Kevin Chen Jimmy DeCicco Eneida Mingla Kristy Yang Industry Consoles Video Games Online Games Recs Why Video Games? FACTS e 35% of American parents play video games, 80% of them play with their kids, 66% of whom think that gaming has brought their family closer. e New studies show that gamers make accurate decisions faster than non - gamers. e In 2011, the industry's value added to U.S. Gross Domestic Product (GDP) is expected to be $17.7 billion. e 190 million households will use a next - generation video game console in 2012. Industry Consoles Video Games Online Games Recs Agenda Industry Overview Console Market Video Games & Software Online Gaming Recommendations Industry Consoles Video Games Online Games Recs Video Game Industry e Industry at a glance e Industry structure e Life Cycle & Revenue e Concentration / HHI e Timeline e Key success factors e Key external drivers e Video game statistics e Competitive landscape Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Video Game Industry e Industry at a glance e Industry structure e Life Cycle & Revenue e Concentration / HHI e Timeline e Key success factors e Key external drivers e Video game statistics e Competitive landscape Industry Consoles Video Games Online Games Recs Industry Structure Life cycle stage Growth Revenue volatility Medium Capital intensity Medium Industry assistance None Concentration level Medium Regulation level Light Technological change High Barriers to entry High Industry globalization Medium High Industry Consoles Video Games Online Games Recs Video Game Industry e Industry at a glance e Industry structure e Life Cycle & Revenue e Concentration / HHI e Timeline e Key success factors e Key external drivers e Video game statistics e Competitive landscape Industry Consoles Video Games Online Games Recs Life cycle stage Industry Consoles Video Games Online Games Recs Industry Revenue 0 10000 20000 30000 40000 50000 60000 70000 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Revenue ($m) Year Industry Consoles Video Games Online Games Recs Video Game Industry e Industry at a glance e Industry structure e Life Cycle & Revenue e Concentration / HHI e Timeline e Key success factors e Key external drivers e Video game statistics e Competitive landscape Industry Consoles Video Games Online Games Recs Video Game Industry Concentration HHI = 1142 Industry Consoles Video Games Online Games Recs Video Game Industry e Industry at a glance e Industry structure e Life Cycle & Revenue e Concentration / HHI e Timeline e Key success factors e Key external drivers e Video game statistics e Competitive landscape Industry Consoles Video Games Online Games Recs VIDEO GAMES TIMELINE Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Video Game Industry e Industry at a glance e Industry structure e Life Cycle & Revenue e Concentration / HHI e Timeline e Key success factors e Key external drivers e Video game statistics e Competitive landscape Industry Consoles Video Games Online Games Recs Key success factors Ability to quickly adopt new technology Aggressive marketing/franchising - given the high level of competition Development of new products Downstream ownership links Establishment of brand names Economies of scale Industry Consoles Video Games Online Games Recs Video Game Industry e Industry at a glance e Industry structure e Life Cycle & Revenue e Concentration / HHI e Timeline e Key success factors e Key external drivers e Video game statistics e Competitive landscape Industry Consoles Video Games Online Games Recs Key external drivers Industry systems and technology Time spent on leisure and sports Video game console sales Per capita disposable income Attendance at spectator sports Industry Consoles Video Games Online Games Recs Video Game Industry e Industry at a glance e Industry structure e Life Cycle & Revenue e Concentration / HHI e Timeline e Key success factors e Key external drivers e Video game statistics e Competitive landscape Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Video Game Industry e Industry at a glance e Industry structure e Life Cycle & Revenue e Concentration / HHI e Timeline e Key success factors e Key external drivers e Video game statistics e Competitive landscape Industry Consoles Video Games Online Games Recs Competitive Landscape (Millions of units sold worldwide, consoles and portables) Industry Consoles Video Games Online Games Recs Market Overview Distribution Chain Pricing Strategies Other Strategies Industry Consoles Video Games Online Games Recs Online Subscriptions 7% Accessories 8% Consoles 17% Games and Software 68% $6.49 billion in revenue I ncludes traditional and portable consoles Industry Consoles Video Games Online Games Recs Major Players Market Share 2010 (units): 47% 28% 25% 21,466,310 units 12,788,440 units 11,418,250 units Industry Consoles Video Games Online Games Recs Founded in 1889 as a card company Market value of over $85 billion – 3 rd most valuable listed company in Japan 2009 revenue = $19 billion/$6.9 billion – US, net income = $2.9 billion 15.2% net profit margin Nintendo of America: majority owner of MLB Seattle Mariners Industry Consoles Video Games Online Games Recs Sony Computer Entertainment, Inc. established in 1993 in Tokyo SCE handles R&D, production, and sales of video games and video game systems 2009 revenue = $77.8 billion/$8.7 billion from SCE Net income = $ (440) million Industry Consoles Video Games Online Games Recs Microsoft Game Studios introduced in 2002 Produces the Xbox & Xbox 360 consoles 2009 revenue of $62.5 billion/$3.4 billion from MGS Net income of $18.8 billion, and net profit margin of 30% Industry Consoles Video Games Online Games Recs Firm Nintendo 47 % 2209 Sony 28 % 784 Microsoft 25 % 625 Total 100 % HHI = 3618 The “Big Three” tend to elicit considerable loyalty from gamers Source: market share data from IBISWorld Industry Consoles Video Games Online Games Recs Market Overview Distribution Chain Pricing Strategies Other Strategies Industry Consoles Video Games Online Games Recs Distribution Chain Hardware Manufacturing • Design • Development Electronic Packaging and Final Assembly Software Manufacturing • Design • • Modeling • Programming Production and Manufacturing • Advertising • TV Commercials Distribution • • • Steam & Amazon Consumers Industry Consoles Video Games Online Games Recs Market Overview Distribution Chain Pricing Strategies Other Strategies Industry Consoles Video Games Online Games Recs Pricing Strategies Intertemporal Price Discrimination Technological Tying & Mixed Bundling Versioning Industry Consoles Video Games Online Games Recs Intertemporal P.D. Sony’s PlayStation 3: At its 2006 release, PS3 20GB = $499.99, PS3 60GB = $599.99 Today, PlayStation 3 160GB sells on Amazon for $299.99 Nintendo Wii: At its 2006 release, Wii sold for $249.99 Now sells on Amazon for $199.99 Avid gamers pay a premium Price subsequently lowered to penetrate the amateur player market Industry Consoles Video Games Online Games Recs Technological Tying Ex: Wii console only plays Wii video games Accessories are unique to each console Mixed bundling: can be purchased together or separately Walmart Product Price Total Wii Console + Wii Sports & Fitness + Nunchuk + Remote + Super Mario Galaxy 2 Game $304.00 $304.00 Wii Console + Wii Sports & Fitness + Remote $289.00 Nunchuk $19.96 Super Mario Galaxy 2 Game $49.96 $358.92 Industry Consoles Video Games Online Games Recs Versioning PlayStation 3 320GB $349.00 at Walmart PlayStation 3 160GB $299.00 at Walmart A form of second - degree price discrimination A llow companies to induce customers into high - valuation & low - valuation consumers I ntense gamers vs. recreational gamers Industry Consoles Video Games Online Games Recs Market Overview Distribution Chain Pricing Strategies Other Strategies Industry Consoles Video Games Online Games Recs Source: http://hbr.org/product/technological - leapfrogging - lessons - from - the - u - s - vi/an/CMR253 - PDF - ENG “Technological Leapfrogging” Conditions: N etwork externalities prevalent Few dominant firms Firms attempt to displace the current standard by introducing a radically improved technology that “leapfrogs” the current generation Industry Consoles Video Games Online Games Recs Source: http://hbr.org/product/technological - leapfrogging - lessons - from - the - u - s - vi/an/CMR253 - PDF - ENG “Technological Leapfrogging” Value of new technology Value of old technology’s functionality, installed base, & complement goods Xbox/GameCube/PS2 Xbox 360/Wii/PS3 Industry Consoles Video Games Online Games Recs Source: http://hbr.org/product/technological - leapfrogging - lessons - from - the - u - s - vi/an/CMR253 - PDF - ENG “Technological Leapfrogging” S ales of consoles follow a cycle C ompanies would introduce new technology at the risk of cannibalization Industry Consoles Video Games Online Games Recs Other Console Strategies Aggressive discounting Ex: PlayStation 3 Pricing based on target market personality Wii vs. Xbox 360 Industry Consoles Video Games Online Games Recs Video Games and Software Background Information Competition Organization Pricing Strategies Raw Data Analysis Industry Consoles Video Games Online Games Recs Background Information Market definition Quick facts 67.6% of total industry revenue Rapid technological growth Growing segment Broadening demographics Online Subscriptions 7% Accessories 8% Consoles 17% Games and Software 68% Industry Consoles Video Games Online Games Recs Video Games and Software Background Information Competition Organization Pricing Strategies Raw Data Analysis Industry Consoles Video Games Online Games Recs # Company Revenue 2009 Market Share # Company Revenue 2009 Market Share 1 Nintendo 6,799 22.15% 14 Shanda Interactive 704 2.29% 2 Activision Blizzard 4,279 13.94% 15 Nexon Corporation 608 1.98% 3 Electronic Arts 3,728 12.14% 16 NCSoft 549 1.79% 4 Sony 1,914 6.24% 17 MTV Games 329 1.07% 5 Microsoft 1,741 5.67% 18 Perfect World 313 1.02% 6 Konami 1,594 5.19% 19 Zynga 270 0.88% 7 Ubisoft 1,249 4.07% 20 Tecmo Koei 260 0.85% 8 Take - Two Interactive 916 2.98% 21 Changyou 260 0.85% 9 Square Enix 916 2.98% 22 Disney Interactive 252 0.82% 10 THQ 909 2.96% 23 NetEase.com 247 0.80% 11 Namco Bandai 860 2.80% 24 Atlus 208 0.68% 12 Sega Sammy Holdings 836 2.72% 25 Giant Interactive 189 0.62% 13 Capcom 767 2.50% Source: http://www.softwaretop100.org/top - 25 - gaming - companies - 2010 Industry Consoles Video Games Online Games Recs 0.00 5.00 10.00 15.00 20.00 25.00 Nintendo Activision Blizzard Electronic Arts Sony Microsoft Konami Ubisoft Take-Two Interactive Square Enix THQ Namco Bandai Sega Sammy Holdings Capcom Shanda Interactive Nexon Corporation NCSoft MTV Games Perfect World Zynga Tecmo Koei Changyou Disney Interactive Atlus Giant Interactive Industry Consoles Video Games Online Games Recs Concentration statistics CR4 = 54.47 HHI = 1013.951 Both indicate low concentration Most competitive segment in the video game industry Low barriers to entry Industry Consoles Video Games Online Games Recs Video Games and Software Background Information Competition Organization Pricing Strategies Raw Data Analysis Industry Consoles Video Games Online Games Recs Organization Game publishing is similar to book publishing Developers Development team of 20 to 100 members Mainstream games cost 3 to 6 million dollars Publishers Provide funding for developers Market the video games Distribute games to retailers Sell the games Industry Consoles Video Games Online Games Recs Video Games and Software Background Information Competition Organization Pricing Strategies Raw Data Analysis Industry Consoles Video Games Online Games Recs Pricing Strategies Uniform P ricing Intertemporal Price Discrimination Bundling Tying Advance Selling Post Purchase Microtransactions Industry Consoles Video Games Online Games Recs Uniform Pricing Why price all games the same? Simplicity Tacit collusion Price is not a measure of quality Uncertain demand Consumer expectations Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination Raw Data Procedure Collected prices of 300 console games by hand on Amazon 100 from each console Top 50 most popular, and 50 of medium popularity Also collected their release dates Plotted those prices against the time since release Ran regressions *Important Assumption: All games begin at the same price Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 0 500 1000 1500 2000 2500 Video Game Price Days Since Release Aggregated Intertemporal Pricing Data Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 0 200 400 600 800 1000 1200 1400 1600 1800 Video Game Price Number of Days Since Release PlayStation3 Combined Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 0 200 400 600 800 1000 1200 1400 1600 1800 Video Game Price Number of Days Since Release PlayStation3 Popular Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 0 200 400 600 800 1000 1200 1400 1600 1800 Video Game Price Number of Days Since Release PlayStation3 Semi - Popular Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination r = .7316 $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 $80.00 3.00 3.50 4.00 4.50 5.00 5.50 6.00 6.50 7.00 7.50 8.00 Video Game Price ln(Number of Days Since Release) PlayStation3 Combined (ln) Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 0 500 1000 1500 2000 2500 Video Game Price Number of Days Since Release Xbox Combined Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 0 200 400 600 800 1000 1200 1400 1600 Video Game Price Number of Days Since Release Xbox Popular Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 0 500 1000 1500 2000 2500 Video Game Price Number of Days Since Release Xbox Semi - Popular Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination r = .6112 $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 2.50 3.50 4.50 5.50 6.50 7.50 8.50 Video Game Price Number of Days Since Release (ln) Xbox Combined (ln) Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 0 200 400 600 800 1000 1200 1400 1600 1800 Video Game Price Number of Days Since Release Wii Combined Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination $- $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 0 200 400 600 800 1000 1200 1400 1600 1800 Video Game Price Number of Days Since Release Wii Popular Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination $- $5.00 $10.00 $15.00 $20.00 $25.00 $30.00 $35.00 $40.00 $45.00 0 200 400 600 800 1000 1200 1400 1600 Video Game Price Number of Days Since Release Wii Semi - Popular Industry Consoles Video Games Online Games Recs Intertemporal Price Discrimination Final word? Intertemporal pricing is evident in the Playstation 3 and Xbox 360, but not the Nintendo Wii The fact that Wii games “age better” might be due to extreme differentiation counteracting the effect of time on prices Industry Consoles Video Games Online Games Recs Bundling Common practice in the video game industry Usually mixed bundling Games with other games Games with consoles Games with peripherals Takes advantage of heterogeneous demand Industry Consoles Video Games Online Games Recs Tying “Razors and Blades” approach Games can only be played on one console Majority of revenue comes from games Consoles can be sold at low margins or even at a loss Industry Consoles Video Games Online Games Recs Advance Selling Consumers can preorder games, usually at a discount This capitalizes on consumer uncertainty (reviews are not out yet) Often incentivized with “preorder bonuses” Portal 2 “potato sack” Industry Consoles Video Games Online Games Recs Post Purchase Microtransactions Consumer pays for extra content after buying the game Could be extra songs in guitar hero, bonus levels in Mario, or even multiplayer in a previously single player game A form of second degree price discrimination Separates consumers who like the game a great deal and are willing to pay for more content from those who are not Often purchased with digital currency Nintendo points, box Live points, etc… Industry Consoles Video Games Online Games Recs Online Gaming Market Overview Xbox Live Case Study: World of Warcraft Pricing Strategies Mobile and Social Gaming Industry Consoles Video Games Online Games Recs Online Gaming Characteristics Games designed primarily for the internet Multiplayer Cooperative and/or competitive Social Consistently updated Typically played on computers Free or subscription based Industry Consoles Video Games Online Games Recs Online Gaming Growth In 1999, nearly nonexistent revenue Now, over a 3 billion dollar industry Average annualized growth rate of 40.1% from 2005 to 2010, compared to industry 4.6% Online Subscriptions 7% Accessories 8% Consoles 17% Games and Software 68% Industry Consoles Video Games Online Games Recs U.S. Subscribers to Massive Multiplayer Online Games 0 2 4 6 8 10 12 14 16 18 20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Number of Subscribers, Millions Year Source: IbisWorld Industry Consoles Video Games Online Games Recs Source: mmogchart.com Industry Consoles Video Games Online Games Recs Online Gaming Production High initial development costs Significant capital requirements Continued maintenance and development costs High risk Matrix Online and The Sims Online Industry Consoles Video Games Online Games Recs Online Gaming Profitability Consistent revenue stream High profitability: 15% vs. 5.7% industry Significant economies of scale: information good Circumvent retailers Prevents piracy Network effects Industry Consoles Video Games Online Games Recs Online Gaming Business Models Free - to - play, upgradable Free - to - play, microtransactions Pay - to - play Pay - to - play, microtransactions Industry Consoles Video Games Online Games Recs Xbox Live Most successful subscription model for consoles Live Free and Live Gold Microsoft Points Downloadable Content Industry Consoles Video Games Online Games Recs Online Gaming Market Overview Xbox Live Case Study: World of Warcraft Pricing Strategies Mobile and Social Gaming Industry Consoles Video Games Online Games Recs World of Warcraft Industry Consoles Video Games Online Games Recs World of Warcraft History Released November 23, 2004 Expansion packs The Burning Crusade: January 16, 2007 Wrath of the Lich King: November 13, 2008 Cataclysm: December 7, 2010 Industry Consoles Video Games Online Games Recs Source: mmogchart.com Industry Consoles Video Games Online Games Recs World of Warcraft Statistics 50% of online subscription revenues in 2009 $1.2 billion revenue in 2009 Industry Consoles Video Games Online Games Recs Online Gaming Market Overview Xbox Live Case Study: World of Warcraft Pricing Strategies Mobile and Social Gaming Industry Consoles Video Games Online Games Recs Pricing Strategies Two - Part Tariff Versioning Microtransactions Strategies Combatting Churn Rate Additional Services Industry Consoles Video Games Online Games Recs Two - Part Tariff Initial purchase Trial period Monthly subscription Industry Consoles Video Games Online Games Recs Versioning Collector’s E dition Expansion packs Network externalities? Industry Consoles Video Games Online Games Recs Microtransactions Secondary for World of Warcraft $2.1 billion market in 2007 Real Money Trading (RMT) Virtual currency Exclusive items “Horse Dung?” “Gold Farming” problem? Industry Consoles Video Games Online Games Recs Combatting Churn Rate 4 to 5% monthly churn rate Subscription options 1 month s ubscription : $14.99 3 month s ubscription : $41.97 ($13.99/month) 6 month s ubscription : $77.94 ($ 12.99/month) Game t ime cards Recruit - A - Friend Industry Consoles Video Games Online Games Recs Social and Mobile Gaming Market Overview Xbox Live Case Study: World of Warcraft Pricing Strategies Mobile and Social Gaming Industry Consoles Video Games Online Games Recs Mobile and Social Gaming Applications for smartphones Applications for social networking sites Simpler than traditional video games Targets female and older demographics Industry Consoles Video Games Online Games Recs Industry Consoles Video Games Online Games Recs Pricing Structures Free - to - play with advertisements Free - to - play with microtransactions Purchased applications Industry Consoles Video Games Online Games Recs Recommendations Investor recommendations Software vs. consoles Firm recommendations Transition to online sales Xbox & PS3 to market toward females Expand to the “app” market Focus more on innovative gameplay