide, which has lead to the online buyer, has gained an increased power, due that the buyer has more options (Chaffey, 2009). Thus, companies that are operating in the gaming industry are forced to be Top of Mind by adjusting their price strategies and consistently developing new innovative product. 3.2 Bargaining power of suppliers Porter believes there are certain factors, which determine whether it is the provider or buyer, who holds power in the negotiating (Jobber, 2004). One of them is, if there are many suppliers of a given component in relation to the number of buyers. Thus, there will always be some form of price war,

it is therefore important that the console developers are able to create close relationships with their suppliers. Key to their bargaining power is that with their hardware, they also serve other industries (source). The suppliers may have less incentive for putting their efforts into developing new technologies for the gaming industry, if they see greater potential in other electronic industries e.g. television, mobile phones or computers. Inevitably, this pose a great threat as the suppliers can ultimately choose where their focus wants to be. One could argue that, Microsoft has stronger bargaining power over suppliers than do Nintendo and Sony, due to the fact that they themselves are leaders in hardware production. 3.3 Threat of substitute In case of dissatisfaction among customers, they would have a wide range of options to buy substituting product from others. According to Porter, if the substitution is easy and visible, then it can weaken a companys power. Therefore, it is decisive for companies in the gaming industry to create uniqueness, due that the Internet enables products to be more readily introduced (Chaffey, 2009). However, sometimes those threats can be turned into possibilities. According to a Euromonitor paper (2011) toys, video games and phone apps has begun to reinforce one another boosting sales. These are industries, which would normally be evaluated as threat of substitutes. Instead games on Android and Apple are becoming proving grounds for downloadable console games (PCWorld, 2010). This phenomenon opens up the possibility for franchises. Franchises are not only prosperous in sales; they are also cheaper and faster to introduce to the market once already having developed the concept. The biggest threat for console developers in the meanwhile is the emergence of smart phones. Where smartphones have a much wider segment, they can allow themselves to offer a wide range of games without having to worry about segmentation. The real danger for the console developing companies is if they continue the aim of capturing the casual gamers. According to a research conducted by MooSpace, more than 47% of casual gamers preferred playing on their mobile at home instead of playing on consoles (GamingBlend, 2012). The console developers will not be able to compete on the casual players, especially when considering that the mobile industry has increased vastly since 2005 on is most likely to increase in the future (see below table).

Source: Euromonitor (2011) The reason why Nintendo had such great success with its Wii console was because they targeted families and elders who cannot enjoy games on a mobile together. The gaming sociality cannot be duplicated on a mobile in the same manner as the Wii. The same notion goes with high definition games. Mobile phones cannot substitute the demanding segment of gamers, who demand high quality games. Thus, they must target that segment, which is still the young males in their 20s and 30s (TheEconomist, 2011). 3.4 Barriers to entry The traditional value chain of the video gaming market has been disrupting by new gaming formats and business models, which has resulted in an increase of new competitors. However, barriers to entry are high. Hence, since the video consoles were introduced by Nintendo and Sega in the 80s, only Microsoft and Sony has been able to really compete with Nintendo. This largely has to do with their technological know-how and the resources they contain. Capturing market share in the video game console industry acquires a lot of resources and only very few can compete on that market (MBA report). The ones that can compete e.g. EA Sports has a different focus strategy, but they should be closely monitored and taken as a serious threat (source). To conclude on this, competition poses a lower risk for Microsoft and Playstation, due to the fact that they compete in a market where basically none can compete with them on technological terms. However, despite Nintendo reaping success with the Wii, they do not offer highly technological features on their console. This in the meanwhile entails, that there is a greater threat of rivalry and if Nintendo does not differentiate their product very well, it is likely that they will lose market share in the future. Microsoft and Sony has already entered the once niche market and they are gaining ground (source). 3.5 Rivalry among existing competitors

Rivalry in the gaming industry is strong, as customers loyalty in this industry is low, which has resulted in the industry being highly price sensitive. Many customers seek out cheap deals, which lead to intense price competition between video developers (source). Some video developers are able to differentiate themselves by offering new features or a better quality service to their lowprice competitors, such as Nintendo. This company success is largely due to its disruptive innovations in alignment with its focus on user experience. As is illustrated in the below figure, the company with its $15,46bn continue to be the largest global games publisher in 2010. While Sony recorded losses of $498m. According to Data Monitor (2011) the main reason is due to lack of successful titles in 2010. 5. SWOT Analysis (see appendix 1 for framework) Strength: Weakness: Opportunity: Threat: As stated by Chaffey (2009); The greatest threat is likely to occur where digital products fulfilment can occur over the Internet (Chaffey, 2009). Here the author want to bring in the price comparison sites, which have huge impact on video developers success and forces them to adopt to the competitors prices constantly. 6. Conclusion and recommendations

Reference list Chaffey, D. 2009. E-Business and E-commerce management. Pearson, 4th edition. Gaudiosi, J. (2011). Global Video Game Industry Sales Expected to top $112 billion by 2015. Available at Business Source Elite. Published, 07/08/2011. Chaudhary, A. (2008). Digital game-based learning future of education. Available from Business Source Elite. Journal of Management Awareness, Vol. 11, No. 2. Accessed, 10th of January.

David, J. (2004). Principles and practice of Marketing. McGraw Hill, 4th edition. Daft, L. R. (2004). New Era of Management. South-Western, 9th edition, Porter, M. (2008). The Five Competitive Forces that Shape Strategy. Available from Harvard Business Review. Publicated, January 2008. Volberda, W. H.; Morgan E. M.; Reinmoeller, P.; Hitt, A. M.; Ireland, D. R.; Hoskisson, E. R. (2004). Strategic Management. Competitiveness and Globalization. South-Western. David, J. (2007). Principles and practice of Marketing. McGraw Hill, 5th edition, Data Monitor. (2011). The Video Gaming Industry Outlook. Available at Data Monitor. Publication date, 24th May 2011. Mintel. (2011). Video Game Consoles and Peripherals. Available on Mintel. Publication date, October 2011. CNET. (2008). Is the video game industry recession-proof?. [online] Available at: <http://news.cnet.com/8301-13772_3-10107412-52.html> [Accessed 3rd January 2011]. MSNBC. (2006). Does game violence make teens aggressive?. [online] Available at: <http://www.msnbc.msn.com/id/16099971/ns/technology_and_science-games/t/does-gameviolence-make-teens-aggressive/> [Accessed 3rd January 2011]. MAVAV. (2007). Video game addiction and violence in underground video game cultures. [online] Available at: <http://www.mavav.org/> [Accessed 3rd January 2011]. New York Times. (2007). Courts Block Laws on Video Game Violence. [online] Available at: <http://www.nytimes.com/2007/08/21/arts/television/21vide.html?pagewanted=all> [Accessed 3rd January 2011]. China Daily. (2007). Lenovos gaming console raises questions. [online] Available at: <http://www.chinadaily.com.cn/cndy/2011-07/07/content_12850974.htm> [Accessed 3rd January 2011].

New York Times. (2010). Foreign Companies Chafe at Chinas Restrictions. [online] Available at: <http://www.nytimes.com/2010/05/17/business/global/17lobby.html> [Accessed 3rd January 2011]. The Guardian. (2010). South Carolina primary: what will the candidates do to create jobs for those left behind? -video. [online] Available at: <http://www.guardian.co.uk/world/video/2012/jan/20/south-carolina-primary-jobs-video> [Accessed 3rd January 2011]. The Economist, (2011). All the worlds a game [online] Available at: <http://www.economist.com/node/21541164> [Accessed 3rd January 2011]. The Economist, (2011). Redback and forth [online] Available at: <http://www.economist.com/node/21526380> [Accessed 3rd January 2011]. International Monetary Fund, (2011). Global Demograhic Trends [online] Available at: <http://www.imf.org/external/pubs/ft/fandd/2006/09/picture.htm> [Accessed 3rd January 2011]. The Economist, (2011). The most surprising demographic crisis [online] Available at: <http://www.economist.com/node/18651512> [Accessed 3rd January 2011]. The Economist, (2011). Jedi v Orc [online] Available at: <http://www.economist.com/blogs/schumpeter/2011/12/online-gaming> [Accessed 3rd January 2011]. The Boston Globe, (2008). Wii gets seniors back in the games [online] Available at: <http://www.boston.com/news/local/articles/2008/04/13/wii_gets_seniors_back_in_the_games/?pa ge=full> [Accessed 3rd January 2011]. MagIssue, (2012). Sony Exec Says PS4 Will Not Be At E3 [online] Available at: <http://www.magissue.com/sony-exec-says-ps4-will-not-be-at-e3.html> [Accessed 3rd January 2011]. TechCrunch, (2009). Mouse and Keyboard vs. Console controller: Lets bury the hatchet [online] Available at: <http://techcrunch.com/2009/11/10/mouse-and-keyboard-vs-console-controller-letsbury-the-hatchet/> [Accessed 3rd January 2011].

Gameranx, (2011). Sony Announces Mouse and Keyboard Controller for PS3 [online] Available at: <http://www.gameranx.com/updates/id/3312/article/sony-announces-mouse-and-keyboardcontroller-for-ps3/> [Accessed 3rd January 2011]. Euro Monitor. (2011). Boundaries Blur Between Toys Video Games and Phone Applications. Available at Euro Monitor. Publication date, 9th August 2011. Euro Monitor. (2011). Consumers Await Next Generation of Video Game Consoles. Available at Euro Monitor. Publication date, 7th November 2011. Euro Monitor. (2011). Video games hardware drives growth in toys and games. Available at Euro Monitor. Publication date, 2nd September 2011. PCWorld, (20010). Angry Birds Migrate To Game Consoles [online] Available at: <http://www.pcworld.com/article/210625/angry_birds_migrate_to_game_consoles.html > [Accessed 3rd January 2011]. Gameblend, (2012). Data Shows Casual Gamers Prefer Mobile Games Over Console Games [online] Available at: < http://www.cinemablend.com/games/Data-Shows-Casual-Gamers-PreferMobile-Games-Over-Console-Games-38383.html> [Accessed 3rd January 2011].