Video Game Industry

Disruptive Innovation Model• An Incremental Innovation enchances the competences  Advantage for the Incumbent • A Radical Innovation destroys the previous competences  Advantage for the Entrant

“Technologically Speaking”• The Video Game industry showed a quick evolution from a Shumpeter Mark I regime, to a Shumpeter Mark II regime. 1972 Shumpeter Mark I 1995 Shumpeter Mark II 2010

RADICAL INNOVATION ATARI introduces Interchangeable Cartridges

RADICAL INNOVATION SONY introduces CD-ROMs

INCREMENTAL INNOVATION NINTENDO introduces movement sensors

Shumpeter Mark I: 1970s-1980s• Ease of innovative entry• no legal or economic barriers to entry • weak pre-existing industrial structure • unexplored technological and scientific opportunities

• Low concentration of innovators• the era of mass entry

• Turbulence in the market• High entry and exit of new innovators

• Low stability : radical innovation

• arcade video games vs. home video games

Shumpeter Mark I Industry Standards

ATARI & 4 Bit Era1972-1985• American Company • Pioneer in arcade and home video games

Technological Level Market Level

• Radical Innovation — Channel F: First with interchangeable cartridges • Atari 2600: First to reach critical mass • Lack of pateting protection • Increase in competition • Exit with 1983 Market Crash

Nintendo & 8 Bit Era1986-1991• Japanese Company (1889) • First enterd in Japanese market through licensing (1975), then moved to US

Technological Level

• Incremental Innovation to 8 bit processor

Market Level

• Control supply and retailers • Massive marketing • Nintendomania

Sega & the 16 Bit Era1992-1995• Japanese Company, founded by Americans

Technological Level

• Incremental innovation to 16 bit processor (Genesis Mega Drive) • Advanced graphics

Market Level

• Competition with Nintendo • 50% in US • Market leader in several European Countries • Follower in Japan • “Genesis does what Nintendon’t”

Shumpeter Mark II: 1990s-present• Barriers to innovative entry• Presence of large firms – incumbents (Nintendo, Sega) • Specific price competition • Economies of scale effect

• Low turbulence of the market• Limited entry and exit of new innovators (new entrants: Sony, Microsoft)

• High stability• Creative accumulation (period of incremental changes)

• High concentration• Three major players (Nintendo, Sony, Microsoft)

Shumpeter Mark II Industry Standards

SONY and the 32/64 Bit Era 1995 – 1998• Sony Corporation • Comes from Joint-Venture with Nintendo

Technological Level Market Level

• Radical Innovation: Cd-ROM software • Playstation (1994 in Japan)

• Ability to gain support of developers and retailers • Large library of game titles • New market leader in Japan, Europe and US

The Battle for The Market• Nintendo’s Super Mario 64• Cheaper hardware BUT cartridges instead of CD-ROMs

• The Sega Dreamcast• 128-bit console, internet-based interactivity BUT no significant advantage of 128-bit over 64-bit

• PlayStation2• Access to internet, e-commerce BUT no modem

• Sega’s Respond• Dreamcast console at no charge, Sega.com, SegaNet BUT no dominant position over PlayStation

• Nintendo’s GameCube• 128-bit machine with unprecedented graphics capabilities, broad library of games • $ 75 million marketing campaign, low retail prices BUT new competitor at the market: Microsoft Xbox

Microsoft and the 128 Bit Era1998-2004• American Company • Software Giant

Technological Level Market Level

• Incremental Innovations: 733MHz processor, DVD player, internet ready, broadband enabled • Unsufficient gaming experience (Entrant Disadvantage)

• Unpopularity of Microsoft • No customer base • Poor game choice  failure in Japanese market

How about now?2004-present• Microsoft Xbox 360 (25th November, 2005)• HD upscaling to 1080p

• PlayStation 3 (11th November, 2006)• High-definition graphics, Blu-Ray Disc technology

• Nintendo’s Wii (19th November, 2006)• Integration of controllers with movement sensors and joysticks

• PlayStation Move (September 17, 2010)• Motion sensing gaming with higher precision and accuracy

• Kinect for Xbox (4th November, 2010)• Users are “controllers”

What Changed?

Market Evolution• Japan – a homeland for most video game producers • Increased Market Concentration Strengthening of Entry Barriers Peculiarity of Exit

• Cooperation among firms on internet gaming structure • Importance of user networks – Communities – Lead Users

Decrease in the Difference Between ProductsRegular Games  Almost None Movement Games  Work in Progress

Dominant Design Life Expectancy Increased• Before

Dominant Design Life Expectancy Increased• After

S-Model

Conclusion• “The great thing about the games console business is that products last for three years” – Mr. Idei , Former CEO of Sony