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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games

Copenhagen Business School, cand.merc.aud., Institute for leadership, politics & philosophy, E65 – Strategic Leadership – Master Thesis

STRATEGY FORECAST

Next Generation Gatekeeping In The Video Games Industry

Hand in date: 28.04.2011 Number of pages: 91 (excl. Front Page, Executive Summary & Appendices), Total: 100 pages Number of keystrokes: 159.541 + 28 figures á 800 = 181.941/182.000 Author: Rasmus Søegaard Kaas - Cpr.: XXXXXX-XXXX Tutor: Søren Dejgaard

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

EXECUTIVE SUMMARY

The objective of this thesis was to provide a strategic forecast of the video games industry hardware market, through the actions of the three gatekeepers, ultimately aiding 3rd party game developers and other stakeholders, in planning their strategies for the next hardware generation.

Through a study of historical industry events and consumer , the frame was set from where to research the current industry . Thus a study of relevant activities was conducted, ultimately exposing the strong linkage between gatekeepers and the developers of 3rd party complementary . To get a picture of the perceived strengths and weaknesses of gatekeepers in the eyes of these 3rd party developers, an interview with umbrella company NOGAP was conducted, identifying as the overall favorite. While Microsoft and had historically followed the performance play strategy, had during the last paradigm shift recaptured market leadership through a controlled migration. An analysis of industry profit potential saw a historical downward tendency, where especially the threat of disrupting had a potential of changing the core industry. In leading a direct war on standards, Nintendo was advantageous.

Highlighting some of the similarities to the feature and relating them to the proposed decline of Hollywood, provided two major lessons: Never force hardware standards too aggressively and never let risk aversion destroy software creativity. This lead to a historical analysis of , ultimately seeing it decline over the years.

Drawing on the key lessons of this thesis, the presumed next generation first-mover, Nintendo, were likely to continue their trend of hardware innovation, this time through convergence of their two core markets: handheld- and home systems. Nintendo would become more innovative, through IP game productions that were harder to imitate than seen with the average casual games. Microsoft and Sony would go for a controlled migration and a performance play respectively.

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

TABLE OF CONTENTS

Introduction ...... 5

1. Problem Statement ...... 6

1.1. Delimitation ...... 6

1.2. Methodology ...... 7

2. Emergence Of An Industry ...... 11

2.1. History ...... 11

2.2. Culture ...... 19

3. The Value System...... 24

3.1. Competitive Advantage ...... 24

3.2. Vertical Linkages ...... 32

3.2.1. Digital ...... 32

4. Market Conditions & Rivalry ...... 36

4.1. Generic Network Strategies ...... 36

4.2. Industry Profitability...... 38

4.2.1. Industry Rivalry ...... 38

4.2.2. Threat of Entry ...... 44

4.2.3. Threat of Substitutes ...... 45

4.2.4. Bargaining Power of Buyers ...... 48

4.2.5. Bargaining Power of Suppliers ...... 49

4.2.6. The Dynamics of Profitability ...... 50

4.3. Waging A Standards War ...... 51

5. Industry Innovation...... 54

5.1. Hollywood Decline ...... 54

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

5.2. Video Game Innovation...... 57

6. Strategy Framing ...... 68

6.1. Decoding The Concept Of Framing ...... 68

6.2. The First Mover ...... 74

6.3. Identifying ...... 75

6.4. Assessing Overflows ...... 76

6.5. Seeking Intermediaries ...... 78

6.6. Reframing The Strategy ...... 79

6.7. Competitor Strategizing ...... 84

6.8. Prospect ...... 86

7. Conclusion ...... 89

Bibliography ...... 91

Appendix 2.A ...... 94

Appendix 3.A ...... 95

Appendix 4.A ...... 96

Appendix 4.B ...... 97

Appendix 5.A ...... 98

Appendix 5.B ...... 99

Appendix 6.A ...... 100

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

INTRODUCTION

The has undergone tremendous development over the past 30 years and is now on to outpace movies and music, with an international annual market growth of 11%, gaining a significant share of the total global experience economy. Teenage boys were initially the primary audience, whereas today it is more difficult to booth the audience from a set of simple criteria such as age, gender or cultural background. There are two main drivers behind this paradigm shift. First, technological development allow for deeper immersion, as the narrative and audiovisual aspects of modern games create a more authentic and cinematic experience, widening the medium appeal. Secondly, new ways of interacting with the medium has created new game genres and with that, broadened the audience – but also to some extent alienated the traditional audience.

The video games industry is globally dominated by three gatekeepers or platform owners. Platforms or game consoles function as bottlenecks for the content that reaches end users, and hereby grants the gatekeepers control, in framing user-perception of what a video game is or should be like.

On the other hand, if no one set the standards, the industry would likely see itself return to the state of 1983, where missing quality control with 3rd party published games, lead to the audience losing faith in the new medium, resulting in what is commonly known as the “the video game industry crash”.

3rd party developers of video games will have to cope with this tightened quality control and are very dependent on the hardware directions taken by the gatekeepers, as these are synonymous with the possibilities and limitations of their future creations.

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

1. PROBLEM STATEMENT

The purpose of this thesis is quantifying the premises and causalities of the strategies being practiced by the three major gatekeepers of the video game industry, affecting the structure of the industry and its stakeholders. With a detailed insight into these processes, the second objective is providing an outlook on the future of the industry, with an emphasis on forecasting a set of holistic strategies for the gatekeepers, focusing on the presumed first-mover.

The recipients are mainly 3rd party game developers, who desire to begin planning of game productions, taking into account the hardware and software strategies of the gatekeepers. The methodology herein should in turn prove applicable to future generational shifts. In fact it is the hope, that any industry stakeholder – even the gatekeepers – might find the herein interesting, as a reflection on the past, present and future state of the industry. As such, an attempt at solving the following problem will be the main purpose of this thesis:

How are Nintendo, Sony and Microsoft likely to frame their own strategic advantage in the next generation of video game consoles, emphasizing on the first-mover?

- How has history contributed to shape the industry to its present state? - How is software innovation related to hardware network ? - What can industry stakeholders expect from the future of the industry?

(For the thesis structure, see Appendix 2.A)

1.1. DELIMITATION

The scope of the thesis is the global market for video game consoles. Video games are only a subarea of digital games, again being a subarea of the /creative industry, encompassing such closely related phenomena as music and movies and more diverse experiences like travels and visits. Video game systems as defined in this thesis comprise any TV-connectable system with the main purpose of running digital games. Any other hardware capable of running digital games

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

will be defined as a substitute product. Games for handheld systems with the main purpose of running digital games will also be included in the term video games, but is not a main focus herein. While the center of attention is the hardware market, complementarity towards software/games is very strong, and games as a facilitator of strategic advantage will be a core element of this thesis.

The term gatekeeper will be used equivalent to the three platform owners; Nintendo, Sony and Microsoft, disregarding that the 3rd party game developers can be gatekeepers of their own towards the consumer audience.

1.2. METHODOLOGY

Chapter 2 seeks a historical tour through the history of video games, mainly by analyzing the development in video game systems installed base. The main sources of market shares are the user- edited site Wikia-Gaming, validated against the industry statistics site VGchartz. While the validity of VGchartz data is very high, as it is directly connected to gatekeepers and publishers, the validity of user-edited Wikia-Gaming is only medium. Only high- aggregates have been taken from Wikia- Gaming, why the consequential risk of incorrect information should be minimal. A majority of the historical information has been taken from the acclaimed Swedish industry magazine Level’s RETRO special editions and Tony Mott’s 1001 games you must play before you die. Tony Mott is daily editor- in-chief of Edge, the leading and independent magazine on the video games industry, and validity of his is high.

The second part of chapter 2 will form a picture of the culture surrounding video games, initiating in a large ISFE consumer survey. Key figures from the survey report have been analyzed, as they will be the foundation of important conclusions in later chapters. The consequence of relying on this survey is compromising with a set of predefined data, rather than conducting a specialized survey relating to the problem at hand. Ideally, a deep dive into some of the topics was desirable, while ultimately the survey proved to be useful with its representative user-sample and detailed analytical disquisitions.

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

The chapter 3 value chain analysis has been composed by linking Michael E. Porter’s theories (1985) to relevant news and articles from industry news and consultancy like Accuval and Gamesindustry.biz. As the analysis is high-level, these sites have proven useful in providing factual information of high validity. The hardware dependence of the 3rd party publishers are exposed through an interview with a Danish umbrella company for small and medium sized 3rd party video game developers.

The interviewee was handpicked with these prerequisites in mind:

- It was desirable, that the interviewee did not have a long history (5+ years) in working with the gatekeepers - It was desirable that the interviewee had been engaged in negotiations with all three gatekeepers, without being biased with any of them - It was desirable that the interviewee had focus on

As such the Danish umbrella company Nogap was an ideal representative, providing useful information on the perceived strengths and weaknesses of the three gatekeepers. The consequence of relying on a single development cluster is lack of geographical diversity, and the risk of it being biased with any of the gatekeepers. However, the interviewee, CEO Maz Spork, seemed to have a professional view on the gatekeepers, not least stemming from his several years of experience in the British games industry prior to heading up Nogap.

Hal Varian and Carl Shapiro’s book “Information Rules” on waging a standards war was then consulted to assess how gatekeepers strive to achieve lock-in to their respective platforms, relying on a generic network strategy. The network strategy concept do away with the parametric, traditional generic strategy framework (Porter, 1980), in exchange for the dynamic transition between two generations, making it useful for defining strategic directions in the cyclical video games industry. The book is well researched by the two economist authors.

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

Through Michael E. Porter’s Five Forces model (1980), supported by Clayton M. Christensen’s “The Innovators Dilemma”, relevant interviews with industry analyst Michael Pachter (Wedbush Morgan Securities) and news and industry analyses from mainly Gamesindustry.biz and Accuval, the current industry profitability was assessed. The consequential risk of relying on several interviews with Michael Pachter is that the analysis becomes biased with his opinions, which is sought minimized by consulting major industry news sources such as Gamesindustry.biz and VG247.com. Clayton’s theories on disruptive technologies proved useful in analyzing the threat from closely related substitute products.

Michael E. Porter’s value chain and five forces models view companies from a design-perspective. Focus is on the formal planning process and unlimited rational decision making. The companies are seen as homogenous, black box actors in the market, not taking into account individual opportunism. The time element is not present, further presuming parametrical rationality of the actors. As the analytical level of this work is the industry, and the analytical entity is the company, the models provide a convenient bird perspective on the industry, omitting factors of uncertainty. A trans- historical radar-diagram (Exploring Corporate Strategy, 8th Ed.) ultimately seeks to make the analysis more dynamic, reducing its greatest disadvantage in regards to this thesis.

As video games are in many ways similar to feature films, albeit with a younger overall life cycle progression, it was desirable to conduct a comparative analysis between the feature film industry alas Hollywood and the video games industry. Hervé Fischer’s critically acclaimed book “The Decline of the Hollywood ” proved a fitting source of inspiration. The book is well researched through its many hard facts and explicates the fatal weaknesses of global entertainment media corporations.

Elaborating on this analysis a large database of the 520 best video games from 1985 to 2010 have been built (own contribution) to quantify video game innovation based on information from two of the largest game-review databases on the web; Gamestats.com and Gamerankings.com, supported by Mobygames.com. In the end it does take some additional experience in the field of video games, namely to properly link game series, ultimately affecting the innovation-scores, at which the author

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

of this thesis is qualified. Relying on games (in terms of review scores) rather than the most successful (in terms of ) is desirable as innovative content has been more likely to be instantly rewarded by critics, than by the video game consumer. Thus important innovative concepts have often failed to achieve a current commercial , rather than inspire creations of future commercial potential for a time when the market was ready. The aforementioned sites are among the most comprehensive and professional ones available for game information and validity of the information taken from them is high, as they conduct frequent quality control with their reviewers, making sure only professional reviews count towards the total average scores.

Inspiration for the last synthetic chapter on forecasting gatekeeper strategies stems from previous chapters of the thesis, and the concept of framing and overflows, as interpreted from its roots in constructivist sociology by French sociologist, engineer and Professor Michel Callon. In prospecting holistic high-level strategies, the concept has proven very useful. To operationalize the concept, a model (own contribution) has been built. Basing the synthetic analysis on these derived concepts of social constructivism implies a consequential focus being the individual's learning resulting from its interactions in a social group – in this case, the 3rd party developer knowledge accumulation gained from interacting with the gatekeepers, and the audiences’ in dealing with both of them. Thus, opposed to traditional industry economic theory, there is no single rational answer to a question, rather than a set of plausible derivatives resulting from the interaction of social groups.

Since this thesis is relying on the latest industry news, a deadline has been set at April 12. 2011. Thus, information relevant to this thesis past the aforementioned deadline, have not been influencing the work at hand.

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

2. EMERGENCE OF AN INDUSTRY

Chronologically the industry is said to have gone through seven generations, represented by the life cycles of different video game consoles. Contrary to the dynamic PC-hardware development, the hardware is static, changing roughly every five years in technological leaps (when new consoles are released):

PC

Consoles

Technology

Time

Figure 2.1 – theoretical modeling of console vs. PC hardware evolvement.

Technology having a tradition of being a main driver for game experiences and perceived game quality among audiences, has had the implication through history of consoles being relatively stronger than PC early in their lifecycles, while in the late cycles PC games have had the upper hand. The most interesting generations for the purpose of this chapter are generations 3 through 7 – 3 to 6 being the center of attention for the first subchapter 2.1.

2.1. HISTORY

The video games industry has experienced significant growth since the mid-1980s, and through the lifetime of the medium, it has undergone several transformations. Many had predicted an abrupt end to the industry in 1983 - the great videogame crash - when consumers completely lost interest, due to platform owners with American in the lead, and their lack of quality control with 3rd party developers. Atari was ultimately forced out of the hardware market, and became a dedicated game developer. Taking notes of Atari’s decay, Japanese Nintendo developed and implemented what would

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

prove a stellar strategy, with an emphasis on quality software and hardware, eventually revitalizing the industry.

(The revenue & unit numbers below have all been taken from Wikia-Gaming1 and VGchartz2. The year of release information for consoles and games has been taken from Gamefaqs3. General historical information stem from various sources4).

1984-1990

Market share (units):

18% Master System NES 82%

After Nintendo's 8-bit NES (Nintendo Entertainment System) video game console had opened the 3rd generation of video games, enjoying terrific sales in (1984) and USA (1985), it was published in Europe (1986), with less success. Nintendo's flagship game Super Bros., released for the NES in 1985, have sold 40mio copies to date - most of those bundled with the NES console, which has sold 60mio units to date – a number not surpassed till 1995 when the Playstation came out. Numerous big game series were born in this 8-bit dawn of the industry, among others can be mentioned Tetris (1989), (1987) and (1987). 's Master System being the only real

1 www.gaming.wikia.com

2 www.vgchartz.com

3 www.gamefaqs.com

4 1001 Video Games You Must Play Before You Die, Tony Mott, Octopus , 2010. Edge Magazine, issue 128, 10th anniversary ed., 2003. Level RETRO, Loading.se several issues, see Bibliography.

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

competitor, suffered from Nintendo’s strong licensing-agreements with 3rd party developers. As a consequence Nintendo enjoyed great success with their own games and a broad catalog of 3rd party games, while the Master System had scarcely any 3rd party support, ultimately selling only 13mio units. Nintendo’s dominance was further cemented by their handheld , launching in 1989. Clearly, Nintendo being able to turn crisis into success, was an achievement won on high quality in- house productions and strict quality control with 3rd party games.

1990-1995

Market share (units):

28% Mega Drive SNES 72%

As Sega released their 4th generation console, the 16-bit Genesis in the U.S. (Megadrive in Europe), Nintendo's licensing agreements with 3rd party developers were about to expire. As a result, many quality game series were now multiplatform titles appearing both on Genesis and the 16-bit Super NES. Sega's mascot and other games were deliberately marketed with a more "cool" and adult image to the liking of Americans. Japanese , and Square, and American cemented their positions as some of the most influential 3rd party game developers during this period, with popular games in their respective , , and FIFA Soccer series. Despite immensely popular 1st party games like bestseller (1992, 6mio units sold) and II (1992), Sega had a hard time catching up to Nintendo’s 1st party library, featuring quality games like World (1990), The Legend of Zelda: A Link to the Past (1991), Super (1994), (1993 – “Starwing” in Europe) and 2nd party developed Country (, 1994). Furthermore Nintendo still held exclusivity for

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

some major 3rd party games of the time including Mega Man (Capcom, 1993) and Final Fantasy III (Square, 1994). The Super NES and genesis sold 49mio and 19mio respectively, cementing the ongoing dominance of Nintendo, albeit by a reduced margin. Only one year after Nintendo controversially turned Sony down during the negotiations on a joint-venture CD-based 5th generation console, Sony was ready with their Playstation for the Japanese market in 1994. Utilizing advanced -based 3D graphics, a more adult focused game lineup and being backed by a massive budget, Sony’s debut-console awakened a new and more culturally diverse video game audience. Sony Playstation was the first game console to surpass 100 units sold globally.

1995-2000

Market share (units):

7% Saturn 23% 70% Playstation

In late 1995 Sony launched the Playstation in the U.S. and the rest of the world. The Playstation was quickly adopted as the platform of choice by video game developers who were particularly attracted by the system supporting the CD-medium. Nintendo required 3rd party game developers to purchase proprietary cartridges from them in bulk at price of $20-$30 per cartridge. Because of the substantial cost advantage of the CD-medium5, Sony’s Playstation quickly enjoyed strong and wide 3rd party support. Playstation games ultimately sold for $45-$50, while Nintendo 64 games sold for $60-$70 (suggestive -prices).

5 www.seekingalpha.com/article/40770-the-video-game-industry-nintendo-back-in-the-lead

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

Sony was only briefly allowed to enjoy their first-mover advantage in 32-bit gaming, harvesting the market of technology pioneers and curious new segments of video game players. Just around the corner, both Sega's 32-bit Saturn (1995) and Nintendo 64(-bit) (1996) were ready to compete, with more horsepower than Sony's console. Seeing key 3rd party IP’s shifting from Nintendo to Sony exclusivity, (Mega Man X4 and Final Fantasy VII to name a few), it is likely that a part of Sony’s audience were previous Nintendo loyalists. Furthermore the Playstation gave birth to some of the most successful IP’s in video game history; (, 1995), (1997), (Capcom, 1996) and (1996), to name a few. While Nintendo seemingly managed to hold a majority of their core fans tight, Sega’s loyalty-base was more flattered by Sony’s marching in on their “adult-games” territory. With a limited game catalog only featuring a few premium exclusive titles, where Into Dreams (1996), II (1995) and II Zwei (1996) shone the brightest, Sega’s Saturn became a fatal tale with only 10mio units sold. With poor sales came loss of 3rd party support and retail interest, and 2-3 years after the launch of the console, the Saturn was a rare sight in worldwide stores. Sega needed a new strategy.

Nintendo 64 was developed in collaboration with Silicon Valley, and released just one year after the Saturn and Playstation. Despite much public skepticism Nintendo stayed with cartridge-media. Technically, it was really a matter of pros and cons, as while the cartridges lacked the storage capacity required for full motion video (FMV), like the CD-based Playstation and had comparably higher costs, they enjoyed more fluent game experiences due to minimal loading times and higher durability. In Nintendo’s world FMV’s were only a disturbance to interactive immersion and so were the load-times generated by the CD-medium, illustrating the ideological disagreement that probably put an abrupt end to their joint-venture plans with Sony. Games like Super Mario 64 (1996), Legend of Zelda: Ocarina of Time (1998) and 2nd party developed Goldeneye 007 (Rare, 1997), secured Nintendo’s position among loyalists and are still today widely recognized as some of the best digital games ever conceived.

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

Yet fan loyalty couldn’t carry Nintendo to a generation leadership hat-trick. Sony's triumph in the 5th generation was a reality, and on the console sales charts Nintendo was bested by a factor three, globally. Nintendo had a reputation of being tough employers, among their 2nd party co-developers and 3rd party licensees, and clearly some sort of disagreement was the reason for Square moving to Sony’s fold at the beginning of this 5th generation, costing Nintendo several premium role-playing game (RPG) series like Final Fantasy, that had previously been exclusive to the Super NES console.

While Sony and Nintendo were battling out the 5th generation, Sega had been hard at work behind the scene. In 1999 they tried for a 6th generation first-mover advantage, putting their margins under heavy pressure in developing what they would like to be a revolution for online-gaming. The Sega doubled the processing power of the Nintendo 64 with its 128-bit and failure was simply not an option for the ailing company. Despite heavy marketing, the Japanese reception was lukewarm, while the console enjoyed initial success in the U.S., following a decent release in the European market. For a short while it would seem like Sega could actually rise again, as sales picked up a little in japan during 1999, and numerous critically acclaimed 1st party games were released, like (1999), (1998) and (2000). While 3rd party support were scarce, games like Soul Calibur (Namco, 1999) and Resident Evil: Code Veronica (Capcom, 2000) were both well received among the audience.

2000-2005

Market share (units):

12% 5% Dreamcast 10% GameCube Playstation 2 73%

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

Ultimately selling no more than 11mio units, in a steadily growing video games market, was a tragedy for Sega’s Dreamcast, and already in 2001 Sega made it clear that, suffering from heavy losses, they would stop production of the console, and become a 3rd party game developer in the future. The biggest problem with the Dreamcast was the fact that it was caught between two generations of hardware, with graphics that were not a significant leap ahead of what was already seen on the Nintendo 64, while at the same time overlapping Sony’s customer base. At the same time Sony's launch of Playstation 2 drew near, as the first “true” 6th generation console, utilizing 256-bit graphics processing. The Playstation 2 launch in 2000 resounded throughout the world and can probably be attributed a large part of the reason for Sega's decline. Sony had an ambitious strategy of total dominance of the industry, by on the great success of the first Playstation. Like the first console pioneered on CD-support, Playstation 2 was among the first DVD-players, which was not an insignificant factor for a primary audience who enjoyed other media as much as they did video games. Playstation 2 continues to set new records every day, with 150mio units sold worldwide to date. The most popular Playstation 2 games include such entries as Gran Turismo 3 (, 2001), III (, 2001), Solid (Konami, 2005) and new IP (2005). Another big achievement for the console was it’s fairly large base of quality niche-oriented titles like Sony’s own ICO (2001) and ’ 3 (2006), contributing to growing a loyal core audience.

In late 2001 Nintendo released their 6th generation console, the GameCube. While previous consoles from Nintendo had been criticized for not growing with their core audience, causing many to switch to Sony’s platform, the GameCube came to struggle even more with this unfortunate label. This was particularly a problem, because even the youngest players were moving on fast to more mature game content. While the GameCube were more powerful than the Playstation 2, it suffered from fewer games and a weaker than ever 3rd party support. A controversial sellout of key 2nd party developer Rare, responsible for some of the best Nintendo exclusive titles during the past three generations resounded negatively among core loyalists. Rare was bought by Nintendo for $1mio and sold to

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

Microsoft for $375mio6, and due to key staff leaving in the process, Rare has yet to serve the Xbox- audience a single game to enjoy the acclaim of past Nintendo-exclusives. At any rate GameCube was Nintendo's least successful console to date, with only 20mio units sold globally. During this period, eager journalists would never hesitate to ask if Nintendo had any intention leaving the hardware market and become a 3rd party developer like Sega, and they would reply: “The day we leave the hardware market, will be the day we quit the industry”. Supporting this confidence Nintendo had a strong position on the handheld market, practically enjoying a state of with their (released 2001), making the total GameBoy (all models) sales rise to 70mio units globally, which was a vital lifeline for Nintendo during this period. Furthermore Nintendo had a strong belief that their large loyal fan base would never let them down as long as their in-house produced games held the high expected standards. With premium 1st and 2nd party games like (, 2002), The Legend of Zelda: Wind Waker (2003), Super Mario Sunshine (2002) and new IP’s (2001) and (, 2002) Nintendo delivered on that promise once again. Major 3rd party semi-exclusives (appeared later on Playstation 2), like Capcom’s Viewtiful Joe and was important for the GameCube as well.

Microsoft had been sitting by, watching Sony cash in on video games long enough, even putting long- time veteran Sega out of business. In 2001-2002 they debuted in the market for video game consoles with their Xbox, which was graphically superior to the competitors, but suffered ultimately from an awkward design and very few exclusive quality games. The inarguably most successful game for the console came from 2nd party developer , under the title : Combat Evolved (2001). Halo must be emphasized as not only the best-selling game for the Xbox but also one of the best reviewed games of its generation7. In fact not till 2005, did the console start to generate black bottom line numbers for Microsoft, but ultimately it sold only 24mio units. It is widely believed, that Microsoft

6 www.en.wikipedia.org/wiki/Rare_(company)

7 www.gamerankings.com/xbox/472132-halo-combat-evolved/index.html

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

had a clear cut strategy, of putting weaker-than-ever Nintendo out of business8, just like Sony did Sega, but after a rumored buy-out attempt, they only got away with Rare. After all, even Bungie was pre-Xbox a Macintosh game developer, but was ultimately bought by Microsoft9, emphasizing a strong company-wide tradition of more or less successful attempts at .

2005-2011 (and beyond)

This period marks the current 7th generation of consoles, and will be covered in chapter 4.

2.2. CULTURE

While the video game phenomenon has come a long way, it largely remains an underground culture, and as such has been tacked on some negative labels during its relatively short life time - "frivolous", "violence cultivating" and "a waste of time" just to name a few. Like the followers of popular music and movies have spent many years fighting with similar prejudices before they reached a broad acceptance in society, the video game audience is still struggling. This chapter will not go into discussing how to change the general perception of video games, but rather seek some characteristics of the video game audience and culture, initiating in the ISFE-survey, conducted by GameVision Europe10. Even though the survey is covering the European market alone, with a representative 13.000 respondents11, it is presumed that the data can be extrapolated to the global market with minor loss of validity. Furthermore the report covers all types of digital games, but due to market share, video games are naturally the major source from which the data is comprised. Ideally, looking

8 www.tomshardware.com/news/microsoft-Xbox-360-nintendo-wii,6373.html

9 www.nintendo-wii.greetingstuffs.com/steve-jobs-reportedly-angry-over-microsofts-bungie-buyout/

10 Video Gamers In Europe 2010, GameVision Europe for ISFE

11 “Data on the five largest European territories UK, France, Italy, and Spain (UFIGS) has been provided from the Game Vision European Market Study Spring 2010 which uses a Face to Face sample of 2000 16+ adults in each country. Estimates in the other three countries are based on omnibus research commissioned specifically for this report. 1000 Face to Face interviews in Poland and 1000 CATI interviews in Sweden and Netherlands.” – ISFE, p.15

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

at a chronology of reports would provide a less static analysis, but this is the first time the ISFE-survey has been carried out.

One of the main achievements of the ISFE survey is dividing the respondents into various groups, based on their dedication, presenting the results in a score-card (There is a spelling error in the top row of the score-card as taken from the ISFE report. Corrected sentence: “Number of games bought in the last 3 months):

Figure 2.2 – Target groupings by hours spent & games bought.

These target group definitions will be used for the remainder of this thesis. Mostly though, Intermittent, Marginals and Dabblers will merely be referred to as the casual audience (68%), while Loyalists, Magpies and Committed will be referred to as the core audience (32%).

Drilling down further, illustrates how these groups split on gender and age:

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

Figure 2.3 – Target groups by age & gender.

25% of the 55+ being intermittent and 40% of the 45-54 year olds being marginal makes sense. Loyalists are most among 16-24 year olds, presumably because there are many attending college/ in this group, with freedom to play, while their purchasing power is weak. Age 25- 29 see the highest proportion of committed players. While this segment has naturally stronger purchasing power than ages 16-24, they also spend more hours playing. It could be a sign of these people having played games for many years, tiring faster of games, finding them too reminiscent of previous game experiences and as a result play many different games for a short while each.

This figure shows, that 74% of the new console users, use the Wii casually (maximum 5 hours/week), while PS3 and are used relatively more for loyal or committed play (16+ hours/week):

Figure 2.4 – Console usage by hours per week.

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Finally, this figure lists the reasons for not playing games among non-players:

Figure 2.5 – Top reasons for not playing among non-players.

A large proportion not having the time or finding games too expensive would imply that non-players are primarily thinking of traditional large-scale video games, demanding intense dedication to master. However, several of the smaller productions available for download on modern consoles are specifically designed for short sessions of play.

Summarizing the ISFE-report, this list comprises subjects of interest, derived from the data in the report:

- The most dedicated group, committed players make up less than 7% total, but they buy many more games and play more hours than other groups, and are comprised mainly of young people and males. - 14% of the audience is buying more than 3 games a year; This group accounts for 56% of all game purchases. - The trend is towards less dedicated patterns of play; overall 76% of the audience plays for less than 5 hours a week. - Almost 40% of people playing games have not bought or been given a game for themselves in the last 12 months.

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- 71% of the audience played some form of in the past 3 months.

Concluding this chapter, will be a brief presentation of a few interesting user surveys, conducted by .com:

Figure 2.6 – Polls of consoles owned and innovation preference.

The first figure shows, that out of the 82.294 respondents, 22% own all three consoles. Wii seems to be the most popular secondary console: 17%/15% co-own it with X360/PS3. The second figure shows that respondents find more accessible online play to be the best innovation this generation (27.5%), followed by HD-graphics (26.5%), (15.9%) and Motion controls (11.9%).

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3. THE VALUE SYSTEM

This chapter will initially comprise a value chain analysis, based on the three gatekeepers. The value chain serves as a platform, from which competitive advantage stems. Finally the importance of alliances will be discussed and 3rd party umbrella company NOGAP’s experience in working with the gatekeepers will be the subject of a semi-structured interview. The findings will lead to a comparative analysis of the gatekeepers.

3.1. COMPETITIVE ADVANTAGE

Before going into the value chain analyses, the subject of gatekeeping will be covered briefly. The filtering of artists by gatekeepers goes on in all and as such the gatekeepers decide what content reaches the audience12:

“Gatekeepers determine what becomes a person’s social reality - a particular view of the world.” (Pamela J. Shoemaker and Tim P. Vos) and “The purpose of gatekeeping is shaping the audiences thoughts about what the world is like” (Ranny) 13

The first quotation implies, that there must be such a thing as an objective reality, being hidden by the gatekeepers, while the second one more explicitly indicates the presence of a cognitive selection process going on with the audience, implying that generating value for the audience is only desirable to a point where existing comparable products are surpassed in perceived value. As an example, The Legend Of Zelda: Ocarina Of Time (Nintendo 64, 1998) is considered among a broad audience to be the best video game ever created - a status like this is obviously achievable, only because there is nothing better to compare it to.

Michael Porter argues that a firm’s competitive advantage grows fundamentally out of its ability to create value for its customers that exceed the cost of creating it14. Total value generated as he defines

12 Creative Industries: Contracts Between Art & Commerce, Richard E. Caves, Harvard University Press, 2000, p. 52

13 Gatekeeping Theory, Pamela J. Shoemaker and Tim P. Vos, , 2009 – p. 6.

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it, is a result of the firm’s aggregated value chain activities. Thus, disaggregating the value chain into sub-activities can be a useful tool for analyzing, from where buyer value stems.

This figure shows the generic main activities and relevant support activities of the gatekeepers’ value chains: s s c i c t i t s i s s g i g n n g e o i o s i o t c L i

t e L e l

v a d k r r a d r n e S e n a u S p u o M o O b t b u n I O

Technology Development

Figure 3.1 – Generic gatekeeper value chain

Some of these activities are only partially performed by the gatekeepers, as they are part of a larger value system, while for the sake of this chapter they have been integrated in the value stream as illustrated above.

Inbound logistics and Operations

Game consoles generally have high component- and manufacturing costs, as such Sony lost $250 on every PS3 sold in 2007. Blu-ray diodes and the Intel/Toshiba -processors were both state of the art technologies at the time, being the main cost drivers. While the PS3 were by far the most expensive of the three consoles at its release, due to aggressive predatory-pricing, Sony’s game division still lost $1.9billion in fiscal year ending 200715. However, Sony still has a cash-cow in their old PS2 driving significant software sales, almost years after its launch16. X360 used to run at a loss of $125/unit, but is in 2007 getting closer to break-even. Wii on the other hand, had a clear cost advantage during the same year, earning Nintendo $90 on every unit sold at $250. Nintendo manages to keep its

14 Competitive Advantage, Michael E. Porter, The , 1985 – p.1

15 www.accuval.net/insights/industryinsights/detail.php?ID=29

16 www.accuval.net/insights/industryinsights/detail.php?ID=29

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hardware cost down, due to their console being technically inferior to the competitors, mostly utilizing yesterday’s technology standard. The reason why it is even attractive to sell consoles at a loss is to build an installed base for the higher margin products such as video games and accessories.

Outbound Logistics And Marketing

While Sony and Nintendo rely on outsourced distribution in many smaller countries, namely in Europe, Microsoft enjoys economies of scale from their high market penetration, being represented with fairly mature agencies in 100+ countries over the world. The fact that Nintendo and Sony rely on outsourced distribution and marketing in some countries, raises the risk of marketing being under prioritized by the distributor due to other higher margin products or closer relations with other allied companies. The distributor, be it in- or outsourced, has a very important role in negotiating space terms with the retailers, and though video games must be classified as a luxury good, in- store visibility is important. Digital distribution, though, is winning terrain fast on all three platforms17 as an alternative to retail games. For smaller, often more experimenting and thereby risky game productions, this is a perfect playground to try out new ideas, without committing to the high sunk and fixed costs raised by typical retail productions18. These games provide some of the most innovative content of the current video game scene and are distributed digitally to the buyer’s console. X360 even has an “Indie” scene, Xbox Live Indie (XBLI), allowing for young and inexperienced developers to show case their ideas. XBLI games go at an almost symbolic value of $1 per game. In comparison a conventional digitally distributed game cost up to $15 on (XBLA) and a retail game cost $90 or even more. For the retail games, distributors reap roughly 10% of revenues19.

17 On PS3 through PSN store, on Xbox360 through Xbox Live Arcade and “indie” and on Wii through WiiWare

18 Creative Industries: Contracts Between Art & Commerce, Richard E. Caves, Harvard University Press, 2000, p. 223

19 Nordiska Datorspel, Nordisk Ministerråd, Redikod AB och Erik Robertson, 2004 – p.27

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The three main distribution options’ complexity as a function of creative risk aversion and time/cost is visualized here:

Retail

Creative risk XBLA/PSN/ aversion Wiiware

XBLI

Production Cost/Time

Figure 3.2 – Distribution complexity as a function of creative risk and time/cost.

Marketing is a very important value driver, improving the signal value of the consoles. Thus B2C marketing spend is generally very high among the gatekeepers, ranging from expensive TV- commercials to magazines, bill-boards and viral. Disaggregating the value chain marketing activity further, leaves Sony a competitive advantage in TV-commercials. As an example, their “THIS IS LIVING” commercials, contributed to grow signal value in time for Sony’s Playstation 3 European launch20 back in 2007.

Sales and

In Porter’s traditional value chain, Sales & Marketing is combined in one activity, though in the present video game industry these are two separate processes. While marketing is typically handled in-house or in close collaboration with media bureaus and/or distributors, the sales activity is dominated by a few, but strong global retail chains: GAME, GameStop and EBgames. Retailers reap 30% of the accumulated value of every full-priced video game sold. Furthermore the retailers demand that the games sell immediately after launch or they reserve the right to return the games. When

20 www..com/watch?v=psd8oVToS8k (over 110.000 views on YouTube, accounting only for this upload)

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games are subject to price cuts, the loss is generally shared 50/50 by publisher and retailer21. For console hardware the retailers’ margins are much lower. It becomes clear, that the retailers have a strong stance towards the publishers, that should however be threatened radically by the emergence of digital distribution alternatives. While games of only a few months of age often vanish from retail- stores, there are minimal costs associated with making old games eternally and instantly available online. On the other hand, Microsoft recently announced that retailer GAME will be selling Xbox Live digital content as cards in stores around the world22. GAME will gain a small profit from this, while Microsoft hopes to bring greater awareness of the digital content to an audience, who is not yet familiar with digitally downloading games. This initiative is also an attempt by Microsoft to gain a relative competitive advantage over Sony and Nintendo for the digitally distributed content on their own platform, but is ultimately cementing the power of the retailers in the current value system.

Technology Development

Gatekeepers invest a substantial amount of time and resources in R&D activities, as video game consoles easily incubate for five to seven years before being ready for early beta testing. For example, development of the Nintendo Wii began in 2001 and the system was released in 200623. This lengthy process results in difficulty to adjust supply in reaction to changes in demand. 3rd party developers will often get access to dev-kits relatively late in this incubation-cycle, to avoid information about new consoles leaking prematurely to the public.

21 Computerspil i videns og oplevelses oekonomien [ games in the knowledge and experience economy], The media secretariat and the Danish film institute, 2005 - p. 33

22 www.gamesindustry.biz/articles/2011-02-09-game-to-sell-xbox-live-digital-content-in-stores

23 www.accuval.net/insights/industryinsights/detail.php?ID=29

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Uniqueness Drivers

According to Porter; “differentiation leads to superior performance if the price premium achieved exceeds any added costs of being unique”24. Drivers of uniqueness can potentially emerge from any of the activities in the value chain and there are generally ten principal uniqueness drivers, which will now be measured relatively for each gatekeeper. Finally scores from 1-3 will be given, depending on the standing of one gatekeeper in relation to the other, where 3 is best and 1 is worst. The scores will be added up to see which gatekeeper is currently the best at achieving these chain synergies, ultimately benefitting their stakeholders. Some assets may be measured equally.

Policy choices involve a broad specter of potential uniqueness factors, one of them being choice of product features. The goal of the Wii was expanding the old target audience of 9-24 year old boys, to include both males and females, age 9-9925. This was achieved through a revolutionary product design, enabling more intuitive motion-based controls. Since 2006 the Wii have continued to impress and Nintendo have created themselves a clear competitive advantage due to uniqueness of product features. Microsoft has showed some willingness to innovate as well with their recently released motion-sensor.

Linkages come in three different forms; inherent, supplier and channel linkages. Managing linkages throughout the value chain, making productions more streamlined and ultimately reducing defect rates is something Japanese firms have a fine tradition at26. The failure to effectively manage inherent linkages cost American Microsoft well over 1billion $27 and a hampered image, by rushing manufacturing of their Xbox 360 console so that it would be ready for the 2005 holiday sales. Many units had a consequential fatal error, rendering them unusable after a short while. Porter exploits the

24 Competitive Advantage, Michael E. Porter, The Free Press, 1985 – p.120

25 www.promomagazine.com/mag/marketing_graying_nintendo/

26 Competitive Advantage, Michael E. Porter, The Free Press, 1985 – p.125

27 www.accuval.net/insights/industryinsights/detail.php?ID=29

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importance of this link between manufacturing and testing this way: “testing may only be 1% of total costs, but shipping 1 defect unit may have major negative repercussions [and added costs] on a firm’s perceived differentiation”28. Nintendo and Sony have a strong tradition and image built on developing quality hardware, while Sony even controls channel linkages through their own concept stores.

Timing is another factor, contributing namely to Nintendo and Sony’s competitive advantage in the current generation. Nintendo with the release of their Wii became first-mover on a big industry revolution of motion control based games. Actually they managed this market all by themselves, till the 2010 holiday season, where Sony released their MOVE, with a game controller design very similar to the Nintendo “Wii-remote”. Sony’s PS3 on the other hand, utilize a Blu-ray drive, just in time for the new medium to really catch air over its predecessor, the DVD. Neither Xbox 360, nor Wii, support Blu-ray playback. Sony has a fine history of releasing their video game consoles with perfect timing, supporting state of the art standards such as CD, DVD and recently Blu-Ray.

Location is a factor Microsoft enjoys the benefits from, being well represented with mature agencies in over 100 countries, a lot of where Sony and Nintendo have to rely on outsourced distribution (previously discussed in this chapter). Sony stands relatively stronger to Nintendo, being represented in more countries and with their own global concept stores.

Integration gives Sony a uniqueness advantage as it is the only one of the three gatekeepers running its own concept stores worldwide, letting them better control the performance of activities, e.g. by utilizing specially trained sales force with superior specialist knowledge29. Eliminating the 30% value surplus normally generated by industry retailers on their own video games is another obvious advantage of concept stores.

28 Competitive Advantage, Michael E. Porter, The Free Press, 1985 – p.121

29 www.sonystyle.com/webapp/wcs/stores/

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Interrelationships concern the extent to which, value can be shared with sister business units. This is an important part of Sony’s business, as they are the only gatekeeper producing other complementary products than games and accessories. Direct knowhow from both Sony’s TV and Audio SBU’s grant them a unique advantage in the complementary developing of video game systems. Microsoft on the other hand has a strong tradition in software development, aiding them in building the best onboard console software.

Learning & Spillover is the last activity potentially driving uniqueness. Sony has a tradition of leaning on Nintendo’s , improving them just enough in terms of performance or design, to gain an advantage in the market. This tradition though, has also started to backfire among the audience30. Regardless, Sony has recently launched the MOVE controller set that is technically and ergonomically superior to the Wii-remote, leaving them a slight competitive advantage, although they are struggling to date, with the quality of the games supporting it31.

Chain synergy relative scores Nintendo Sony Microsoft

Policy Choices 3 1 2 Linkages 2 3 1 Timing 2 3 1 Location 1 2 3 Integration 2 3 2 Interrelationships 1 3 2 Learning & Spillover 2 3 2 Total 13 18 13

Table 3.1 – Competitive advantage stemming from uniqueness drivers.

The competitive advantage stemming from the uniqueness drivers, grants Sony an advantage, prior to entering the next generation.

30 www.computerandvideogames.com/140270/news/nintendo-sony-steals-our-ideas/

31 www..com/2010/09/01/playstation-move-review-the-launch-games/

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3.2. VERTICAL LINKAGES

This chapter will focus on the fragment of the value system concerning vertical linkages to 3rd party publishers. These can be more or less binding, eventually leading to the publisher becoming a dedicated 2nd party developer for a specific console. Often 2nd parties are owned more or less by the gatekeepers, but the definition is not carved in stone. For this thesis, a 2nd party developer is a studio that is not yet merged with the gatekeeper (in that case would be 1st party), hence still having its own identity, while the gatekeeper is actively engaged in several 2nd party value chain activities, leading to a game being exclusively produced on their console. Examples of 2nd parties are Rare’s commitment to Nintendo, developing such classics as Goldeneye 007 (Nintendo 64), Polyphony Digital who is responsible for the popular Gran Turismo driving simulation games for Sony’s consoles (PS1, PS2, PS3 and PSP) and Bungie, developing Halo games for Microsoft’s Xbox consoles. Often the linkage is so strong, that most players don’t even recognize 2nd party developers as unique studios, hence the perceived signal value flows directly back to the gatekeeper.

A large catalog of 3rd party titles has a strong tradition of facilitating console sales - the best example being the PS1 (chapter 2.1). 3rd parties need a license to develop games for a specific console, and getting one often involves passing several quality-assessment gates. Gatekeepers also charge a substantial amount for their dev-kits32, sometimes scaring smaller developers away.

3.2.1. DIGITAL DISTRIBUTION

To get a better view of how the gatekeeper business models are perceived among the 3rd party developers, and their experience in the process of developing and co- a game on the three systems, an interview with NOGAP has been conducted. The interview was semi-structured to allow for improvisation. The key findings will be presented here (see Appendix 3.A for a list of the asked questions).

32 www.the-magicbox.com/gaming.htm - (news date: February 16., 2011)

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NOGAP is a Copenhagen umbrella company for a number of already successful or promising Danish 3rd party developers. , being one of these companies, recently (summer 2010) released Limbo - being one of the best games on XBLA to date33. The focus of these companies are digitally distributed games on XBLA, PSN (Sony), WiiWare (Nintendo) and , and they are all to some extent characterized by lacking professional diversity in regards to the commercial aspects of game production. NOGAP’s expertise is in these commercial disciplines, and as such they frequently negotiate terms with the three gatekeepers, and their CEO, Maz Spork, will thus prove a knowledgeable asset, in illustrating the perceived strengths and weaknesses of each gatekeeper and their platforms, to the 3rd party developers.

The relevant observed differences were:

Nintendo / WiiWare Sony / PSN Microsoft / XBLA & Indie High penetration, but many Wii-owners Well suited for Japanese market Well suited for American market don’t know that they can download games Wii firmware issues prevent effective PSN promote new games, but older games Xbox Live has very effective online promotion promotion – any game can be hard to find can be harder to find + in-store (GameStop cards) Wii hardware specificity secures exclusivity Not restrictive in regards to exclusivity of Restrictive in regards to exclusivity of games of key games games Minimal meddling in actual game Minimal meddling in actual game production Meddling in actual game production once a production deal has been made Not very good at/interested in supporting Not very good at supporting indie-developers Good at supporting indie-developers (XBLI) indie-developers34 Nintendo makes deals on a game-by-game Sony prefers long term relations, based on Microsoft makes deals on a game-by-game basis good track-record basis Varying support and Q&A structure for Not so good support and Q&A structure for Good support and Q&A structure for developers (game dependent) developers developers - Suggests price point Dictates price point Varying technical barriers, dependent on High technical barriers Modest technical barriers use of motion controls - Market oriented when picking games Globally oriented when picking games

Table 3.2 – NOGAP’s perceived differences between industry gatekeepers.

33 www..com/xbox360/991005-limbo/index.html - Limbo reviews

34 www.gamesindustry.biz/articles/2011-03-18-nintendo-draws-line-between-independent-developers-and-hobbyists - Nintendo of America (NOA) CEO Reggie Fils Aime: “We don’t want to support garage developers”

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Applying relative scores to key findings from above, gives the following results (the points are given with the gatekeepers’ ability to advantageously control a given process in mind):

Alliances relative scores Nintendo Sony Microsoft

Promotion 1 2 3 Exclusivity demand 2 1 3 Meddling in production 2 2 3 Indie-support 1 2 3 Deal structure 2 3 2 Support 2 1 3 Technical barriers 2 1 3 Total 12 12 20

Table 3.3 – Competitive advantage stemming from 3rd party relations & digital distribution.

The competitive advantage stemming from 3rd party alliances, grants Microsoft a competitive advantage over its competitors, prior to entering the next generation.

Generally for all three gatekeepers, when it comes to their digital distribution services the developer carries the risk all the way through production. If a game is 90% complete and does not live up to a gatekeeper’s subjective expectations or quality tests, there will be no distribution agreement. Retail game productions on the other hand, is in much larger part based on framework agreements, thus minimizing the risk of sunk costs for the developer at a much earlier stage in production.

Maz also commented on the general industry paradigm shift from PC to consoles, as he mentioned these three decisive parameters:

- Commercial – Consoles are a better commercial alternative, as many PC games today are free. Further, It is harder to determine a target audience on PC - Production – Throughout a console generation the hardware specifications are static, while the PC platform is changing on a more gradual basis, making it hard to produce PC games over a 2-3 year period, that still meets the expected standards

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- Piracy – PC games have a higher piracy-rate, which is why many modern large-scale productions are only released on consoles or at least at a later time on PC

One of the biggest challenges of digital distributors are marketing, as this new distribution form forces developers to look for new ways to promote their games. PR is vital, as it is cost-effective and can potentially reach a wide audience.

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4. MARKET CONDITIONS & RIVALRY

Initially this chapter will identify which generic network strategies are currently followed by the three gatekeepers. This leads to the actual study of the industry rivalry and potential industry threats, based on Micheal E. Porter’s Five Forces model. Understanding the current drivers of rivalry and how external forces influence the gatekeeper profit potential is essential for the 3rd party developers in assessing the future state of the industry.

4.1. GENERIC NETWORK STRATEGIES

While developers often have a clear preference for different hardware based on their business models and general risk profile, end user preference stems in large part from the hardware/software synergy and the potential “social life” of the network.

Being part of the experience economy, the video games industry is challenged by the ever changing social reality of their buyers, struggling to find ways of measuring the highly subjective concept of what makes a perfect game experience – or at least what makes it good enough to satisfy the existing cognitive maps of the audience. Specific for the video games, is the dominating hardware standards - at the same time facilitating and limiting the experience gained from the games. Being fully aware of this, the audiences ever so often find themselves in the middle of an inevitable console standards war, often discussing hardware specifications above actual game experiences. At stake is the risk of being locked-in to an inferior standard, loosing connection to the important social network. Thus, a certain game platform becomes a virtual identity – a way to define ones taste in games and a mediator of certain framed experiences. This implies a premium agenda for the gatekeepers, where customer lock-in by raising switching costs becomes utmost desirable35. In the end though, it is the games that justify the hardware purchase towards the consumer, raising switching costs and lock-in. Shapiro and Varian define the relation between lock-in and switching costs this way:

35 Information Rules, Carl Shapiro & Hal R. Varian, Harvard Business School Press, 1999 - p.144

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“Users of are notoriously subject to switching costs and lock-in: once you have chosen a technology or format for keeping information, switching can be very expensive”36

While this statement is clearly based on traditional information technology, it illustrates the powers at hand when users make the choice between video game consoles. So does the concept of network externalities, defined as a result of the product value to one user, being dependent on the total number of users. In modern online games, the positive game experience is often a function of the actual number of current users at the time of play (direct value), while in traditional “offline”-games, network externality is more a matter of sharing thoughts and experiences with others (indirect value).

Based on the contemporary concept of network economics, the generic network strategy framework becomes relevant37:

Control over hardware Open standard hardware

Compatibility Controlled Migration Open Migration Performance Performance Play Discontinuity

Table 4.1 – Generic network strategies.

Generic network strategies are useful for understanding the cyclical nature of the video games industry. While the classic generic strategy framework (Porter, 1980) takes a parametric stance towards the current generation (static), this new framework is concerned with strategizing during the transition between two generations (dynamic), centering on how to recapture loyalty in the new generation. Which generic network strategy should be followed when moving from the current 7th generation to the 8th, will be a topic of chapter 6’s synthetic analysis, while this chapter will briefly outline, which strategy were followed during the last generational transition.

Nintendo: While Nintendo has a history of following the performance play strategy, sacrificing backwards compatibility to technical prowess, they took a different approach, when releasing their

36 Information Rules, Carl Shapiro & Hal R. Varian, Harvard Business School Press, 1999 - p.11

37 Information Rules, Carl Shapiro & Hal R. Varian, Harvard Business School Press, 1999 - p.204

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Wii. Not only are the old GameCube discs directly playable on the Wii, facilitated by the hardware specifications of the two consoles being largely similar, but even a large catalogue of old NES, SNES and N64 games can be downloaded from WiiWare. While many ascribes Nintendo’s impressive comeback in this generation their revolutionary motion-control hardware, the new controlled migration strategy have without doubt locked-in a fair share of older players.

Microsoft & Sony: Have both followed the performance play strategy throughout history, retaining strong proprietary control over their technologies, while sacrificing some backwards compatibility. As such both platforms only play some of the older Xbox and PS2/PS1 games respectively.

4.2. INDUSTRY PROFITABILITY

This chapter will center on the strength of the five market forces determining the ultimate profit potential of the video games industry (see model in Appendix 4.A).

4.2.1. INDUSTRY RIVALRY

The global videogame industry is experiencing an annual growth rate (CAGR) of 10,6%38, making it a relatively high growth sector of the experience economy as a whole. This growth is a likely facilitator of the tense and equally balanced state of differentiated oligopoly or “triopoly” in the industry39, without any of the three seemingly close to losing, bailing out or downsizing.

Michael Porter distinguishes between eight main conditions, from which intense rivalry typically stems – four of these being particularly relevant for the video games industry40:

- Numerous or equally balanced competitors - High fixed costs

38 Global Entertainment and Media Outlook 2010-2014, PriceWaterhouseCoopers, 2010 (hardware and software)

39 Own interview with Maz Spork, NOGAP

40 Competitive Strategy, Michael E. Porter, The Free Press, 1980 – p.18

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- High strategic stakes - High exit-barriers

While the first two have been previously discussed, the last two deserve some attention. High strategic stakes is a result of the video game SBU being a dominant part of the total business. While video game SBU’s are only 10% of the total businesses for Sony and Microsoft41, Nintendo lacks the business-diversification of its competitors making it more vulnerable to changes in the market.

The high fixed costs and losing out on 3rd party licensing control makes for constantly high economic exit-barriers, but the emotional barriers may in turn be even higher. Nintendo clearly has no intention of becoming a 3rd party game developer, as a lot of their pride and historical identity comes from tailoring the hardware to exactly the games they want to create (chapter 2.1).

Microsoft had a first mover advantage in the current 7th generation of video game consoles, when their Xbox 360 released in the fourth quarter of 2005 in Europe and USA. The initial loss of the media standards war to Sony, seeing HD-DVD lose to Blu-Ray, was a major loss for Microsoft, making it look like their console was struggling between two generations, being unable to compete with the price point and popularity of the 6th generation PS2, while being technically inferior to the upcoming PS3. In generic terms, X360 would seem to be “stuck in the middle” like the Dreamcast almost ten years ago – while in reality there was more to the story. Many important 3rd party IP’s like Tekken, Grand Theft Auto and Final Fantasy, which had previously been closely associated with Sony, became multiplatform titles also available on the X360, lowering Sony’s exclusivity-advantage, giving fans of the respective series a cheaper hardware alternative in Microsoft’s console. On the other hand X360 had only a few in-house and 2nd party developed key IP’s. Microsoft had been hard at work though, prior to their late 2010 release of Kinect – a sensor allowing for controller-free motion-based interaction, seemingly a perfect fit for an expanding casual audience (chapter 2.2). Launch Games like

41 www.seekingalpha.com/article/40770-the-video-game-industry-nintendo-back-in-the-lead

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Kinect Animals (2010) and (2010) were even very closely inspired by previous popular Nintendo games like (Nintendo DS, 2005) and (Wii, 2006).

Microsoft’s ability to support Kinect with quality software in 2011 will be a vital factor for their sustained competitive advantage. So far (February 2011) 8mio Kinect units have been sold worldwide, leaving for a 15% penetration among X360 users, while 40% is required for Kinect to be of serious interest to the biggest 3rd party developers42. This more or less leaves Microsoft and their 2nd parties alone to develop Kinect games well through 2011.

One year after the Xbox360 released worldwide, Nintendo Wii launched in fall 2006, promising revolutionary motion controls bound to redefine the way video games were played, and more importantly, who played them. Nintendo further made it clear, that they had no intention going head to head with Microsoft or Sony, rather than the Wii being a complement and entirely different experience to the other consoles. Regardless, Wii quickly took leadership of the 7th generation. The biggest challenge for Wii, was serving a new casual audience, while not losing their longtime loyal fans. The result being some very diverse game-experiences, like core-games Legend of Zelda Twilight Princess (2006), Metroid Prime 3 (Retro Studios, 2007) and (2007), contrary to casual sports games, like New IP’s Wii Sports and (2008). The sales top-20 charts were often heavily populated by the later, more casual experiences, making loyal fans fear for Nintendo’s future plans43. Even though the Wii in its late cycle have still to enjoy one new 1st party IP for the core fans, Nintendo have no plans on abandoning them, according to Chief Game Designer Shigeru Miyamoto44 - while only serving new editions of long running IP’s, has the risk of eventually tiring them. It would seem like Nintendo suffers from an identity crisis. At any rate, supply of Wii has finally caught up with

42 www..com/episode/bonusround/501?ch=1 – Interview with Michael Pachter, Industry Analyst, Wedbush Morgan Securities; Industry outlook 2011 and beyond

43 The ESA – Essential facts about the industry, 2010, p. 8 (Top-20 selling video games of 2009 – heavily populated by casual Wii games)

44 www.qj.net/qjnet/nintendo-ds/wii-gamers-not-abandoned-games-for-loyal-nintendo-fans-in-development.html

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demand as sales have stalled (October 2010)45. Nintendo’s Motion-sensing advantage is being reduced by MOVE and Kinect, offering equally good casual games, even taking advantage of true HD- visuals. According to Michael Pachter, Nintendo is under heavy pressure to showcase their 8th generation console this year in order to stay on top of demand46.

The last contender to the 7th generation battle was Sony’s PS3, featuring a Blu-ray drive and the most advanced graphical specifications of the three consoles. On the downside of things the learning curve has been steep and costs high in game development – 4 to 5 Wii development teams can be staffed at the same cost - making PS3 attractive only to the biggest of 3rd party developers47. Developers are slowly learning to cope with the powers of the PS3 though, and as a result Sony’s console is catching up to Microsoft’s share in the market. Sony’s 1st and 2nd party lineup will have to improve as well, and with games like the late 2010 released (6 million units sold the first month48), it is starting to look better for Sony. Sony have not been idling behind the motion-control wave either, releasing their MOVE controller set in late 2010, being largely an imitation of Nintendo’s Wii controllers, albeit at a higher price-point and struggling with the weakest motion-control game library among the three consoles to date, with no immediate blockbuster on the way in 2011 either.

While X360 may have been the 7th generation overall first-mover, Nintendo got a more commercially important first-mover effect with their motion-based hardware. Even though Sony and Microsoft has later entered the stage of motion controls, Nintendo have had motion-based games entirely for themselves for three years, explaining their superior market standing among the casual audience.

45 www.andriasang.com/e/blog/2009/10/29/iwata_says_wii_price_drop_effective/

46 www.gametrailers.com/episode/bonusround/501?ch=1 – Interview with Michael Pachter, Industry Analyst, Wedbush Morgan Securities; Industry outlook 2011 and beyond

47 www.gamer.blorge.com/2007/10/20/sony-pleads-with-developers-not-to-abandon-ps3-for-wii-and-xbox/

48 www.computerandvideogames.com/280019/news/gran-turismo-5-sales-hit-55-million/

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Kinect is however the most innovative leap over Wii, as it requires no controller-unit at all to play (compatible) games49.

Ultimo 2010, 51mio X360 units, 46mio PS3 units and 85 Wii units had been sold worldwide.

Market share (sell-through units to date as of January 1st 201150:

28% 47% Nintendo Wii Playstation 3 25% Xbox 360

Splitting these market shares by major regions, Japan, USA and Europe per console, shows some interesting tendencies. Nintendo’s Wii is leading by far in all three regions, with a relatively stronger share of home market Japan, which has a low regional share of only 10% though. Nintendo’s favorable profit margins make its leadership even more advantageous. X360 has a comfortable second place behind Wii in home country USA, being the main reason for it still maintaining its worldwide second. Heavy local marketing and strong local loyalty towards Microsoft in general is the main drivers. Microsoft’s share of the Japanese market is scarce, due to a tradition of more western oriented game experiences like FPS (First Person Shooters) to be found on the console. On the contrary, the Achilles-heel of Sony is apparently the American market, as in Japan and EMEAA, they are actually leading over Microsoft by a substantial margin (then comes the seemingly never ending demand for the PS2).

While previous console generations have had a typical life-span of 4-5 years, the current generation, could last at least till 2014. A dramatic rise in costs of game productions and time to market is the

49 Level, issue 52, august 2010, Loading.se/ Reset Media (Sweden), p.34-37 article on motion-sensing war, Kinect vs. Move

50 www.vgchartz.com

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main driver behind this prolonged lifecycle51. As a consequence, hardware additions like MOVE and Kinect and the creativeness of game developers becomes even more pertinent, to maintain lock-in. Sony is most happy with the long lifecycle of the current generation, as they see their installed base growing faster than the competitors, all while component and manufacturing costs are dropping.

“History dictates that in tippy markets, ultimately only one standard will win”52 – Varian & Shapiro

Expanded life-cycles are a major threat to the future industry growth-rate, and thereby the currently healthy oligopoly. The intense present industry rivalry is a result of the gatekeepers trying to create a favorable position for themselves, during an eventual downturn for the industry in years to come. As such the industry is moving from the shake-out phase towards the maturity phase:

Figure 4.1 – Industry life cycle (source: Exploring Corporate Strategy, 8th ed.)

As buyers become more selective, growth rate stagnates. As the cycle moves towards decline, rivalry will intensify, and the probability of one or more of the existing gatekeepers being forced to leave the industry rises. Low cost is the key in the last two lifecycle phases, giving Nintendo the upper hand, should they be able to maintain their favorable cost position into the next generation.

Verdict: Rivalry is medium to strong, minimizing the industry profit potential.

51 www.games..com/articles/708/708972p1.html - average: $10million for an Xbox360 or PS3 game, $3-5million for a PS2/Xbox/GameCube game

52 Information Rules, Carl Shapiro & Hal R. Varian, Harvard Business School Press, 1999 - p.176

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4.2.2. THREAT OF ENTRY

Looking narrowly at video game hardware, defined as TV connected devices with the primary function of running video games, the threat of new entrants is minimal. The existing companies enjoy large economies of manufacturing, yet even they have a hard time breaking even on hardware53. Should a competitor still try to enter it would have to be an already established global IT- or TV-manufacturer with related market experience, like Apple, Logitech, Phillips or Panasonic. While Apple has clearly stated that they have no intentions entering the video games industry, Panasonic is a more plausible direct threat. In 1993, Panasonic released their 3DO home video game console at a price point between $500-600, which was considerably higher than the price point of competitors Sega and Nintendo. Panasonic never did release official sales numbers, but analysts estimate 50.000 units worldwide. Recently they cancelled their handheld console “Jungle” due to changes in the market54, not further specified.

Switching costs is another major entry barrier. The fear of losing out on network externality is a main driver to uphold high switching costs. Multiplayer online-games are some of the bestselling console games of this generation55, and an installed base is vital for users, which is contributory to games like : Modern Warfare 2 selling twice as many copies on X36056 than it did on PS3, even though the X360 installed base is only 10% bigger than PS3.

Verdict: Threat of entry is weak to medium, facilitating the industry profit potential.

53 www.accuval.net/insights/industryinsights/detail.php?ID=128 - in 2008 Microsoft’s Entertainment and Devices division reported approximately $8 billion in operating expenses

54 www.gamesindustry.biz/articles/2011-03-01-panasonic-cancels-jungle-portable-gaming-device

55 www.csmonitor.com/Innovation/Horizons/2009/1112/modern-warfare-2-sales-nuke-all-previous-records

56 www.gametrailers.com/episode/bonusround/501?ch=1 – Interview with Michael Pachter, Industry Analyst, Wedbush Morgan Securities; Industry outlook 2011 and beyond

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4.2.3. THREAT OF SUBSTITUTES

Narrowing the field of substitute down to other hardware products capable of running interactive games, the major current threat of substitutes come from two forms of disruptive technologies. A Disruptive technology is defined as technology in market/value network “A” that can eventually knock-out an established technology in market/value network “B”57. This figure show how console technology is slowly starting to overshoot demand, while the disruptive technologies of smartphones and tablet PC’s is ready to capture the market58:

Console technology

Demand by Technology Game players development

Smartphone/Tablet Technology

Time

Figure 4.2 – Purely theoretic model (inspiration from The Innovators Dilemma) of the /tablet disruption.

A way to identify a potential threat of a disruptive innovation is if the value networks in form of suppliers, channels or customers of incumbents and disruptors start to overlap59. In the light of this two threatening disruptions will now be assessed.

The disruptive smartphone & tablet pc threat

In his recent GDC’11 statement (march 2011), Nintendo President expressed serious concern with the rapidly growing market of simple smartphone and iPad games, being instantly available at attractive price-points, relative to Nintendo’s DS cartridges60:

57 The Innovators Dilemma, Clayton M. Christensen, Harvard Business School Press, 1997, p. 41.

58 The Innovators Dilemma, Clayton M. Christensen, Harvard Business School Press, 1997, p. 16

59 Seeing What’s Next, Clayton M. Christensen, Harvard Business School Press, 2004, p. 68

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“These platforms [smartphones and iPad] have no motivation to maintain the high value of videogame software - for them, content is something created by someone else. Their goal is just to gather as much software as possible, because quantity is what makes the money flow - the value of video game software does not matter to them."61

This obvious frustration and fear has to be seen in an even broader perspective though, as while smartphone- and iPad games provide a direct sustaining technological threat to declining handheld game devices such as the 3DS62 and PSP, the technology is actually moving along so fast, that graphically these formats have a potential of posing a disruptive threat towards even the home console market in the near future. Sony Ericsson’s Xperia PLAY is one of the first smartphones marketed mainly as a game device, with a reminiscent button-layout of the PSP63.

"Already mobile gaming is hot on the heels of what you would expect from console-class gaming,"64 - Bea Longworth, Senior PR manager, .

Even though the consoles still have their exclusive IP’s going for them a large segment of mobile players care less about exclusive games, than about quick rounds of play, already making the smartphones/iPad a serious contender for the casual audience. Playing games is the number one use

60 www.amazon.com - While many iPhone games can be purchased at a mere $1, a DS cassette or PSP UMD cost $30-40

61 www..com/2011/03/07/gdc-11-iwata-isolated-as-ipad-2-signals-serious-apple-intent

62 www.gamesindustry.biz/articles/2011-04-12-3ds-sales-have-slowed-considerably-claim-analysts - Smartphones hinder 3DS sales targets

63 www.sonyericsson.com/mwcnews/xperia_play

64 www.gamesindustry.biz/articles/2011-03-21-nvidia-consoles-are-stable-but-static

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for tablets such as the iPad, with 84 per cent of owners using it for the purpose - compared to 78 per cent for "searching for information" and 74 per cent for emailing65.

The disruptive STB & broadband threat

A video game world devoid of limiting hardware standards, and with instant digital access to game experiences, in turn rendering the powerful retailers check mate sounds like a dream come true for both players and game developers alike - save for the current industry gatekeepers. This dream is the foundation for initiatives such as , OnLive and Playcast – all of which are offering streaming of PC and video games through conventional broadband or cable TV set-top boxes (STB). A main achievement of these formats is the more flexible payment-models, where OnLive users for example can choose to pay $29 for a full game pass, or only $7 or $5 for a 5 or 3 day pass (full content) for a specific game66. All three mentioned initiatives are still in a very early stage, either just introduced in 2010 to some regions (OnLive, Playcast), or still in Beta Phase (Gaikai), and still have three major set- backs, minimizing the threat against established home console gatekeepers:

- High bandwidth a prerequisite - Lack of hardware/peripherals symbiosis - Limited 3rd party support and exclusivity

A 5mbit broad-band connection is required for “optimal performance” of games streamed through OnLive, and while the penetration of such connection-speeds is common on the U.S., it is still very limited in some European countries. Playcast, being focused on cable-TV streaming, is less affected by bandwidth limitations, but high-quality cables and connectors are a necessity – something that most cable-users have not found a need for in conventional TV-watching.

65 www.gamesindustry.biz/articles/2011-04-11-survey-games-number-one-use-for-tablets

66 www..com/games/featuredgames

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OnLive is the only one of the three with a proprietary controller, otherwise the services rely on supporting seemingly random USB-connectable controllers, making controller mapping a hassle for the user, compared to the symbiotic hardware and peripheral design of traditional video game consoles.

Entering almost five years into the current cycle of game consoles, penetration of these is already high, and video game console owners will inevitably be asking, what these streaming services can provide content-wise, that are not available to them through their console, and the answer so far is: very little. As none of the initiators are game developers, there are no exclusive 1st party titles for their services, and 3rd party support is still very limited, with no exclusive titles either. However, their ability to expand 3rd party relations in time for the 8th console generation, can eventually pose a serious threat to the established video game gatekeepers.

Cable-streaming of games in generic terms fuels an open migration strategy, not previously pursued in the industry, where restrictive hardware is no longer the limitation of its users, as most modern STBs will work. STB-penetration is also much higher than video game consoles globally, e.g. with a household penetration of 90% in major video game country France67, loosely compared to 41% of global consumer base for video game consoles (USA, EU, Japan)68.

Verdict: Threat of substitutes is strong, minimizing the industry profit potential.

4.2.4. BARGAINING POWER OF BUYERS

While the substantial threat of the above substitutes raises the bargaining power of buyers considerably, they are all still very early in their lifecycles, leaving plenty of room for video game gatekeepers to strategize accordingly towards the 8th generation of consoles. In the meantime buyers still face a lock-in to their platform of choice, due to key exclusive IP’s and strong network

67 www.digitaltvnews.net/content/?category_name=market-research

68 www..com/view/news/26692/Nielsen_Current_Gen_Console_Penetration_Reaches_41_Percent.php

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externalities. Price has proven to be very important for most video game players – and as previously mentioned, the high penetration of the Wii is a combined result of its relatively lower price point and premium perceived customer value. Many buyers own multiple consoles, however, (chapter 2.2, table 2.7), heightening their bargaining power towards the software and peripheral markets of the gatekeepers.

Verdict: Bargaining power of buyers is medium to strong, minimizing the industry profit potential.

4.2.5. BARGAINING POWER OF SUPPLIERS

A significant amount of manufacturing of video game consoles and accessories has moved overseas. Countries such as China, Japan and Vietnam have seen an increase in the amount of manufacturing of video game consoles and accessories over recent years69. Cost effective manufacturing is key to video game companies, especially in production of gaming systems, and the three gatekeepers are still very reliant on specialized suppliers of micro-chips, graphics cards etc., differentiated for their specific needs, heightening supplier bargaining power. The high price Sony has to pay for the Blu-Ray diode and the Intel cell-processor is evidential of them lacking more cost efficient alternatives.

Gatekeepers commission a number of outside manufacturers to produce key components. If even one of these businesses fail, they will have a hard time procuring key components or manufacturing products. Yet a more pertinent problem is the one of timing, as video games is a highly seasonal industry with demand usually peaking during holidays70. Oftentimes demand have exceeded expectations during these times by a large margin, resulting in suppliers being able to keep prices high, ultimately lowering gatekeeper profit margins71. These issues have had a potential to impair the relation between gatekeepers and their suppliers. However, the prolonged lifecycle of the current

69 www.accuval.net/insights/industryinsights/detail.php?ID=128

70 www.accuval.net/insights/industryinsights/detail.php?ID=29

71 Nintendo WW annual report 2009, p.20

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console generation is worrying suppliers like NVidia, as the static nature of console hardware from generation to generation, in contrast to the more dynamically developing PC platform, is not good for the their high-end business, which is made clear by this recent statement from senior PR manager Bea Longworth72:

"The fact that they [video game consoles] are static from one generation to another, and that the technology can't improve is a major disadvantage. Whereas with other platforms like the PC and now mobile gaming, they will be constantly moving ahead”.

The pace of the disruptive formats will show to what extent such suppliers as NVidia and Intel can close these potential gaps by switching their focus to new hardware standards.

Verdict: Bargaining power of suppliers is medium to strong, minimizing the industry profit potential.

4.2.6. THE DYNAMICS OF PROFITABILITY

Wrapping up the Five Forces analysis, will be a radar-diagram, providing a dynamic view on industry profitability. Scores for each console generation from 1 (least attractive) to 5 (most attractive) have been given - thus the size of enclosed area corresponding to the sum at the right of the diagram below, grows proportionally to industry profitability:

72 www.gamesindustry.biz/articles/2011-03-21-nvidia-consoles-are-stable-but-static

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SUM G3 14 G4 15 G5 16 G6 14 G7 13

Figure 4.3 – Dynamic radar-display of industry profitability.

The overall industry profit potential suffers from a slight downward tendency, looking at G5-G7 (for detailed information on individual scores, see Appendix 4.B). The average score for G7 is 2,6 equaling a profit potential slightly above medium, but lower than any of the previous four generations, providing a sign of the traditional industry structure moving towards maturity.

4.3. WAGING A STANDARDS WAR

According to Varian and Shapiro, success in waging a standards war depends on of seven key assets73. While all of these assets should be familiar to readers at this point of the thesis, they will now be measured relatively for each gatekeeper. Finally scores from 1-3 will be given, depending on the standing of one gatekeeper in relation to the others, where 3 is best and 1 is worst. Some assets may be measured equally.

Control over an installed base: Nintendo is in the lead with their Wii, with X360 in a distant second position. PS3, even though dominating Japan and EMEAA, is still in third due to lack of penetration in the U.S.

73 Information Rules, Carl Shapiro & Hal R. Varian, Harvard Business School Press, 1999 - p.270

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IP rights: Looking at the exclusive 1st and 2nd party games, Microsoft is trailing behind, focusing mostly on casual Kinect games and strong 3rd party support. Both Sony and Nintendo boast several key IP’s, with a slight advantage for Nintendo, as their very foundation is built on 1st party IP’s.

Ability to innovate: Nintendo have proven time and again that they are both able and willing to push the boundaries of video game hardware, allowing for entirely new ways of playing. Sony on the other hand, has a history of imitating Nintendo, their MOVE being the most current example. In the middle stands Microsoft, with a promising potential in their controller free device, Kinect, and their special care for indie-developers through an innovative and accessible online-service.

First-mover advantage: Nintendo was first with their motion controller, but Microsoft came first in the 7th generation. Serving two very different audiences, they both managed to obtain high penetration among their audiences, prior to Sony’s PS3 launching.

Manufacturing abilities: Sony has a long and strong tradition of quality manufacturing across multiple SBU’s, strategically winning wars of technology standards. Microsoft on the other hand has had several cases of manufacturing-related issues with their consoles, resulting in expensive replacement. Nintendo are known as a quality-aware manufacturer, while lacking the scale of Sony’s reputation.

Strength in [hardware] complements: Sony were not late to provide PS3 owners with a firmware upgrade, allowing for 3D games – that is if players own a 3D compatible TV, which they are equally happy to offer. While Sony’s complementary strengths like this example, affect the very game experiences, like audio (receivers) and visual (TV’s) complements, Microsoft has a sparse selection of complements (some compatible PC hardware), and Nintendo have none.

Brand Name & Reputation: While Nintendo has a strong brand among video game players, Sony and Microsoft have strong brand value among a broader audience, in the form of users of their additional products and services. Sony having the longest history in video games ultimately grants them a slight advantage.

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Waging a war relative scores Nintendo Sony Microsoft

Control over an installed base 3 1 2 IP Rights 3 2 1 Ability to innovate 3 1 2 First-mover advantage 3 1 3 Manufacturing abilities 2 3 1 Strength in complements 1 3 2 Brand name & reputation 1 3 2 Total 16 14 13

Table 4.2 – Competitive advantage stemming from ability to wage a standards war.

The ability to wage, and ultimately win a standards war according to this analysis, assuming the seven assets weigh equally, grants Nintendo an advantage over its competitors, prior to entering the 8th generation of video game systems.

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5. INDUSTRY INNOVATION

Initially will be outlined an introductory view on the popular feature film industry in the U.S. and its power to control the diversity of experiences available to the public. The film industry, being a part of the technology driven experience economy, is interesting, as it shares many similarities with video games, both in regards to production and marketing. However, the industry life cycle is more mature, hence providing some holistic indicators on what major strategic pitfalls the video games industry would want to avoid, to stay relevant in the future. The findings of subchapter 5.1 on the film industry will be carried over to chapter 5.2, comprising an analysis of software innovation in the video games industry.

5.1. HOLLYWOOD DECLINE

When discussing popular film history it is almost inevitable to avoid Hollywood. Since the early 20th century the Hollywood film industry has grown from producing a few B/W short movies to a state of global imperialism and dominance74. Critics of the system even find it, that Hollywood is a major contributor to the lack of diversity and innovation of feature film experiences in modern global Cinema.

“It’s hard not to criticize the imperialism of an entertainment industry created through in-your-face marketing that tries to steamroll the planet, destroying art and freedom in film, an industry that generates wealth by impoverishing the art form and casually killing off independent theatres.” 75 - Hervé Fischer

74 www.en.wikipedia.org/wiki/Hollywood

75 The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006, p.12

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To illustrate this dominance, in 1990 the Hollywood Oligopoly76 earned 77,4% of total European Box Office revenue, and of all globally distributed feature films in 2001, 66% were American. During the same year, 12 out of the 20 most watched movies in theatres worldwide were American, and 5 were co-produced with Americans77. In 1930 the MPAA78 and the censorship office adopted the Motion Picture Production Code (MPPC), putting a number of moral restraints on motion picture producers; such as national pride, happy endings, and political correctness. Even while today the code has been replaced with a rating system, simply classifying film according to a public age criteria, the influence of the MPPC is still very apparent in modern feature films coming out of Hollywood.

The MPAA’s ultimate goal is that every feature film that plays in any theater around the world should have its roots in Hollywood and the U.S. and the numbers above indicate that this bold imperialistic ideology could eventually be a reality.

The foundation of Hollywood’s major success is making sure any feature film produced strives for a lowest common multinational denominator. Hervé raises a well-fitting analogy to airport food, as he states that it is rather expensive, with neutral taste, not to scare anyone away, but is also instantly forgettable79. The combination of easily swallowed, superficial entertainment and underlying national evangelism is worrying a global crowd of feature film professionals, as the diversity of smaller film productions stand no chance of reaching an audience, when faced by the competition of the Hollywood apparatus. Heavy marketing and an accustomed audience drives demand, despite the many hackneyed remakes, sequels, tired framing and heroes80.

76 The Hollywood oligopoly also referred to as “The Big Seven” studios: Walt Disney/Buena Vista, Sony Colombia Tristar, Metro-Goldwyn-Mayer, , Twentieth Century Fox, Universal Studios, and Warner Bros.

77 The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006, p.41

78 The Motion Picture Association of America, governing the American feature film industry, Hollywood included

79 The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006, p.55

80 The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006, p.54 & p.114

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“We are witnessing the planet-wide success of a commercial, formulaic cinema, based on short- sighted market analyses rather than on the vision of filmmakers”81 – Hervé Fischer

During the early 20th century the big seven studios started to materialize, setting up effective entry barriers for those that didn’t meet their “standards”. By the 1920-1940’s the studios started to buy up theatre chains around the world, making sure that these theatres would use their proprietary and expensive 35mm film reels and expensive operational equipment. Quickly these 35mm film strips became the industry standard, and the cost of a 35mm feature film print being between $4.000-6.000 – and a factor 10 for the master copy – have contributed to the demise of countless small theatres, thereby marginalizing experimental film82. The 1980-1990’s were a time of consolidation in the industry, where many vertical integrations and buyouts took place, much like what has been happening with 3rd party publishers in the videogame industry for the past three to five years.

Hollywood’s historical success, however, does not necessarily carry into the future. Winds of change are blowing inside and around the seemingly unshakeable empire.

The threats come from three directions:

First, Cost & Demand: Hollywood more than ever, is in a state of financial vulnerability, due to thinning profits caused by rapidly growing costs (driven by production, wages and marketing), while demand growth is modest. As such even one feature film flop can force any of the seven studios out of business83. With James Cameron’s latest movie The , 20th Century Fox raised half of the bottom-line costs, adding up to $500mio, for the movie from external investors, minimizing their risk - along with their profit potential84.

81 The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006, p.19

82 The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006, p.67

83 The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006, p.115

84 www.nytimes.com/2009/11/09/business/media/09avatar.html?_r=3&hp

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Second, Digital Distribution: Posing a major threat to the core Hollywood business-model, by substantially lowering the fixed costs for theatres, even making distribution easier and preventing quality-loss. As digital distribution is spreading like a wildfire Hollywood is losing control with the theatre chains, gained through its archaic 35mm film standard85. MPAA have not been late to condemn digital distribution, even backed up by major producers like , officially stating piracy and quality loss as the main reasons – obviously what they are really afraid of, is the wake of a previous spellbound audience.

“Everyone has been using it [35mm equipment] for so long that no one recognizes the flaws anymore… They pretend not to see the film elephant, but they point out the digital elephant”86 – George Lucas

While specialized companies like DigiScreen offer digital equipment for theatres at a price point of CAN$35.000, the Hollywood Equivalent cost CAN$450.000 and even more for their 35mm projection equipment87.

Third, Consumer Awareness: As with all suppressing empires, the eventual revolution of the public is inevitable. As such the demand for non-Hollywood movies has increased drastically over the past 5-10 years, putting further pressure on America’s creative pride. This tale is very reminiscent of what is starting to happen in the video games industry. The question is, how long will the audience cope before starting a revolution, in favor of smaller experimental, distributed on more open formats like the , smartphones or set-top boxes.

5.2. VIDEO GAME INNOVATION

A major problem for Hollywood is relying on tired remakes and sequels, to minimize risk of high-cost productions, while this strategy is equally harmful in the long run. There is a common saying: “know

85 The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006, p.75

86 The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006, p.152

87 The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006, p.84

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the rules, and then break them”. Implementing this idea in his painting style, shifting from realism to surrealism, Picasso made his creative work world renowned. What Picasso did, was expand the audiences social reality, instead of just painting what was expected from him – this way he became even more popular than he could ever have achieved through his realism-painting. Quantifying and measuring innovation in game productions is no easy task, while this is in turn the attempt of the analysis presented herein. The nature of innovation is blurred by the fact that any creative products that does not just replicate, can be defined as innovation88, and while this thesis comes nowhere near a nuanced quantification method for creative innovations, it does take a step in the direction by defining an innovative game as a game that is not part of an existing series of games and at the same time being critically acclaimed.

A large dataset of 520 video games spanning the five generations (3-7) have been selected based on the Gamerankings and Gamestats databases89, supported by Mobygames90. Rather than selecting the games based on sales, the included games have been selected, for being in the top-20 best reviewed (avg.) games of each year from 1985 to 2010. Thus the quality of games as innovative trendsetters is more important than quantity (sales) for the work at hand, as visionary game developers will do better to seek inspiration from content providing for long-term success of their businesses, than from a fleeting sales-window. Reaching the number “20” was a tradeoff, making the database comparable over the years, while still maintaining an acceptable number of reviews for each game. In the end it was also a consequence of a line, as building a database with as many variables as this for each game, is a very time consuming endeavor.

Each of the 520 games have been assessed from a range of criteria. The end result is complex dataset which will now be analyzed through the use of pivot-table based diagrams, to study the major trends.

88 Creative Industries: Contracts Between Art & Commerce, Richard E. Caves, Harvard University Press, 2000, p. 202

89 www.gamerankings.com & www.gamestats.com

90 www.mobygames.com

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The database allows for many detailed and in-depth analyses of various relevant subjects, though due to the limits of this thesis only a few carefully picked ones have been featured (For a detailed description of each of the metrics and a sample of the database, please refer to Appendices 5.A and 5.B. For the full database Excel-file, please refer to the attached CD-media).

Identifying innovations on the three platforms thus becomes utmost relevant for the visionary 3rd party developers to assess which platform their future audience is likely to be locked-in to.

This first diagram shows how many games for each gatekeeper’s consoles have hit the top-20 each year:

Figure 5.1 – Number of top-20 games per year.

Starting from 1995 when Sony entered the market, it is natural that Sega and Nintendo would dominate in terms of quality games; given the launch line-up of games often being relatively weak on consoles. In 1997 Nintendo is almost sharing the top-20 with Sony, despite Sony’s dominance of the total installed base in the 5th generation (chapter 2.1). However, towards 1999 there is a clear tendency of Sony gaining momentum in terms of quality games. 2000 is a transition year for Sony between their PS1 and PS2, and it would seem Sega is the one to take advantage of this hole in the market with their Dreamcast, if only for a short while. In 2001 Sony not only gains further share of installed base, but also recaptures the market of quality games – the same year that Sega is forced

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out of the hardware market and Microsoft enters with their Xbox. All the way to 2006 Sony dominates the Top-20 only truly threatened by 3rd party multi-console games scoring better on the Xbox, often due to its superior horsepower alone. Looking at the years 2006-2010, Nintendo Wii’s installed base dominance is certainly not reflected in the share of top quality games. That said, Nintendo 1st party titles does take the 1st place in the top-20 in three of the past five years – the problem is clearly with the rest of the top-20. Removing 3rd party titles from the diagram provides a slightly different picture, with Sony now leading the past 2 years thanks to strong 2nd party developers like Insomniac and :

Top 2nd party developers since year 2000 Number of Titles Dev Gate Total Insomniac Sony 7,0 Bungie Microsoft 4,0 Microsoft 3,0 Sega 1,0 Naughty Dog Sony 3,0 Retro Studios Nintendo 3,0 Rare Nintendo 3,0

Figure 5.2 - Number of top-20 games per year, excluding 3rd party games & top 2nd party contributors by number of games.

Microsoft was apparently leading overall top-20, thanks to many 3rd party titles. While this is not a bad thing, a majority of these 3rd party titles are also multiplatform titles, and as such not facilitating competitive advantage, to the same extent as exclusive 2nd and 1st party titles.

The number of platforms a game appears on will now be taken into account. The more platforms, the weaker the competitive advantage generated for each gatekeeper. Possible numbers are 1-3, where 3 = 3 or more total platforms.

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The displayed numbers are averages for each year:

Multi avg. per generation Avg. of Multi Gen Gate G3 G4 G5 G6 G7 Total Nintendo 1,1 1,2 1,1 1,5 1,4 1,2 Sega 1,0 1,1 1,2 1,7 1,2 Sony 1,2 1,8 1,4 1,5 Microsoft 1,8 1,7 1,8 Total 1,1 1,2 1,2 1,7 1,6 1,4

Figure 5.3 – Average number of platforms top-20 games appeared on per year & per generation.

While many of the best titles on the Sony PS2 during years 2001-2004 would seem to be multi- platform, Sony has managed to establish strong 2nd party relations since 2005. Microsoft, again, clearly has a large number of multi-platform titles entering the top-20 through time, reflected by the relatively higher score in the table above. Several 3rd party developers previously preferring Sony’s platform, are now publishing games on X360 as well – a great achievement for Microsoft in the 7th generation. Multi-scores are generally higher in G6 and G7, reflecting the need for developers to go multi-platform to reach an audience big enough to cover their high costs.

How this relates to innovation, however, is to what extent these games are based on New IP’s or existing properties. Each of the 520 games have been scored 1-3 based on their “New IP” value, to see how innovation develops throughout history. 3 is equivalent to an entirely new video game IP. Known characters and/or worlds changing genres score 3 as well ( is a good example). 2 and 1 points are given for a direct or indirect sequel or remake to a New IP originating from the same (2 points) or past (1 point) generations of video game consoles.

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The displayed numbers are averages for each year:

Top developers by New IP value, since year 1995 Values Dev New IP Titles Weighted Electronic Arts 48 37 1,30 Rare 25 10 2,50 Sony 22 10 2,20 Nintendo 21 16 1,31 Square 21 11 1,91 21 10 2,10 Namco 19 10 1,90 Capcom 18 11 1,64 Sega 17 8 2,13 Insomniac 17 8 2,13 Naughty Dog 15 6 2,50 Konami 14 12 1,17 12 8 1,50 BioWare 11 4 2,75

Figure 5.4 – Average new IP value of top-20 games per year & total New IP scores for game developers weighted by number of titles.

Microsoft dominating this chart provides an indication that several new quality IP’s are originating from 3rd party developers, while Nintendo’s last five year entries are not only 1st party (and a few 2nd parties), they are also direct or indirect progressions to already established series, making it harder to reach new audiences (reflected by the relatively low weighted score in the figure above). Times may eventually change for Nintendo mascots such as Mario and Link (Zelda-series protagonist), like it has been the case with famous Disney protagonists, making the future of Nintendo a question of how long their new audience will accept mediocre quality (but currently top-selling games) like (Nintendo, 2006) and (Nintendo, 2010).

Relating figure 5.4 to the installed base development (chapter 2.1), The New IP tendency for Microsoft was negative till 2006 when the X360 released (ultimo 2005), and has been gaining momentum ever since, as Microsoft’s installed base market share has improved. The PS1 has a natural downward innovation tendency through its lifetime, as it was Sony’s first console, having many new IPs. Looking at the PS2, it took a few years for software innovation to pick up, while 2003- 2006 shows a very positive tendency, as installed base is gaining share. The PS3 has lost installed base share to the competitors in the 7th generation, presumably as a result of the decline in innovation. Nintendo’s installed base share along with software innovation has been declining all the way to

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2005, while it is hard to conclude anything on the past five years, as Nintendo has so few top-20 entries. Thus, disregarding the last five years for Nintendo, there is congruence between the development in software innovation and hardware installed base.

Looking at genres, gives a rather scrambled diagrammatic view. Instead, looking at the original source of the video game inspirational material, there is a few interesting observations:

Figure 5.5 – Number of games inspired by various source materials.

Feature film licenses are the best example of how effective marketing and cross-media synergy collide to seduce the lesser experienced video game audience. While games based on feature film worlds or characters have always had a strong representation in sales numbers, this diagram clearly shows that very few of these games have actually had the quality of a top-20 game. The publisher stands in front of a classic dilemma, exploiting their willingness to harm their own image in exchange for a few short sighted top-selling feature film rip-offs. In terms of quality, games based on popular sports have a better history. Established sports series have been well represented in the top-20 through history, but scores low on innovation, as a few dominating publishers like Electronic Arts are milking their IP’s, releasing new “editions” every year, often with minor tweaks to the actual game, but with updated teams and player names etc., at full retail price. It seems the sports S-curve peaked in 2003. Music games seem to be gaining momentum over the last 5 years, indicating a possible new S-curve tendency, also facilitated by the demand for more immediately accessible games (chapter 2.2).

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So returning to the “New IP” average metric and the concept of innovation, it is interesting to see, from what region the innovative productions originate:

Top European devs by New IP, year 1995 & beyond Values Dev New IP Titles Weighted Ubisoft 19,0 9,0 2,11 Bizarre Creations 9,0 5,0 1,80 Criterion 7,0 4,0 1,75 Rare 7,0 3,0 2,33 Digital Illusions 5,0 2,0 2,50 Rocksteady 3,0 1,0 3,00 3,0 1,0 3,00 Starbreeze 3,0 1,0 3,00 3,0 1,0 3,00 PLAYDEAD 3,0 1,0 3,00

Figure 5.6 - Average new IP value of top-20 games by region per year & top European developers by number of New IP

Isolating the past three years, European developers looks relatively stronger than the rest of the world, in creating new quality IP’s. Also the traditionally strong Japanese development culture seems to be losing momentum, looking namely at the past 10 years. Thus, gatekeepers and 3rd parties alike might want to look towards Europe for strategic alliances and creative inspiration.

Finally, innovation needs a little nuance to closer relate to competitive advantage for each gatekeeper. Thus, concluding this chapter will be an introduction to the Competitive Advantage Indicator (CAI).

What the CAI metric does, is basically reducing the New IP value by the % of the review score (New IP “1” scoring 88% in avg. reviews, would then be 0,88), then subtracting Multi-platform score and Form-score (Form scores: 3= 3rd party, 2=2nd party and 1= 1st party) by a factor 0,5 and 0,33 respectively, to weigh the estimated importance of each factor desirably91. The Logic is, that the

91 The weights: The negative impact on a gatekeeper’s competitive advantage due to a game being multi“3”-platform is higher than that of a game being 3rd party produced. But most important is whether the game is a new IP. A new IP will be hit proportionally harder than an existing one by a bad review score, as reviews are more important for new IP’s.

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better the avg. review score and New IP value, and the fewer the additional platforms - and the closer the production is to the gatekeeper (1st party=closest: Better control with content) the higher the competitive advantage stemming from the game is to the gatekeeper. CAI thus is a function of rise in New IP- and review scores, and fall in Multi-platform- and Form scores:

CAI = New IP value * RevScore% – Multi * 0,5 – Form * 0,33

There is no good or bad CAI score, but a 3rd party game, appearing on 3 or more platforms, scoring 0% in avg. reviews, with a New IP value of 1 would get a CAI-score of –2,500 while a 1st party game, exclusive to a platform, scoring 100% in avg. reviews, with a New IP value of 3 would get a CAI-score of +2,167. The average of the 520 game database is 0,341, but the interesting aspect of CAI is in fact its relative comparison between gatekeepers, 3rd party developers and even regions.

Presented here is CAI average for the past fifteen years, split on each gatekeeper and top developers the past 5 years:

Top developers since year 2005 Avg of CAI Dev Dev Reg Total Media Molecule EU 1,67 PLAYDEAD EU 1,55 Quantic Dream EU 1,51 2D Boy USA 1,32 Japan 1,28 Team Meat USA 1,21 From Software Japan 1,20 USA 1,18 USA 1,17 Naughty Dog USA 1,14 Games USA 0,85 Rocksteady EU 0,76

Figure 5.7 – Average Competitive Advantage Indicator (CAI) score per year & top developers per region.

Sony’s avg. CAI took a dive around the introduction of their PS2 in 2000, and not till 2003 did it start to pick up, yet console unit sales (see chapter 2.1) did not seem to suffer during the same period – or most consoles were sold during the late cycle. Interestingly, as many of the main complaints about the PS3 has revolved around its poor catalog of games, the CAI-curve actually looks a lot more healthy

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in 2006-2008 than it did in 2001-2003. The diffuse curve during the past five years for Nintendo is a result of them having so few top-20 games represented, making CAI more sensitive. Yet it would seem they have a good tendency going for them in 2010, while Wii-console sales are stagnating. While it is almost a dead run between the three in 2010, Nintendo is the only one seeing a positive tendency, landing just below the avg. CAI of the database. Microsoft’s CAI sweeps just around the 0-point, Halo on the Xbox being the major reason this was not the case in 2001. Milking a few IP’s such as , Halo and Fable on the Xbox360 explains much of the negative tendency during Microsoft’s industry history.

CAI outlook for 2011

Microsoft seemingly relying heavily on casual Kinect games for 2011, will probably see their CAI- score falling, as a majority of these titles are unlikely to hit the Top-20 as is the case with many current casual Wii titles. 3 seemingly being the only promising exclusive non-3rd party game, is likely to get a good critic reception92, will score low on innovation.

Sony has several strong IP’s in the pipeline inbound to sweep their CAI up, like 1st party The Last Guardian and 2nd party studio Ghibli/Level 5 co-produced Ninokuno to name a few. Albeit, these games have no official 2011 release date yet. Dark , The follow up to PS3 exclusive sleeper hit Demons Souls, has been announced for Xbox360 as well for release in 2011, but even multi-platform owners will likely be playing the game on the PS3.

Nintendo seems to have little in their pipeline in terms of games in 2011, and speculations are heavy towards their possible reveal of a Wii successor around the time of the big mid-year industry summit, 2011 in (June 9.-11.). A late 2011 release of “Wii2” with a strong launch line- up will have the ability to switch the tides of CAI to Nintendo’s advantage.

92 www.gamerankings.com/browse.html?search=gears+of+war&numrev=3&site=

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Judging from this CAI analysis, there is a tendency of Sony getting the upper hand well through 2011, with an upside to shift Nintendo and Microsoft’s audiences to their side. Assuming this tendency continues into 2012, 3rd party developers might want to take advantage of a potentially growing installed base on the PS3.

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6. STRATEGY FRAMING

Elaborating on the key findings of previous chapters, the goal of this synthetic chapter is forecasting a set of plausible strategies for the gatekeepers. However, due to the limitations of this thesis, the main focus will be on the presumed first-mover into the 8th console generation. This forecast should in turn prove valuable for industry stakeholders such as 3rd party developers in assessing how the future of games and hardware can and will eventually affect and inspire their creative and commercial profile.

6.1. DECODING THE CONCEPT OF FRAMING

Outlining the concept of framing and overflows as it is being interpreted from its roots in constructivist sociology to economic theory by Professor Michel Callon, and explaining how this applies to framing a sustainable strategy in the video games industry, is the main purpose of this deliberately extensive subchapter. Understanding the concepts thoroughly is necessary to in turn appreciate the benefits of the method in providing a strategy forecast for the gatekeepers.

Because social constructs as objects of knowledge are not "given" by nature, they must be constantly maintained and re-affirmed in order to persist. This process also introduces the possibility to change what is "good and bad" and what it means shifting from one generation to the next. As such the strategies forecasted herein provide a static picture based on the current state of the industry, and will have to be reassessed at a regular basis.

Framing is a term often used in media studies, sociology and psychology, referring to the social of a social phenomenon by sources or specific political or social movements or . A frame defines the packaging of an element of rhetoric in such a way as to encourage certain interpretations and to discourage others. Framing is so effective because it is a heuristic or mental shortcut. Human beings are by nature “cognitive misers”, meaning they prefer to do as little thinking as possible93. Frames provide people a quick and easy way to process information.

93 Social cognition (2nd ed.), Fiske, S. T., & Taylor, S. E., New York: McGraw-Hill, 1991

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Hence, people will use their cognitive maps to make sense of incoming messages. This gives the framer, in this context the gatekeepers, of the information enormous power to use these maps to influence how the receivers will interpret the message - the receivers in this context being game developers and consumers.

The concept of framing interactions has been a point of interest for sociologists for , while the focus has changed over the years. While sociologist and Professor Erving Goffman was interested in how conceptual frames structure the individual’s perception of the society (Frame Analysis, 1971). Taking a different approach, Sociologist Mark Granovetter (Economic Action and Social Structure: The Problem of Embeddedness, 1985) has defined frames as violent attempts at extricating individuals from their external network, preventing them from seeing an objective reality.

While it is clear that Michel Callon has been inspired by the two, his attempt takes a slightly more structural approach on framing and what he defines as overflows, linking the concepts closely to the dynamics of market interactions. It is at the core of his interpretations and thematics that the foundation for this chapter’s strategy analysis lies. Further interpreted from its roots in both economics and constructivist sociology, the concept will in fact prove very useful for strategy development in a creative industry with a cyclical nature of evolvement.

“A Frame establishes a boundary within which interactions take place, more or less independently of their surrounding context”94 - Goffman

The frame, as defined by Goffman, is based on a tacit agreement – an intangible set of rules, between actors and spectators. Tacit agreements would swiftly fall apart, were they not contained within a physical framework – the living room, the and the video game console. Perfect framing is a theoretical condition where all rules – or strategies – are accepted by everyone, hence no overflows to the current social reality would occur.

94 Goffman, E., 1971, Frame Analysis: An essay on the of experience

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Framing requires the presence of four prerequisites:

1. Physical devices 2. Appropriate training of the actors 3. The habited mindset of the audience 4. Carefully written “dramas”

As such the video game frame is comprised of the television, console and peripherals (1), the gatekeeper employees creating and marketing hardware and software (2), a habitual audience accepting a certain social reality (3) and the games (4). Framing a next generation strategy, always involves the actor (gatekeeper) adjusting one or more of these parameters, resulting in a new strategic frame, affecting the stakeholders. The more change induced to the underlying factors of these prerequisites, the stronger the signals of a potentially disruptive innovation.

The next step is explaining the linkage to the economically rooted concept of externalities. Externalities imply social reactions outside the frame that the actors are not directly capable of influencing. When a frame has been set, externalities, whether positive or negative, will inevitably occur. Externalities are hard to exemplify, as they can take a variety of forms, here is but a few examples:

- Direct and Indirect network externalities (see chapter 4.1) - Market reaction to hardware/software

Negative externalities are unwanted – it is not desirable, that products get abysmal critical reviews or that people get dizzy from using them – requiring the negative cause, or overflow, to be identified, ideally prior to it causing an unintended externality. An overflow is an immaterial process in a firm or its value network, with a potential of causing externalities, resulting from committing to a certain strategic frame - as such it symbolizes the leakage of a strategy frame, and becomes the epitome of its imperfection. Thus containing of overflows that can potentially cause negative externalities is desirable.

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Taking the example of unexpected critics’ reception from above, an overflow causing said externality would be a promising game in the minds of its creators that ultimately fail to satisfy or positively expand the cognitive social reality of critics, thus resulting in the externality: bad review scores. Another overflow example is the 3D screen of Nintendo’s 3DS making people dizzy from use95. While the first overflow could be proactively avoided through effective PR management prior to the game release, or monitoring reception of a released demo, the second overflow could be avoided through effective product-testing and consequential change to the hardware.

Identifying which interaction is responsible for the overflow, draws on what Callon defines as intermediaries. An intermediary is an interaction taking place within the frame, with the potential of breaching it, causing one or more overflows. The decision to release a game or hardware at a certain point in time, regardless of warning signs in the market is an example of intermediaries that can ultimately hurt a firm’s image, while intermediaries, like overflows and externalities, can as well be positive.

Finally, the firm wants to measure the ultimate commercial risk posed by the overflow, and even this can often be done prior to the overflow actually becoming reality. In case the overflow is considered material it would need to be internalized through a reframed strategy. For a new IP, the audience is more likely to look into reviews prior to purchase, why a prospected bad critics reception would in this case be a material overflow.

Moving to the dynamic process of framing will illustrate how to contain overflows. If the current strategic frame has been breached, a reframing needs to be performed in order to prevent negative externalities.

95 www.thesun.co.uk/sol/homepage/news/3499049/Nintendo-3DS-makes-gamers-dizzy-sick.html

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Framing or reframing comes in four forms96:

1. Frame bridging involves the linkage of two or more ideologically congruent but structurally unconnected frames 2. Frame amplification involves the clarification and invigoration of an existing frame 3. Frame extension represents an effort to incorporate participants by extending the boundaries of the frame to include or encompass the views, interests, or sentiments of targeted groups. 4. Frame transformation becomes necessary when current frames do not resonate with the core values of the audience

Frame bridging could be a gatekeeper’s attempt at unifying the strategy for handheld and home video game systems. Frame amplification is the most obvious progression like Sony’s shift from PS1 to PS2 and again to PS3, minimizing risk. Frame extension is the result of reaching for entirely new customer segments, like Nintendo did with the Wii. Frame transformation implies the most radical change, fundamentally redefining all four frame prerequisites mentioned initially in this chapter.

Finally Callon distinguishes between hot and cold market conditions. Hot conditions are characterized by what he calls “technocratic hyper forums” and uncertainty when it comes to identification and measurement of overflows, often leading to reactive decision making. Conceptualizing hyper forums he insinuates that the technological development has demanded an increasing tendency towards hot situations, by speeding up the market dynamics. The desire for perfect frames thus becomes greater, to contain an increasing number of negative overflows.

96 Snow, D. A., Rochford, E. B., Worden, S. K., & Benford, R. D., Frame alignment processes, micromobilization, and movement participation, American Sociological Review 51, 1986, p. 464

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This table will summarize the presented thematics:

THEMES: THE VIDEO GAME INDUSTRY:

Framing The process of strategizing by altering four key prerequisite variables through one of four forms of framing. Actors The gatekeeper employees contributing to strategy implementation Targets The audience – players and critics - experiencing the ultimate output of the framing process Intermediary The frame breaching interaction resulting in one or more overflows Overflow An unaccounted for or ignored process in a firm or its value network with the potential of causing externalities Externality An external (to the frame) market impact caused by unattended overflows Conditions Hot & cold. Cold calling for proactive action under perfect information, solid frames, and foreseeable overflows, contrary to hot.

Table 6.1 – Summary of the framing and overflows thematics.

Finally, there is an inherent element of the principal-agent theory in the concept, where the player becomes the agent/spectator, the developer the principal/actor, and the press/critics become the controlling unit, trying to close the gap of asymmetric information between the two, seeking to exploit the holes in the framed social reality, to the benefit of the audience.

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This practically oriented decision-model based on the outlined concepts of framing and overflows has been created, to operationalize the concept for strategy forecasting (own contribution):

Gatekeeper / Actor

Objective Reality

User PR Trends

4. Reframing 3. Seeking The Intermediaries Strategy Hot/Cold Market Communication Critics / Target Channels

2. Assessing 1. Identifying Overflows Externalities

Feedback Guardian

Social Reality

Audience / Target

Figure 6.1 – The strategy framing model for planning and forecasting purpose.

This rendition of the framing model is specific to the creative industries, and will be the backbone of the synthetic analyses throughout this chapter. The model is equally suited as a planning-tool for crafting new strategies by the gatekeepers, while herein it will be used mainly as a forecast-model, leaving out the “communication channels” and “critics” elements.

6.2. THE FIRST MOVER

Referring to previous analyses, mainly chapters 3.1, 4.2.1 and 5.2, market leader Nintendo is very likely to be first in the 8th generation of video game consoles, probably revealing their next console at

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their E3 press conference on June 7th 2011. A strategy forecast for Nintendo’s next generation hardware and software will thus be the subject of the following synthetic analysis.

Nintendo’s current strategy according to their most recent annual report:

“The basic strategy on which Nintendo has been focused is the expansion of the worldwide gaming population. To this end, Nintendo is striving to get people all over the world, regardless of age, gender, language, cultural background or gaming experience, to embrace and enjoy video games as a mode of entertainment”97

The statement were largely the same in the 2003 annual report, except the “gaming experience” part were not present then98. The shift indicates, that the focus have changed from facilitating game creation for everyone experienced in playing games, to basically anyone who are capable.

While the analyses moving forward may in fact seem to equal a set of strategic suggestions for Nintendo, Microsoft and Sony to follow, it is presumed that none of the scenarios herein are new to them, thus the purpose is in fact closing the inherent information gap towards their stakeholders.

6.3. IDENTIFYING EXTERNALITIES

The first step in forecasting an 8th generation strategy is assessing the negative externalities resulting from the current strategic frame. As exemplified above, externalities can take a variety of forms. Most interesting for the task at hand, is the subject of network externalities (chapter 4.1). Nintendo’s network externality has improved considerably between the 6th and 7th generation (chapters 2.1 and 4.2.1), albeit expanding the network so rapidly seems to have come at the cost of losing faith among a large group of long-time loyal and committed supporters (chapter 2.2, e.g. table 2.5). While Sony and Microsoft have been struggling to establish IP’s of equal quality and brand-value to Nintendo’s most

97 Nintendo worldwide annual report 2009, p. 5 (presidents message)

98 Nintendo worldwide annual report 2003, p. 5 (presidents message)

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tried and true mascots, they have never truly succeeded in threatening the perceived value of these among the general video game audience. All it took to imitate Wii sports, however, was a motion- sensitive peripheral of their own, and the software part, harshly, was anyone’s . The games were even in HD, making Nintendo’s offerings look dated in comparison. It becomes apparent, that serving this new inexperienced audience of Intermittent, Marginals and Dabblers was Nintendo’s short-cut to victory, while the 8th generation challenge will be a tough battle of recapturing faith among the loyalists and committed audiences, expanding network externality in these important long-term segments. In short, Nintendo must be careful not to stray from the social reality (chapter 3.1) they spent so many years building with their audience, while at the same time establish closer connections to key 3rd party developers of core-content.

6.4. ASSESSING OVERFLOWS

Having identified the main negative externality for Nintendo in the current generation – losing faith among the core-audience – it becomes pertinent to identify and handle causative overflows. In the light of these, it will be easier to forecast a reframed strategy for Nintendo. Three material overflows breaching the current strategic frame’s part about: “Nintendo is striving to get people all over the world, regardless of gaming experience, to embrace and enjoy video games” have been identified:

- Motion-controls largely failed to support or facilitate deeper game experiences, thus appealing mainly to inexperienced players (chapter 2.2, table 2.7 and chapter 4.2.1) - The only new 1st party IP’s were clearly aimed at the new inexperienced audience, while core players were left only with new iterations of existing IP’s (chapter 5.2, e.g. table 5.4) - 3rd party support was scarce due to technological limitations (big publishers) and unorthodox control-regime (small publishers) (chapters 3.2.1 and 5.2)

The reality of the first overflow can be partly proven by looking at the relatively large number of casual players preferring the Wii, while the impact can be measured by benchmarking sales data of

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typical casual games vs. typical core games (e.g. casual games Wii Fit and sold 41,5m copies, while core games Super Mario Galaxy 1 & 2 sold merely 15,7m copies worldwide99).

The reality of the second overflow can be proved looking at a complete list of Wii games, noticing that no 1st party games for Wii are original IP’s100. The impact, however, is harder to measure. A simple calculation can be made to indicate, how rough the GameCube/Wii transition has been to the loyal and committed players:

The GameCube sold 20m units (chapter 2.1), while Wii has sold well over 80m units to date (chapter 4.2.1). Super Mario Galaxy (2007) sold 9,4m units to date while its direct GameCube predecessor Super Mario Sunshine (2002) sold 6,2m units. Assuming the GameCube had sold as well as the Wii, and that the proportion of core- vs. casual gamers had been a constant, the sales of Super Mario Sunshine can be extrapolated to 6,2/20*80 = 24,8m units. In the light of this calculation, Sunshine could have outsold Galaxy roughly by a factor 2.5, indicating that Nintendo’s new focus, has made them fail in growing the core-audience at a rate relative to the casual audience. It does not explicitly indicate, however, that any member of the core-audience has abandoned Nintendo – in that case the Galaxy actual sales should have been less than the Sunshine actual sales.

99 http://gamrreview.vgchartz.com/browse.php?name=&keyword=&console=Wii®ion=All&developer=&publisher=&genr e=&boxart=Both&results=50&order=Total+Sales

100 www.gamefaqs.com/wii

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The last overflow can be proved, by seeing the low number of Wii 3rd party games populating the innovation database compared to earlier Nintendo consoles:

Number of 3rd party titles Number of Titles Plat Total NES 54,0 SNES 35,0 N64 10,0 GC 7,0 WII 3,0 Total 109,0

Figure 6.2 – Number of top-20 3rd party titles for all five generations of Nintendo consoles.

A reasonable explanation is the small 3rd party developers having trouble with the motion-controls (chapter 3.2.1). The impact is very hard to measure, but an indication can be found in the example of key 3rd party developed core game Resident Evil 4 (Capcom) selling 1,7m copies on GameCube (2005) and 1,9m copies on Wii (2007), while its successor (2009) sold 3,9m copies on PS3 and 2,9m copies on Xbox360 – even though the Wii installed base is almost the same as the two competitors combined (chapter 4.2.1). This presumes that when key 3rd party support is moving to other platforms, network externality resonating primarily with 3rd party games moves along with it, ultimately seeing even more 3rd parties flee (Resident Evil 5 was never released on Wii).

6.5. SEEKING INTERMEDIARIES

Seeking responsible intermediaries is the hardest part of the framing process, as ideally it requires detailed knowledge of internal processes and the mindsets of specific employees. Thus the goal of this subchapter is merely providing a few observations, as to where in the organization intermediaries relating to the aforementioned overflows can be found.

For the first overflow, Nintendo President Satoru Iwata has always had the dream of truly making games for everyone – the motion-controls provided a way of making games more intuitive an easily accessible. He is thus very likely to be the main driver behind the motion-control wave.

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The second overflow was clearly initiated by Nintendo’s legendary game designer . While he invented such successful series as Super Mario Bros. and The Legend of Zelda in the 80’ies, it would seem that his ability to come up with entirely new core-concepts has decreased over the past 25 years. While Mr. Miyamoto is currently controlling any in-house developed games, according to major industry watchers Nintendo is bound to set up small internal incubation teams to come up with the next software “S”’s101. For this to work, Miyamoto will eventually need to take a step back.

The intermediaries relating to the last overflow, is a combination of failed attempts at communicating the qualities of motion controls to core- 3rd party developers, and the failure of these developers to truly take advantage of it, and instead going for the lowest denominator of initial commercial success criteria.

6.6. REFRAMING THE STRATEGY

Containing of the identified overflows demands a reframed strategy. But reframing existing material overflows is not enough, as an equally important part of the new framing process is forecasting inherent future overflows with the potential of causing negative externalities under the new strategic frame. Thus the cyclical nature of framing and its relevance to the video game hardware industry flow becomes apparent. Elaborating on the current strategy presented in chapter 6.2, a new basic strategy for Nintendo has been prospected:

“The basic strategy on which Nintendo is most likely to be focused is the expansion of the worldwide gaming population. To this end, Nintendo is striving to stimulate the curiosity of people all over the world, regardless of age, gender, language or cultural background, to eventually embrace and enjoy video games as a mode of entertainment”

This strategy implies, that games should not be designed specifically for inexperienced players, rather than stimulate their curiosity to eventually become drawn to deeper game experiences. Thus,

101 Jason Della Rocca, “Industry Guru” & Senior Consultant at Perimeter Partners – speech on innovation at Copenhagen Entertainment Annual Meeting, September 30., 2010

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Nintendo will contain the main material breach of the 7th generation strategy. Making simplistic games that everyone can immediately enjoy, without added layers of complexity for core players, make the firm most vulnerable to attacks from imitators, as seen with the casual Wii games.

Referring to the framing theory, the actors are already operating under hot market conditions that will however heat up even more as rivalry intensifies in time for the 8th console generation. As new disruptive technologies adapt, the market conditions will change and the competition will not be limited to other video game gatekeepers, rather than expand towards a hyper competing hardware market, where smartphones, tablet PC’s and Cable-TV providers compete for the same customer segments as the traditional video game gatekeepers.

This radar-diagram compares the current gatekeepers in terms of their competitive advantage stemming from three dimensions; Chain synergies (chapter 3.1, table 3.1), Alliances (chapter 3.2.1, table 3.3) and Ability to wage a standards war (chapter 4.3, table 4.2), to assess where Nintendo has an advantage and where they would want to improve for the next generation (the radar is built from the accumulated scores of the three tables):

Figure 6.3 – Competitive advantage stemming from chain synergies, alliances and ability to wage a standards war.

Nintendo is currently the best in leading a direct war on standards, thanks mainly to their ability to create innovative hardware and controlling powerful – albeit not innovative – software IP’s, thereby raising switching costs.

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With these initial observations in mind, Nintendo’s new hardware and software strategies could be framed along these lines:

Hardware: Nintendo’s favorable cost position (see chapter 3.1) have left them plenty of time to cumulate a surplus to invest in a truly innovative product, even under the distressing hot market conditions of late. The disruptive innovation DS launched with great timing in 2004, the sustaining innovation 3DS in 2011 not so much (chapter 4.2.3), as the competitive foundation had changed radically during the past eight years. The market change is also the reason why Nintendo needs a disruptive frame bridging strategy, not just a Wii2, if they are to stay relevant past 2012. President Iwata’s frustrations are not to be mistaken (chapter 4.2.3); the 3DS came too late, compared to such devices as Xperia Play and iPad 2, and in fact they may even be better of phasing it out, launching their new home console as a convergent product between portable and stationary. Technologically the device may just need a little more horsepower than the Wii, and HD output, to satisfy the market. Going for a controlled migration rather than a performance play ensures that the technology can be shelled in a compact and portable exterior, and at the same time support older games (chapter 4.1). The device would obviously need wireless internet access for game downloads and HDMI-out for connection to the TV-screen at home. Ergonomically it should have the feel of a controller for comfortable play, emphasizing the focus on games, differentiating it from the iPad and smartphones currently available. Centrally the unit would need a state-of-the-art small HD-screen for portable play, which together with a reasonably amount of storage capacity are likely to drive costs up together with the end-user price, ultimately reducing the current cost-advantage (See Appendix 6.A for a simplified sketching). The device, even though being portable, will also in time be competing head to head with Sony and Microsoft’s 8th generation offerings, for the home market. Here Nintendo will engage in a war of standards, where they stand relatively stronger (figure 6.3).

Software: The Hollywood case study (chapter 5.1) hinted at how important it is, not to push the lock- in strategy too far. Given the emersion of independent games, Nintendo are likely to change their rather arrogant position towards this segment of developers (chapter 3.2.1, Reggie Fils-Aime

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statement), not only PR wise, but also by better promoting the games, where they have historically been relatively weaker than the current direct competitors (chapter 3.2.1) – and especially compared to the iPad substitute. Furthermore, all game offerings need to become digital, as this is already standard on the disruptive formats, whether talking set-top box, smartphone or iPad. Another generation with physical boxed retail games would make Nintendo look prehistoric and make them unable to compete for a new price sensitive audience (chapter 2.2, figure 2.5). The dependency on retailers would in turn be lessened, making Nintendo more open towards taking innovative 3rd party productions under their wing. Nintendo is going to win over Apple, only if they uphold their social reality towards the audience (chapter 3.1), through developing quality IP’s. Reissuing existing IP’s is not enough to win over Sony and Microsoft though (chapters 2.1 & 5.2, figure 5.4). Nintendo needs to come up with new IP’s to raise their CAI (chapter 5.2, figure 5.7). A plausible way to do this would be going back to what made them famous in the first place. An IP like Super Mario Bros. (chapter 2.1) became an immense success because, while feeling new, it had something for everyone; it was simple to learn for casual players, while maintaining enough depth to interest core-players – Nintendo Wii’s new IP’s only got the first part right (chapter 2.2, figure 2.4), also reflected by the mediocre critic receptions, ultimately splitting the audience in two. New core-oriented in-house IP’s will strengthen Nintendo’s competitive advantage, recapturing a desirable share of core-players. Nintendo’s Chief Designer Shigeru Miyamoto is a most treasured asset for Nintendo, but in some ways also their biggest holdback. While he is responsible for almost all Nintendo’s core-IPs, he also seems to have lost his ability to come up with new core IP’s (chapter 2.1 & 5.2). In turn he may need to take a step back for new in-house ideas to flourish. While the S-curve tendency of this generation seems to have been favoring online play and high-definition graphics (chapter 2.2, figure 2.6), Nintendo will want to identify the next S’s, as innovating is at the core of their nature (chapter 2.1 & 4.2.1). While hardware convergence is one element, the ability to create innovative software to take advantage of it is even more important, and this is where Nintendo has more experience than any direct or disruptive competitor. Motion-controls may just have been ahead of their time, but at any rate Nintendo’s new

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hardware is likely to be framed in closer collaboration with big and even disruptive 3rd party developers in mind in order to succeed in the next generation.

Nintendo will thus stray from focusing directly on the Marginals segment and go for the Dabbler and Magpie segments of game players (chapter 2.2, figure 2.2), as they are well suited for a “one size fits all” software strategy. By creating games with an ambition of satisfying these middle of the segments, Nintendo will eventually recapture the interest of committed and loyal players, looking for more immediately accessible game experiences than the offerings on the next Microsoft or Sony console - while still providing enough depth and innovation to make the next Nintendo console an obligatory “second choice” for the core-segments.

The Frame: Summing up, Nintendo is likely to change all four of the framing prerequisites (chapter 6.1): They need a new revolutionary piece of hardware. They need new front-going actors for new game ideas to flourish. They need to change the mindsets of their two main audiences, by breaking down the barriers between them. They need carefully crafted new IP’s that are easy to pick up for the casual player, and hard to master for the core player, in turn limiting the risk of competitor imitations.

Potential overflows: Nintendo will want to avoid the most obvious material overflows, with a potential of ultimately hurting their network externality. Nintendo have gone for the hardware disruptions many times before, sometimes they fail bitterly (The Virtual Boy, 1995), and sometimes they succeed enormously (The Wii). Obviously having one platform with one digitally downloadable standard of compatible games is something most video game players could benefit from, but avoiding such externalities as the system not being accepted by the market or being too gimmicky for long term success, is a much harder achievement. The system will need to be easily connectable when at home, ideally through wireless HDMI, and as a DVD drive would simply make the device too big, people with no access to internet connection would be out of luck. Most of the video game audience is presumed to have access to the internet though (chapter 2.2, figure 2.6). Containing these overflows demands thorough market research, and assigning the most experienced engineers for the

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R&D process, which Nintendo is very likely to do given a proud tradition in developing quality hardware in line with audience-demand (chapters 2.1, 2.2 & 3.1).

The new device is likely to go to market in 2012 to close the revenue-gap towards the stalling Wii (chapter 4.2.1).

6.7. COMPETITOR STRATEGIZING

As a consequence of the changing market, and reacting to Nintendo’s framing above, an 8th generation strategic forecast for Microsoft and Sony respectively, will now be covered briefly, to understand what Nintendo might be up against, and provide 3rd party developers with a better idea of what alternatives are likely to become available to them.

Microsoft

Hardware: Microsoft wants a console that to a greater extent than the X360 converges with the PC platform, through a more direct connectivity (for example compatible software). This frame extending strategy is less radical than Nintendo’s frame bridging, as no hardware cannibalization is desired. Like Nintendo, Microsoft needs a first time attempt at controlled migration, as they want proper support for their older games, to raise switching costs towards a growing loyalty base (chapter 2.1). Not pushing technology will in turn be a positive strategy towards the smaller developers (chapter 3.2.1), to whom a more streamlined PC-connectivity will be an advantage in game development.

Software: Microsoft’s relative strength towards its direct competitors stems from its strong perceived quality and commitment amongst namely small disruptive 3rd party developers (chapter 3.2.1, table 3.3). Microsoft wants to screen their large pool of loyal 3rd party developers for 2nd party potential in light of their strong integration history (chapter 2.1), as this would improve their relative New IP scores and their CAI (chapter 5.2). Controller free games are a hit or miss, and Microsoft will need to assess the performance of Kinect and the vital expansion of 3rd party support for it (chapter 4.2.1.) to see if it is truly a trend they want to pursue in the long run. On the other hand MMO-Games (Massively Multiplayer Online Games) has never truly had their breakthrough on consoles, contrary to

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PC, and by going for the Dabbler and Loyalist segments of game players (chapter 2.2, figure 2.2), Microsoft could truly leverage their PC/Console convergence strategy, further improving their CAI through New MMO IP’s.

The Frame: Microsoft is likely to only change 2 frame prerequisites (1 & 4). They want to develop a new physical platform, with greater PC connectivity to also support more developers. They need to establish strong 2nd party relations from their current pool of small 3rd party and indie developers to craft new quality IP’s for them, strengthening their CAI.

The next Xbox are likely to release in 2013/ early 2014, while the PS3 slowly continues to gain share outside the technology-pioneer segment.

Sony

Hardware: Sony will follow their tried and true frame amplifying strategy. Sony has the brand and the audience to support another performance play, and they will use it to push the technological boundaries of what can be expected from a dedicated video game system. To succeed they will draw on their relational advantages in value chain synergies (chapter 3.1, table 3.1), securing an even better linkage between Games, TV and Audio equipment, framing the “PS4” as the ultimate video game “experience”. As the new console is likely to market at a relatively high price point, Sony needs to take advantage of their strong tradition in consumer marketing (chapter 3.1), focusing on the technology pioneers, while being especially careful not to overshoot the demand of these (chapter 4.2.3, figure 4.2).

Software: Continuing the performance play strategy from past generations, Sony will be careful not to lose more 3rd party support, than has already happened (chapter 4.2.1). Up until this point too many top-20 games on the PS3 was multi-platform or non-original IP’s (chapter 5.2). This needs to change if they are to gain a competitive advantage from CAI (chapter 5.2, table 5.7). To do this they need more accessible dev-kits and better training of 3rd parties (chapter 3.2.1). State of the art hardware calls for state of the art software, but Sony and their 2nd parties like Naughty Dog and Insomniac will have to

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be careful that this does not necessarily mean Hollywood imitation, as this sometimes makes the games feel more like watching movies than interacting, going for the same narrative clichés and superficial action that has tired a previous feature-film audience (chapters 5.1 & 5.2, Figure 5.5). Together, this leaves 3rd parties with strong development skills and a vision of creating real game- experiences in a strong position, catering for 2nd party development. Sony’s focus should be the Magpie and Committed players, as while these segments are relatively small, they are technology pioneer heavy and account for over half of the total game purchases (chapter 2.2). Sony needs this segment, in order for their expensive hardware strategy to make sense (chapter 3.1), as high game sales will be essential.

The frame: Sony is ultimately only likely to change one frame prerequisite, keeping the three others constant. The physical hardware is what needs to change, allowing for a next generation performance play.

Given the current cycle of the PS3, Sony’s next console will not launch till late 2014/ early 2015.

6.8. PROSPECT

Given the strategizing and market prospect above, the industry profitability radar (chapter 4.2.6) has been updated, comparing only generation 7 and a generation 8 forecast:

Figure 6.4 – Dynamic prospect radar-display of industry profitability stemming from the five forces

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Due to the intensified rivalry caused by the disruptive technologies, as these will become part of the direct competition, suppliers and buyers will stand stronger, having a greater number of alternative platforms to “bargain” with. The threat from entry and substitutes will lessen, as the hardware market saturates due to oversupply of game devices, ultimately driving the games industry towards maturity. The three traditional video game gatekeeper platforms will remain dominant as dedicated video game devices through the 8th generation, but hardware and especially software growth rates will suffer to the benefits of the disruptive technologies.

Concluding the prospect, a simple segmentation table of the audience and derived future market shares will now be presented:

Intermittent Marginals Dabblers Magpies Loyalists Committed

Nintendo X (17,5%) X (8,5%) Sony X (9%) X (7%) Microsoft X (8,5%) X (16%) Disruptors X (16%) X (17,5%)

Table 6.1 – Next generation audience segmentation and derived marketshares, given constant market factors.

The percentages have been taken from figure 2.2, and where target segments overlap, percentages have been split equally between gatekeepers. This is assuming that the current segment-split is a constant into the 8th generation, and that the gatekeepers succeed in conquering their equal share of the respective segments, given the forecasted target audiences in chapters 6.6 and 6.7. Though the disrupters are leading the hardware installed base forecast given this simple calculation, it is in the

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least attractive segments in terms of software sales, making their platfroms attractive only to smaller developers.

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7. CONCLUSION

History saw how Sega first battled for market leadership with Nintendo, then immediately being put out of the hardware business by Sony. Not only did Sony contribute to Sega’s demise, it awakened a new audience in turn. Sony enjoyed a dominant market leader position for 10 years, till the next wave of casual video game players emerged to the benefits of Nintendo and their new motion-control innovation. While Nintendo swiped the away underneath Sony in the current 7th generation, even industry latecomer Microsoft has managed to best Sony by moving early. It would seem like anything can happen as a motion-control inherent war has breathed new life into the current generation, while disruptive technologies stay put on the side, waiting for a chance to invade.

Video game hardware is nothing without quality games to support it. Network externality is presumably achieved through having as many new IP’s as possible, while these must ideally be exclusive to the console in question, and be in-house developed or in close collaboration with the gatekeepers to make sure a certain quality is upheld. Even still the audience might be put off if these games receive mediocre critics’ scores, drowning among the many alternatives. History has proved that if a gatekeeper achieves superior performance to its competitors from the mentioned parameters, they have a solid foundation for shifting network externality to their platform. While the CAI metric, taking all these factors into account, show an almost dead run in 2010, Nintendo has the best tendency going for them, with Sony being likely to get the upper hand in 2011.

Stakeholders are likely to find themselves in a hyper competing market in the next generation of video game consoles, where almost all hardware with a screen will have its fair share of the video game market. For the audience this means more platforms to choose from, improving their immediate bargaining power towards the hardware manufacturers, while in turn also raising the risk of being locked-in to a losing format. 3rd party developers will be forced to choose between an overload of hardware platforms for their games, making it easier for them to reach a specific audience with their games – that is if they are capable of identifying the future hardware preference of their target audience, under the rapidly changing market conditions.

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Taking care especially of disruptive threats from emerging game-platforms like Xperia play and iPad, Nintendo’s new console is likely to become a convergence between the existing handheld and home markets, being able to play games both away and from home through an innovative piece of hardware. All games will become digitally downloadable to stay competitive and innovation through new IP’s towards a core audience is necessary to not loose network externality among this segment. Simple games with no added layers of depth like Wii Sports and Wii Play only provides short term competitive advantage before being imitated by competitors or the audience losing interest, and Nintendo is likely to be pursuing a more core-oriented software-strategy. Microsoft will expand their audience by catering for the PC-game segment through a tighter integration between their Xbox and the PC platform, in turn benefitting the smaller 3rd party developers. Sony will react to Microsoft and Nintendo’s strategies by continuing to serve the technology pioneers through a another performance play console, while taking care of game-production costs not growing faster than demand.

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BIBLIOGRAPHY

All listed sources will be scored as follows: Decisive use (3), Supportive use (2), and Occasional use (1)

Interviewee

Maz Spork, CEO, Nogap A/S – Kronprinsensgade 13. 1. tv, 1114 Copenhagen K – CVR: 32 55 96 97

Books

(3) Competitive Advantage, Michael E. Porter, The Free Press, 1985

(3) Competitive Strategy, Michael E. Porter, The Free Press, 1980

(3) Gatekeeping Theory, Pamela J. Shoemaker and Tim P. Vos, Routledge, 2009

(3) Information Rules, Carl Shapiro & Hal R. Varian, Harvard Business School Press, 1999

(3) The Innovators Dilemma, Clayton M. Christensen, Harvard Business School Press, 1997

(3) The Decline of the Hollywood Empire, Hervé Fischer, Talonbooks, 2006

(3) The Laws of the Market, Michel Callon, Oxford : Blackwell, 1998

(3) 1001 Video Games You Must Play Before You Die, Tony Mott, Octopus Books, 2010

(2) Seeing What’s Next, Clayton M. Christensen, Harvard Business School Press, 2004

(2) Creative Industries: Contracts Between Art & Commerce, Richard E. Caves, Harvard University Press, 2000

(1) Frame Analysis: An essay on the organization of experience, E. Goffman, 1971

(1) Social Cognition (2nd ed.), Fiske, S. T., & Taylor, S. E., New York: McGraw-Hill, 1991

Magazines

(3) Level RETRO, issues: 1 & 2, 2009 and 1, 2, and 3, 2010, Loading.se/ Reset Media AB (Sweden)

(1) Level, issue 52, august 2010, Loading.se/ Reset Media (Sweden)

Scientific Articles

(2) Snow, D. A., Rochford, E. B., Worden, S. K., & Benford, R. D., Frame alignment processes, micro mobilization, and movement participation, American Sociological Review 51, 1986

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Reports

(3) Video Gamers In Europe 2010, GameVision Europe, 2010 (for ISFE)

(2) Essential facts about the computer and video games industry, The ESA, 2010

(2) Nintendo worldwide annual report 2003 & 2009

(2) Global Entertainment and Media Outlook 2010-2014, PriceWaterhouseCoopers, 2010

(1) Nordiska Datorspel, Nordisk Ministerråd, Redikod AB och Erik Robertson, 2004

(1) Computerspil i videns og oplevelses oekonomien [Computer games in the knowledge and experience economy], The media secretariat & the Danish film institute, 2005

Events

Copenhagen Entertainment Annual Meeting, September 30., 2010 - Jason Della Rocca, “Industry Guru” & Senior Consultant at Perimeter Partners, Canada – Speech on incubation & innovation

Web

(3) www.accuval.net – Industry analysis site

(3) www.gamesindustry.biz – Industry news

(3) www.vgchartz.com – Industry sales data and statistics

(3) www.gamerankings.com - Market leading game review and statistics database

(3) www.gamestats.com - Market leading game review and statistics database

(3) www.mobygames.com – Comprehensive video game database

(2) www.gaming.wikia.com – User edited wiki

(2) www.gamefaqs.com – Video game database and help files

(2) www.ign.com – Market leading video game critique site

(2) www.gamasutra.com - Industry news focused at developers

(2) www.vg247.com – Industry news

(2) Interview with Michael Pachter, Analyst, Wedbush Morgan Securities, thanks to www.gametrailers.com

(1) www.seekingalpha.com – Professional market analytical site

(1) www.en.wikipedia.org – User edited wiki

(1) www.tomshardware.com – Computer news and articles

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(1) www.nintendo-wii.greetingstuffs.com – Wii news site

(1) www.ugo.com – Media news

(1) www.youtube.com – User uploaded video

(1) www.promomagazine.com – Specialized marketing site

(1) www.sonystyle.com – Sony sub-site

(1) www.computerandvideogames.com – Specialized computer and video games site

(1) www.joystiq.com – Industry news site

(1) www.news..com – Technology news site

(1) www.the-magicbox.com – Industry news site with emphasis on Japanese products

(1) www.hardcoreware.net – Hardware debate site

(1) www.qj.net – Playstation news site

(1) www.andriasang.com – Video game news site

(1) www.gamer.blorge.com - Xbox 360, PS3 and Wii news and views

(1) www.csmonitor.com – General science news

(1) www.onlive.com – Homepage of OnLive (set-top box games)

(1) www.digitaltvnews.net – Digital TV news and statistics

(1) www.amazon.com – Market leading e-commerce site

(1) www.sonyericsson.com – Sony sub-site

(1) www.nytimes.com – New York Times

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APPENDIX 2.A

Thesis structure:

Introduction

Problem Statement

Emergence Of History Culture An Industry

Vertical The Value Competitive Linkages System Advantage

Market Generic Industry Conditions & Strategies Profitability Rivalry

Hollywood Industry Video Game Decline Innovation Innovation

Strategy Strategizing Prospect Framing

Conclusion

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APPENDIX 3.A

Interview with Maz Spork, NOGAP (interview was carried out in Danish) - February 23. - 2011

Det overordnede formål med undersøgelsen her er, at afdække forskelle mellem de tre gatekeepers, hvorfor alle spørgsmål nedenfor ønskes så vidt muligt besvaret sekventielt for hver af dem.

Hvilke overordnede overvejelser gør I jer før I vælger platform(e) til et givent spil?

Hvilke fordele og ulemper er der ved de tre forskellige platforme:

Tekniske/Økonomiske?

Hvilke krav stiller platformejerne typisk til jer, f.eks. krav om eksklusivitet el. andet?

Hvilke aspekter af et spil tillægges størst betydning af de tre platformejere?

Hvilke parametre forhandles der typisk på, f.eks. størrelsen på royalties etc.?

Hvorfor vælges konsol ofte frem for PC?

Begrænser platformejernes forretningsmodeller innovationsgraden i branchen, og hvorfor?

Ser du initiativer som Playcast, som et seriøst alternativ til konsollerne på sigt, og hvorfor?

Hvilke særlige udfordringer gør sig gældende for digitale distributører som jer, i forhold til traditionelle detail-distributører?

Det er atypisk at hele tre aspirerende standarder på en gang har succes med at betjene et bredt marked, hvorfor tror du det fungerer i videospil branchen og hvilke implikationer har det evt. for fremtiden?

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APPENDIX 4.A

Porter’s Five Forces Framework (1980):

Jointly, the five forces determine an industry’s profitability potential.

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APPENDIX 4.B

Radar diagrammatic scoring:

Entry Rivalry Substitute Buyer Supplier SUM G3 2 4 3 4 1 G3 14 G4 3 3 3 4 2 G4 15 G5 4 2 4 3 3 G5 16 G6 5 1 2 2 4 G6 14 G7 4 2 1 2 4 G7 13

Justification of scores:

Entry: Threat of direct entry has decreased over time due to intensified rivalry and increased number of gatekeepers, peaking in G6 due to maximum of 4 big gatekeepers overcrowding the market.

Rivalry: Direct rivalry has intensified through time, peaking in G6, lowering the profit potential.

Substitutes: Threat from substitutes started average, as PC and /Commodore being the only alternatives. G5 was favorable for video game gatekeepers due to Consoles winning terrain over PC. G6-7 faced initial disruptive competition from smartphones, browser-based games and games on a series of previously non-gaming platforms, limiting the core video game industry profit potential, relative to earlier generations.

Buyers: Buyers have become stronger as industry has matured, due to a larger number of hardware devices supporting games, thus lowering industry profitability for the gatekeepers.

Suppliers: Bargaining power has decreased as console gatekeepers have become more established and powerful in negotiating terms, being a larger part of suppliers' businesses than previously, compared to other markets like PC. G6-G7 is static as consoles get stronger due to expanded lifecycles, while alternative disruptions arise, nullifying this advantage.

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

APPENDIX 5.A

Random database sample (20 of 520 games):

Title Genre Year Gen Press Dev Pub Dev Reg Form Plat Media Med.Score Multi New IP Rev Crit WNIP CAI Super Mario Bros. Platform 1985 G3 100,0% Nintendo Nintendo Japan 1 NES Casette 1 Game 1 3 1 3,00 2,167 Platform 1989* G3 100,0% Capcom Capcom Japan 3 NES Casette 1 Game 1 2 1 2,00 0,500 The Legend of Zelda: Ocarina of Time Adventure 1998 G5 97,5% Nintendo Nintendo Japan 1 N64 Casette 1 Game 1 1 11 0,97 0,141 Super Mario Galaxy Platform 2007 G7 97,5% Nintendo Nintendo Japan 1 WII DVD 5 Game 1 1 26 0,97 0,141 Super Mario Galaxy 2 Platform 2010 G7 97,1% Nintendo Nintendo Japan 1 WII DVD 5 Game 1 1 21 0,97 0,138 Grand Theft Auto IV Action 2008 G7 97,0% Rockstar Rockstar USA 3 PS3 BD 7 Game 2 1 22 0,97 -1,030 Soul Calibur Fighting 1999 G6 96,9% Namco Namco Japan 3 DC GD 3 Game 1 1 10 0,97 -0,531 Platform 1991 G4 96,5% Nintendo Nintendo Japan 1 SNES Casette 1 Game 1 1 2 0,97 0,132 2: Among Thieves Action 2009 G7 96,4% Naughty Dog Sony USA 2 PS3 BD 7 Game 1 2 30 1,93 0,762 Fighting 1998 G5 96,3% Namco Namco Japan 3 PS CD 2 Game 1 2 11 1,93 0,426 Metroid Prime Adventure 2002 G6 96,3% Retro Studios Nintendo USA 2 GC MINI-DVD 4 Game 1 1 20 0,96 -0,204 FPS 2007 G7 96,2% Valve Electronic Arts USA 3 X360 DVD9 6 Game 2 1 26 0,96 -1,038 Super Mario 64 Platform 1996 G5 96,0% Nintendo Nintendo Japan 1 N64 Casette 1 Game 1 1 5 0,96 0,126 Super Metroid Adventure 1994 G4 95,8% Nintendo Japan 2 SNES Casette 1 Game 1 1 3 0,96 -0,209 Resident Evil 4 Adventure 2005 G6 95,8% Capcom Capcom Japan 3 PS2 DVD 5 Game 2 1 31 0,96 -1,042 RPG 2010 G7 95,7% BioWare Electronic Arts USA 3 X360 DVD9 6 Game 2 2 21 1,91 -0,087 Halo: Combat Evolved FPS 2001 G6 95,6% Bungie Microsoft USA 2 XBOX DVD 5 Game 1 3 22 2,87 1,701 GoldenEye 007 FPS 1997 G5 95,4% Rare Nintendo EU 2 N64 Casette 1 Film 1 3 10 2,86 1,694 Grand Theft Auto III Action 2001 G6 95,3% DMA Design Rockstar EU 3 PS2 DVD 5 Game 2 1 22 0,95 -1,047 Trigger Adventure 1995 G4 95,1% Square Square Japan 3 SNES Casette 1 Game 1 3 3 2,85 1,353 Column explanation:

Column Explanation Title Title of the game: If the same game for different platforms have several top-20 entries, only the one scoring best is included. If straight ports of past year's top-20 games hit top-20 at a later year, they will be excluded. Complete visual remakes will not be excluded, however. stand-alone Expansion sets has also been excluded. Exclusion is to secure the best possible diversity among the represented games. Genre Genre of the game in its most aggregated form Year Year of release in the United States. 1989* is special, as all G3 games released after '89 have been dated back to 1989, to not harm the superior data quality available for G4 and forward on Gamerankings. Top-10-20 for years 1985-1988 have been extrapolated from Top 1- 10, as not enough games have review scores on either sites. G3 is only available on Gamestats, all other generations have been taken from Gamerankings Gen Referring to the generation of consoles in which the game were released (classification: www.gamefaqs.com/systems.html) Press The average review score of the game - G3: Based on Gamestats review avg. and a minority on Gamefaqs user review score avg., as they are not available on Gamerankings. G4-G7 is based on Gamerankings avg. Dev The developer of the game Pub The publisher of the game Dev Reg The regional origin of the developer’s HQ Form 1= 1st party: Developed in-house. 2= 2nd party: Developed by non-gatekeeper, published by gatekeeper. 3= 3rd party: Developed and published by non-gatekeeper. Plat The video game system, the game was released for Media The type of physical media holding the game data Med Score The more “advanced” the media, the higher the score (for the purpose of measuring gatekeeper performance play) Origin The game world may be inspired by Sport, Film, Music or from the imagination of its creator(s) (Game) Multi 3 or 2 Points: The game has been released previously, or during the same present generation on a total of 2 or 3+ gatekeeper's consoles. 1 point: The game is exclusive to one console New IP 3= Entirely new video game IP, Known Characters/worlds changing genres count as well. 2 and 1 points= A direct or indirect sequel or remake to an IP originating from the same (2) or past (1) generations of video game consoles !! Generally for New IP and Multi: only Nintendo, Sega, Sony and Microsoft consoles taken into account (eg. PC excluded) Rev Crit The minimum number of reviews counting towards the average for a given years top-20. The logic is the higher the Rev Crit the better, but not at the cost of going too low for top-20 game scores. For earlier generations Rev Crit will generally be lower, due to fewer total reviews available per game WNIP "New IP" weighted by Press Score -> the better the score, the higher the WNIP indicator (New IP*Press) CAI Competitive Advantage Indicator: measures a relative number corresponding to a single game's attractiveness to a specific gatekeeper's platform Calculation: WNIP-Multi/2-Form/3; as such CAI weighs WNIP > Multi > Form CAI presumes that a New IP is more attractive than an existing one, and that bad scores hit NEW IP's proportionally harder than existing ones (Logic: the more unknown the concept to the user, the more probable the user is to rely on reviews pre-purchase)

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

APPENDIX 5.B

Pivot example.

For analytical purposes, a master pivot-table (Excel 2010) was first made from the full 520 game database, and from that starting point, the desired views were generated. An example:

Number of Titles Dev Reg Gate Plat Gen Aus EU Japan USA Total Sega DC G6 1,0 10,0 4,0 15,0 GEN G4 4,0 41,0 10,0 55,0 SAT G5 9,0 1,0 10,0 SCD G4 4,0 4,0 SMS G3 2,0 2,0 Sega Total 5,0 66,0 15,0 86,0 Nintendo NES G3 5,0 90,0 3,0 98,0 SNES G4 1,0 7,0 38,0 7,0 53,0 N64 G5 12,0 12,0 6,0 30,0 GC G6 10,0 7,0 17,0 WII G7 6,0 5,0 11,0 Nintendo Total 1,0 24,0 156,0 28,0 209,0 Sony PS G5 5,0 30,0 20,0 55,0 PS2 G6 5,0 27,0 33,0 65,0 PS3 G7 3,0 6,0 12,0 21,0 Sony Total 13,0 63,0 65,0 141,0 Microsoft X360 G7 1,0 13,0 5,0 34,0 53,0 XBOX G6 10,0 3,0 18,0 31,0 Microsoft Total 1,0 23,0 8,0 52,0 84,0 Total 2,0 65,0 293,0 160,0 520,0

This table for example shows how many games for each platform have originated from specific developer regions. This is visualized by the following diagram:

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Rasmus Søegaard Kaas, stud.merc.aud., CBS, 2011 – Strategic Framing In The Video Games Industry

APPENDIX 6.A

Sketching of Nintendo’s next generation console:

While this is obviously a simplification (the topic of this thesis is after all not designing a new console), it goes only to illustrate the desired new hardware converging direction, providing a console and controller in a single hardware unit, allowing for play on the go, or at home through HDMI.

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