|Management Team Decision, Chapter 6
Playing the Game
When you first started in the business of inventing video-game systems, it was fresh and exhilarating. Nintendo had revolutionized the home video-game industry by making arcade-quality graphics available on home game consoles. By the mid 1990s, the company’s Super Nintendo Entertainment System was a market leader, selling 49 million units, and your Sega Genesis system was no slacker, selling 30 million units globally. Today, however, video games and consoles have little in common with Nintendo’s groundbreaking Mario Brothers and Donkey Kong games, let alone Atari’s Pong.
The video-game industry is a $17 billion industry and consoles sell hundreds of millions of units. Sony’s first PlayStation sold 102.5 million units worldwide, and its PlayStation 2, which was so powerful the Japanese government feared it could be used to make advanced weaponry, has sold 111.3 million units since its launch. Microsoft’s first-generation Xbox sold roughly 25 million units and used chip technology that made it more powerful than Sony’s market leader. Then Microsoft upped the ante with the Xbox 360, whose new-generation microchip transmits data 3.5 times faster than the original Xbox. Then Sony trumped Microsoft by making its PlayStation 3 even more powerful; it contains a chip able to perform 218 billion calculations per second—speed on par with a supercomputer!
All this one-upmanship comes at a heavy price that pushes smaller players out of the market. For example, Sony spent $1.8 billion just to develop the microchip that powers its PlayStation 3 console, which retails for approximately $500. Even at that price, though, Sony is selling the PlayStation hardware at a loss and counting on making up the money on the sale of related video games, which it expects will take three years! The same is true of Microsoft, whose Xbox console retails for nearly $300 but hadn’t earned Microsoft a single penny after six years on the market.
You wonder if all these big investments make sense. After all, despite the general increase in the number of consoles sold, the same folks tend to buy the consoles year after year. Game playing in Japan is declining about 10 percent a year, and in the United States game consoles have been in the same percentage of households (36 percent, to be exact) for years. That means competitors are all vying for the same customers, those 18-to-34-year-old men who get a rush from the screamingly fast action of complex games. That is, until Nintendo came out with Wii, a simple console designed to play simple games and priced at a relatively reasonable $250. Wii was designed to attract new customers to video-gaming, like women and older consumers. As for handheld video games, Nintendo’s DS is simpler than the Sony equivalent PSP3 and has sold more units. The cost to develop a game for DS is one tenth the cost to develop games for other platforms, which means Nintendo recoups its investments more quickly.
In the end, the industry is still exhilarating—not so much from the excitement of creating something new, but in a swimming-with-sharks kind of way. Sega hasn’t been a serious force in the industry for over 20 years. If you’re going to get back into the game, so to speak, how should you do it?
Assemble a team of four to five students to play the management team at Sega trying to reestablish itself in the gamer market.
Sources: Y. I. Kane & N. Wingfield, “Out of the Box: Amid Videogame Arms Race, Nintendo Slows Things Down,” Wall Street Journal, 2 November 2006, A1; J. Alabaster, “Nintendo’s 9-Month Net Beats Full-Year Target,” Wall Street Journal, 26 January 2007, B4; Y. Kim, “In War of Game Consoles, Chip Makers Are Winners,” Wall Street Journal, 1 March 2007, online; R. Guth, “IPod Envy: Microsoft’s Xbox Whiz Drives Strategic Shift,” Wall Street Journal, 5 January 2007, A1.
1. Using Porter’s Five Industry Forces, map the video-game industry.
2. What are the risks and opportunities of the strategies followed by Sony and Xbox? Of Nintendo?
3. Do you try to reestablish Sega by participating in the attack-and-respond dynamic of escalating technology, or do you try to follow Nintendo’s go-simple path out of the video arms race? Explain.