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The video game industry and the future of console gaming

Entertainment is emerging as a distinct business form the World over. Electronic entertainment is a niche segment which is of particular significance given the growth of computers and the internet. Vogel (2001) has highlighted the growth of the American entertainment industry which has emerged as one of the largest business sectors and is also attaining a similar status of significance globally. While electronic entertainment comprises of a number of segments such as movies, television and cable programs, music, videos and broadcasting, video games are a significant segment of this vast industry.

(Vogel, 2001). The video games industry made a noticeable impact in 1972 when it emerged as a mass-market, with the introduction of the cooperated video game named ‘Pong’ and the console ‘Magnavox Odyssey’ which proved a huge success in the game industry. (Adam, 2003) According to Informa Media group (2005) the game industry is growing every year. In 2004 the game industry took in $31. 4 billion worldwide. The video games industry includes PC games, mobile phone games, set-top box games, arcade games and video game consoles.

It is expected to grow 71 percent from $49. 9 billion in 2001 to $85. 7 billion in 2006. Video game console has the largest share in the game industry. Newman (2004) states that the video game industry is a young and profitable industry for example the Nintendo’s game Legend of Zelda had generated domestic gross revenues more than $100 million, even though the cost of production had been a mere $6 million for each game.

Though this is an impressive ratio of revenue to cost, it can be seen as risky business as well, in terms of development which can take around two years or more to produce a game and poor rate of assurance of success during the time of production. The video game industry is oligopoly’s competition business and it’s changing over time. (Besanko et al, 2000) The market leader is Sony which sold 60 million units of PlayStation 2 compared with 15 million units sold of Nintendo Gamecube and Microsoft Xbox.

The Consoles have their strengths and weaknesses differently; moreover the major difference among the platforms is the quantity and quality of available games. In order to be the leader in the video game industry, it should be able to offer a large number of unique, high quality video games as the strength of these complementary products will be a critical success factor for the console. (Friedman, 2002). This in turn is driven by the developer who is provided creative inputs by the gamer. There is a symbiotic relationship in console gaming between the console, developers and the consumers or gamers.

Being an interactive, on going developing product the gamers have as much to contribute as the developers and the console has to be extremely adaptable to the needs of the consumers. The market though an oligopoly, is highly competitive and is sustained by volumes, which in turn are determined by the extent to which the games developed by the developer entertain the consumer. The importance of the relationship between the console, the developer and the consumer is thus an essential facet in the success of the industry.

There are various other political, social, environmental and technological factors which affect this highly dynamic yet lucrative business which need to be analysed in great detail to understand the salient factors of success. Problem Statement In the computer games industry, it is easier to create a start up but the console games industry is more closed, a games developer must have up to three licenses from the console manufacturer, firstly; a license to develop games for the console, secondly; the publisher must have a license to publish games for the console and thirdly; a separate license for each game.

(CGSociety, 2005). Profit margins for in-house video games are between 50% and 70%. In contrast, third-party titles bring in royalties of about 10% for the console maker through the license fee of $10 a unit that they might usually impose on outside game developers. Most major video game software companies like Electronic Arts or Activision provide the same games for all platforms. These companies have substantial development resources and historically have chosen to stay out of the console wars by not picking one platform.

Therefore, the difference between competing brands will come from the games created by the console-makers, in-house development teams and those games created by the smaller companies who, due to resource constraints, must choose to distribute on only one platform. (Adam, 2003). There is intimate relationship between the console, the developer and the consumer in the video games industry as the product is interactive and software manipulated. Thus the contribution of the user to the game and its various versions can be continuous.

There is however inadequate information on the exact nature of the relationship and how it impacts on the overall development of the video games industry per se which needs to be examined to determine its critical success factors. Hypothesis Statement. A symbiotic relationship exists in the video games industry between the console, developer and the consumer which impacts on the overall growth and performance of the business and will also have an effect on future trends. Importance of the Study The global videogames industry is growing very rapidly.

According to ELSPA (2002) UK sales total was almost ? 1. 0 billion in 1999. The UK is the third largest market behind the US and Japan, In 2000 US games sales were $9. 4 billion topping year 1999 record by about $3 billion. Sherry et al. (2001) state that 35 percent of Americans identified video games as largely fun entertainment activity, videogames also consume an enormous amount of time as the period playing the game is actually always longer than the players intend because videogames can be very absorbing.

The Japanese consumer is more likely to be different from the US and European customer in different countries has different tastes because of factors as culture and technology. The strategy of the console in global market may be different depending on the countries. (Asakura, 2000) The production life cycle of console gaming is changing over a period and will depend on how long and consistently the console can stay in the market. In the case of Sega Dreamcast which was released in 1999 and has gone out of the market since 2002, Sega didn’t release any next generation console.

In 2000, Sony and Nintendo released PlayStation2 and Gamecube followed by Microsoft which launched its first games console, the Xbox in 2001. Within around every five years or so, technology changes and companies will have to release new consoles which are more powerful than the earlier generation as a result Microsoft released the new generation console Xbox 360 into the UK market on December 2005 before Nintendo and Sony next generation in order to capture more consumers. (EDGE, 2005). Similarly consoles have to be supported by software which is developed by developers.

Developers are creative persons who are attuned to developing games catering to the tastes of the consumers. Being an interactive industry, the video games industry is highly dynamic in nature and the gamer has a very high degree of impact on its growth and development particularly in a very narrow market where a small shift in preference leads to major surge in volumes for a company, be it Sony, Nintendo or Microsoft. Thus the interplay between the gamer, the developer and the console is critical and the manner in which it progresses will dictate the state of the industry in general.

It is therefore important that the critical success factors in the video games industry are analysed in the light of the above. Scope of the Study The study envisages covering the following research questions:- • What are the characteristics of the video game industry? • Is there a relationship between the console, developer and consumer? • If the positive relationship is proved, what are the critical success factors between them? • What strategy should be adopted by the video game industry for the global market? • What strategy should be adopted in order to increase its competitive advantage?

• What are the trends in the future of game console? Chapter 2 – Literature Review This chapter provides an overview of the literature and the theories that form the basis for the purpose of this dissertation. This chapter begins with a review of the theoretical framework followed by an overview of the general facets related to the video game industry and then goes on to review the various aspects of console gaming and the future trends thereof.. A deductive approach has been adopted as the research strategy, further rationalized in the Research Methodology chapter.

Deductive approach is felt most suitable as it will enable us to follow logically the growth of the video games industry in general and console gaming in particular. This will also provide a wide perspective of the subject increasing our deeper understanding of the issues. Theoretical Framework The main aspects of the proposed research are firstly, literature review and data collection to analyze the characteristic and performance by using graphs and charts to exam global market statistics in order to answer a key question is it a profitable or risky business.

Moreover to understand the changes that may be brought about over time and the life cycle in the industry from the past to the present. Secondly, using case studies of Sony, Nintendo, and Microsoft empirical evidence should support the positive link between the console, developer and consumer in the industry, to gauge what is the critical success factor between them. Thirdly, empirical analysis by using tools such as PEST and Porter’s Five Forces is being carried out to help understand competitiveness of the industry in a dynamic business environment.

It examines internal forces as well as external forces as they exist in the business environment that may affect the video game industry. Finally it is envisaged to collate all factors and evaluate the outcome to spot out the possible future trends in console gaming. Layers of the Business Environment The organizational environment needs to be examined in detail so that key issues are identified and ways of coping with complexity and change evolved.

A business environment comprises of a number of layers. These layers have been summarized as under:- (a) The first layer is the macro environment which evaluates the broad environmental factors which have an impact on all organizations. This will provide an understanding of the changes in the macro-environment and its impact on organizations. This is generally carried out by the PEST framework which includes evaluation of political, economic, social and technological factors.

(b) The next layer is the in industry evaluation which can be carried out by the Five Forces Framework to understand how dynamics within and around the industry is transforming and affecting business. While the closest layer to the environment comprises of immediate competitors and markets. (c) The characteristics of all the organizations within a structure will be different and these need to be evaluated separately. Industry structure and positioning within the industry are the basis for models of competitive strategy promoted by Michael Porter.

The “Five Forces” framework defines the key ideas of Porter’s (1985) theory of competitive advantage. Competitive strategy has to be an out flow of sophisticated understanding of the rules of competition that determine an industry’s attractiveness. These forces determine industry profitability, denoting some industries as more attractive than others. The key facet in determining profitability is how much value firms can create for their buyers, and how much of this value will be captured or competed away. Industry structure determines who will capture the value.

But a firm cannot be seen as a prisoner of the industry and it can influence the five forces through its own strategies. In fact it should attempt to influence it by proactive measures which can provide it a competitive advantage. The video games industry is impacted in various ways in as much as these five basic factors are concerned. The five basic factors include the following:- 1. Threat of new entrants. 2. Threat of substitute products or services. 3. Bargaining power of suppliers. 4. Bargaining power of buyers. 5. Rivalry among existing firms.

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