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


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,, 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


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