Sony Computer Entertainment Quentin J Thomas University of Florida July 2011 This case was prepared and written by Quentin Thomas as a final project for the Master of Arts International Business program at The University of Florida. This case is intended for discussion and freely distributed courtesy of Queso Media Group via RapConQueso.com. This case is to be neither redistributed for profit or without proper credit given to the appropriate source. 1 INTRODUCTION Wednesday, June 6th 2011, Jack Tretton, President and C.E.O. of Sony Computer Entertainment America, is preparing to take the stage for the Sony E3 press conference being held in Los Angeles, California. It is about 60 days since the PlayStation Network has been hacked and approximately three months since the devastating earthquake and tsunami that brought much of Japan to a stand-still. Both are expected to cost Sony Corporation billions of dollars—a big difference from the predicted profits for the 2011 fiscal year. Now he will address six thousand consumers, some victims of the recent hack, about the future of Sony Computer Entertainment. (E3, 2011) INTERACTIVE ENTERTAINMENT INDUSTRY The video game industry has seen huge leaps since the mid 1960’s. In 1966, a German-born inventor named Ralph Baer began work on what would be the first home video game console. The console was called “Brown Box,” powered by D-cells and connected to a black and white television. (Orlando, 2007) It was later named Odyssey and released by Magnavox in August of 1972. (Magnavox, 2011) Odyssey received lukewarm sales, but Baer started something he probably never imagined. (See Exhibit 1) It is estimated that the video game industry will see $40.7 billion in revenue in 2011, including research and development, manufacturing, and sale. (Morris, 2011) This is an impressive figure for something expected to be a fad in the early 80's. The video game industry has achieved a position that rivals the film industry and even overtaken the ailing music industry. (Reuters, 2007) The one day record holder for films in 2007, Spider-Man 3, brought in $59 million in ticket sales. Compare that to the 2007 best-selling game, Grand Theft Auto IV, which raked in $310 million on its first day. (Seeking Alpha, 2008) The video game industry has also seen consistent growth throughout the years. (EXHIBIT 2) Despite the recession, the industry averaged a 4.6% growth from 2006 to 2011. The top three corporations in this industry, in order (in terms of market share), are Sony , Nintendo, and Gamestop. Microsoft comes in at 4. Gamestop Corporation, a used game company, represents one of several shifts occurring in the video game industry—increase in used game sales. This has been a plus for many video game stores and customers, but negative for manufacturers and developers. Companies such as Electronic Arts and NetherRealms (developers of the popular Madden and Mortal Kombat games, respectively) are combating resale by including one-time use codes with new copies of each game to unlock game content, such as online play. Other trends having large effects on the industry include downloadable content (DLC), micro- 2 transactions, and replay value of online gaming. DLC and microtransactions are similar in that both involve the purchase of new content to be added to a game. DLC was and in some cases still is, free content, such as new characters or levels, added to games. Multiple items are often bundled together into a “pack” to be sold at around 10% – 25% of the price of the full game. Microtransactions are most often an element of a game which was released for free. The game is released for free with minimal content included and additional content, such as weapons for action games or accessories for characters, can be purchased individually for a small fee. While DLC and microtransactions have been helpful for generating revenue, more problematic changes in the industry have included the aforementioned used game sales, growing development costs, and new competition from non-traditional games. In recent years, big name titles have become the source of life for game developers and console manufacturers. But with the big name, comes a big budget. As video games became more cinematic, they took on a more cinematic development style, also keeping video game prices high. Many gamers have turned to second-hand stores. Also, cheaper, non-traditional games on mobile devices and internet browsers, are taking video game market share. Between 2008 and 2009, the iPhone has increased its share of software revenue from portable games in the U.S. (Exhibit 3) Sony's PlayStation Portable (PSP) was already struggling for position in the portable game market with Nintendo's line of handhelds remaining strong. Nintendo Nintendo Corporation was founded on September 23, 1889, first producing hanafuda cards (Japanese cards used for a variety of games). Nintendo continued to produce cards for many years but, realizing the limitations as a card manufacturer, decided to try its hand in other areas including a food company, hotel chain, and a TV network. After the failure of these ventures and the decline of playing card sales, Nintendo moved into the toy industry, where it saw minor success. With the creation of its Laser Clay Shooting System, an arcade-style shooting simulation game, Nintendo found more success and a new market. In 1983, Nintendo made it's move towards becoming a leader in the video game market with the release of the Nintendo Entertainment System (NES), known as the Family Computer (Famicon) in Japan. The NES saw great success, eventually outselling its biggest competitor, Sega Mega Drive/Genesis, by 20 million units. Nintendo followed the NES up with it's hand-held console, the Game Boy. This system only showed four shades of gray and was originally bundled with the game, Tetris. The Game Boy found great success, remaining the best selling console for many years and still remaining number three in all-time hardware sales for gaming. Nintendo would go on to release several more consoles, including Super NES, Gameboy Color, 3 Nintendo 64, Gameboy Advance, Gamecube, Nintendo DS and Wii. The Wii revolutionized interactive entertainment with it's motion sensing hardware. The Wii Remote, or “Wii-mote”, is able to detect motion in three dimensions and used with most Wii games. On June 7 – 9, Nintendo had playable demos of its next generation home console, Wii U. Wii U will also use the same three-dimensional motion detection, but include a full-color touch-screen on the controller. (Nintendo, 2011) Microsoft (Entertainment and Devices Division) Microsoft Corporation was founded on April 4, 1975, after inking a deal with MITS, who distributed an interpreter developed by Paul Allen and Bill Gates earlier that year. The company moved into developing operating systems (OS) in 1980 with its own version of Unix, known as Xinix. Microsoft jumped into the video game industry in 2001 with the release of its Xbox console. Xbox is a part of Microsoft's Entertainment and Devices Division, which also houses the Zune and Windows Phone. The Xbox was designed by members of Microsoft's DirectX team in order to compete with Sony's PlayStation 2. At the time, Nintendo and Sony were dominating the video game market and drawing developers away from developing for the PC platform. With the Sega Dreamcast having been discontinued in March 2001, ending Sega's console development business, a gap was lane left open in the three-horse console race. On November 14, 2001, Microsoft launched the Xbox gaming console and in 2002, Microsoft replaced Nintendo as the number 2 seller of for that generation, although the PlayStation 2 outsold both consoles.. Microsoft's current generation console, the Xbox 360 and there have been no confirmed plans for the next generation. (Microsoft, 2011) SONY COMPUTER ENTERTAINMENT Sony Computer Entertainment (SCE) was established November 16, 1993 as a part of the Consumer Products and Services Group of Sony. SCE handles the research and development, manufacturing and sale of its hardware, which include its line of PlayStations (PS) and PlayStation Portable (PSP) consoles. Sony also develops software for its gaming platforms through Sony Computer Entertainment Worldwide Studios. After severing ties with Nintendo during the early 90s, Sony Corporation created its Computer Entertainment division and launched its competitor to Nintendo and Sega, the PlayStation. The PlayStation was officially launched on December 3, 1994 in Japan. (PlayStation, 2011) It was the first console to ship 100 million units, reaching this mark 9 years and 6 months after launch. (Sony Computer, 2005) The PlayStation included a compact disc (CD) drive and was capable of playing audio 4 CDs. The successor to the PlayStation, PlayStation 2 (PS2), was released on March 4, 2000. The PlayStation 2 included backwards compatibility (allowing it to play PlayStation games) and a DVD drive. The PS2 holds the record as the best-selling console of all time, having sold over 150 million units worldwide to date. (Sony Computer, 2011) It also reached the 100 million units mark faster than it's predecessor, reaching that number in 5 years and 9 months. Sony's current generation console, the PlayStation 3, was released on November 11, 2006. Sony Computer Entertainment divides its business development into four regions: Japan (SCEJ), North America (SCEA), Europe (SCEE), and Asia, similar to video game regional lockout. The main headquarters for each region are located in Foster City, California; London, England; and Tokyo, Japan (for all of Asia). (Sony Computer Entertainment Inc, 2011) Developing studios acquired by Sony Computer Entertainment, Inc. become members of Sony Computer Entertainment Worldwide Studios. SCE Worldwide Studios oversees all wholly-owned developing studios and is responsible for the strategic and creative directions of all development and production within each studio.