Game On: an Analysis of the Video Game Console Industry
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Of Hedgehogs and Plumbers: An Investigation of Marketing Strategies in the American Home Console Industry By: Daniel DeMaiolo Michael G. Pontikos ADVER 3711 Marketing Communications Research April 23, 2008 Daniel DeMaiolo Michael G. Pontikos ADVER 3711 23 April 2008 Of Hedgehogs and Plumbers: An Investigation of Marketing Strategies in the American Home Console Industry From rescuing damsels in distress locked away in castles, slaying foul monsters in mythic lands, zooming through loop-de-loops in bizarre environments to realistic simulations of everyday life, the American video game home console industry emerges vibrant as ever. Even more interesting is the ability of such tiny pixels and sound bits to capture American minds and wallets. Through examination of the origin of the industry and the subsequent targeting, pricing, and positioning strategies, a portrait of the lucrative home video game console industry emerges. Although many of the major home console manufacturers over the years share a similar goal of selling home consoles to consumers, most of the corporations began in a completely different industry long before the birth of the gaming business and the subsequent console wars. To illustrate, Nintendo Co., Ltd. initially manufactured playing cards in 1889 “called ‘Hanafuda’ [which were] tenderly hand crafted using the bark from the mulberry and mitsu-mata trees” and later expanded to “love hotels” and “instant rice” (N-Sider Media, “Nintendo”). In addition, Sega Corporation, formerly known as Honolulu-based Standard Games in 1940, “began importing jukeboxes to supply American military bases in Japan…[and] eventually expanded into amusement game imports [with the slogan] ‘service and games’ ” from which their name is taken (Pollack, “Sega”). In 1965, Sega merged with Rosen Enterprises which “dealt in everything from instant photo booths to mechanical arcade games” (Sega Corporation, “Sega DeMaiolo 2 History”). Even newer home console makers such as Sony Corporation and Microsoft Corporation began in the unrelated industries of transistor radios and computer operating systems respectively before entering the gaming market. Although many of the previously mentioned corporations were destined to enter the video game home console industry eventually, which generation of the seven home console wars they would enter would be decided in time. To create the First Generation, Ralph Baer in 1967 “design[ed] the first video-game console that works on a standard television…known as the Brown Box” which would ultimately illustrate the origins of the Magnavox Odyssey (Time Magazine). After a successful First Generation which would also see Atari and Sears Corporation partner to release “Pong” for home consoles, the Second Generation’s success continued from simple devices such as the Magnavox Odyssey that resulted in a booming home console industry; however, “the glut of unlicensed games and new home systems…lead to a major video-game industry crash in 1983-84 in which many of the gaming companies [went] bankrupt” (Time Magazine). Inevitably “the crash [of the Third Generation] was caused by too many derivative or poor-quality game cartridges from too many manufacturers” (Miller, “History”). During the Fourth Generation from 1985-1989, graphics improved as well as game quality; the Atari 7800 competed (and lost) to the Sega Master System and the Nintendo Entertainment System. Ultimately Nintendo “sold more than 3 million NES units in its first two years of release; [and] it is estimated that, over its entire product life, more than 65 million NES consoles were sold worldwide, along with 500 million cartridges” (Miller, “History”). Generation Five of the console wars, 1989-1995, “featured 16-bit processors, more detailed graphics, and more imaginative games” (Miller, “History”). Although new consoles such as NEC’s TurboGrafx-16 tried to grab market share, Generation Five was dominated by a brutal DeMaiolo 3 console war between beloved character Mario from Nintendo’s Super Nintendo Entertainment System and Sonic the Hedgehog from the Sega Genesis System. Generation Six of the console wars from 1995-1998, characterized by “high-powered microprocessors and dedicated graphics processors that enabled extremely realistic graphics and game play,” introduced the first three- dimensional characters and environments as well as a new competitor for Nintendo and Sega in the form of Sony’s PlayStation (Miller, “History”). In an interesting turn of events, “the PlayStation unseated both Nintendo [64] and [the] Sega [Saturn] to become the leading home video game system” which would go on to sell “50 million units worldwide” (Miller, “History”). Generation Seven of the console wars, 1998-2006, consisted of amazing graphics, improved game play, solid storylines, and record breaking sales in an established industry with competition from Sega’s Dreamcast, Nintendo’s Gamecube, Sony’s PlayStation 2, and the introduction of the new Xbox by Microsoft. In terms of competition, Sega, due to financial woes, bowed out of the industry. In addition, Sony, in 2005, boasted “101 million PlayStation 2 units sold…[while] Microsoft's Xbox was second with 24 million…[and] Nintendo's Gamecube came third with 22 million” (The New Zealand Herald, “Nintendo”). Currently the Next-Generation home console war, characterized by high definition graphics and innovation, is being fought by Nintendo’s Wii, Sony’s PlayStation 3, and Microsoft’s Xbox 360. Although it is much too early to declare a winner, it would seem as if Nintendo’s Wii will emerge dominant followed by Microsoft’s Xbox 360 and finally with Sony’s PlayStation 3 losing all advantageous market share as projected by “total numbers for 2007 (rounded up to the nearest 1,000) [that] show the Wii leading with 3,958,000 consoles sold, Xbox 360 in second place with 2,589,000, and the PS3 following in third with 1,294,000” (Quirk, “Game”). Through a massive history of over seven generations of home console wars, it is clear that the video game industry is thriving in America. DeMaiolo 4 After glimpsing into the past successes and failures of many home consoles throughout the industry’s rich history of console wars, it becomes evident that a firm’s marketing strategies related to targeting, pricing, and positioning determine survival in this cutthroat industry. In terms of targeting, one of the reasons home consoles failed in the beginning was because several companies spread their targets too thin. This is evident by corporations such as Atari partnering with Sears, a mass retailer, to distribute “Pong” for home consoles. Despite these major setbacks, the first real successful targeting occurred when Nintendo in 1989 and 1990 focused on “children and a substantial part of the culture as a whole…[that were] more influenced by interactive electronic media---in their simplest form, video games---than by television” (Sheff 8). To confirm this, “a study by Nielsen Media Research, showed that within a particular age group more kids were playing Nintendo than were watching the major children’s TV network, Nickelodeon, at certain times on certain days of the week” (Sheff 8). Following Nintendo’s lead, “in 1990, Sega aimed its products at a slightly older market than its main competitor, Nintendo” (Sega Corporation, “Sega History”). Specifically, American home consoles were targeted at consumers in “Generation Y [which] includes the 72 million Americans born between 1977 and 1994…[that] exerts influence on music, sports, computers, [and] videogames” (Kerin, Hartley, Berkowitz, and Rudelius 76). In particular more males have been targeted for home console sales as exhibited by evidence that there has been “lower use of video games than computer and Internet games by women” (Kerin, Hartley, Berkowitz, and Rudelius 80). Although males have been primarily targeted more, a study of eight hundred people by Market Data Corporation in the early 1990’s revealed that “more girls between the ages of six and fourteen were becoming primary players, and their level of satisfaction was intensifying” (Sheff 399). With rapidly diversifying consumer markets, companies such as DeMaiolo 5 Nintendo realized “segmentation was a key…[and they] would have to market specific products to specific groups” in order to maintain dominance with their market share (Sheff 399). Although targeting has been rather consistent over many generations of consoles, new trends in targeting range from Sony expanding “its user base by developing PlayStation 2 video games for children under 13 years old” and adding a built-in DVD player to appeal to older audiences, Microsoft’s Xbox 360 targeting more hardcore, mature, and older gaming audiences, and Nintendo’s Wii targeting everyone from the experienced male gamer, untested newcomer, and the elderly Baby Boomers (Kerin, Hartley, Berkowitz, and Rudelius 297). Without successful targeting, American home consoles would fail to even exist. After evaluating potential consumer targets, an effective pricing strategy must be implemented to even begin attracting attention. As the past has illustrated, if a corporation employs an unrealistic skimming strategy that establishes a price that is too high such as with the 3DO Interactive Multiplayer and PlayStation 3, which both sold for $699 each at one point, the system’s sales can struggle and cause the product to rapidly shift from an introductory to a decline stage. In contrast, consoles such as Sega’s Genesis, Nintendo’s Wii, Microsoft’s Xbox 360, and Sony’s PlayStation