Porters Model for the Gaming Industry

8/2/2019 Porters Model for the Gaming Industry

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INTRODUCTION

Over the past 30 years, video games have become an integral part ofthe lives of the people living in developed countries particularly

Video games industry has become a multi-billion dollar behemoth,as the entertainment industry is taking new shape with video gamesas a major player

Video games now capture a similar market size as the movie boxoffice and music sales

During the last few years, video games have been appealing to abroader demographic base, and, for example, average American isspending much more time (75 hours in 2003) in playing games than

the past The average game player age is increased to 35, and 65% of

American households play computer or video games

In 2008, 26% of gamers were over the age of 50

Out of total American gamers, 60% are male and 40% are female


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PORTERS FIVE FORCES MODEL

CompetitiveRivalry

Threat ofnew

entrants

Bargainingpower ofSuppliers

Bargainingpower of

Customers

Threat ofsubstituteproduct

(Very Low)

(Medium to High)

(High)(Very High)

(Fairly High)


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DEGREE OF RIVALRY

Industry Concentration

Concentration for the video game system industry is very high

We use the herfindahl index.

If the herfindahl index is greater than 1800, then it can be assumed that the

potential for rivalry is reduced

It is evident in our HI calculation of 4,502 that the preceding statement is

true for the video game system industry.

Amount of Video Game Systems sold in 2008 for the Three Competitors


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This is typical for this industry, because when a new system hits the market it is

priced incredibly high due to consumers excitement about the newest product

innovation.

However, once that system has been on the shelves for a considerable amount of

time, the price decreases in order to keep the sales level high.

Prices for PS3, XBOX 360, and Wii from 2006-2007

Most of the original systems were discontinued after a short period of time and

replaced with consoles that had higher gigabytes of memory - Major contributing

factor to the reduced price over the following years.

DEGREE OF RIVALRY


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Switching Costs The biggest switching cost to consider is the fact that when a

consumer wants to switch to a new system, they have to buy a

whole new console and all of the necessary controls and

accessories that go along with the new system

The second issue that arises with switching systems is the gamesthat go along with it. Competitors have their own games that can

only be played on that specific system. Thus these two switching

costs reduce the level of rivalry dramatically, and encourage

consumers to steer towards one particular system maker.

Furthermore, consumers may be more likely to purchase anIPhone over the PlayStation Portable or the Nintendo DS because

of the multiple uses the IPhone offers.

DEGREE OF RIVALRY


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DEGREE OF RIVALRY


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THREATS OF SUBSTITUTES Personal Computers

In 2003, according to the US Census Bureau, 61.8% of householdshad a computer. and the Entertainment Software Association hasreported that computer game software sales totaled $701.4 million.

Recent announcement by Valve to release its Steam content deliveryplatform to Macintosh operating systems.

Considering Apples recent increases in the market share of personalcomputers, in particular premium priced units, their chances forsuccess as it relates to video games should be promising

Hand-held devices

Recent statistics show that the IPhone is a force to be reckoned withwhen it comes to using it as a gaming device.

Since July 2008 over 30,000 games have been released in the IPhoneApp Store.

By 2009, Apple was responsible for the sale of 19% of all portablegame software, which is an increase of 5% from their 2008 numbers


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BARGAINING POWER OF SUPPLIERS

Supplier Concentration

The suppliers in this industry are very concentrated to ensure consistency with

the manufacturing of the gaming console. This will allow a better relationship

between the suppliers and the companies in our industry; however having

concentrated suppliers could potentially decrease future profits.

Supplier Substitutes This industry tries to maintain good relationships with fewer suppliers because

they want consistency in the production of their consoles. The demand of these

systems is huge which puts a lot of pressure on both the manufacturers and the

big three.

Importance of Supplier Input

The suppliers depend on the design offered by the big gaming producers like Sony,Microsoft, and Nintendo. The suppliers then manufacture the gaming console as

well as provide feedback on how to be more efficient and cost effective

Threat of Forward Integration

Even though the suppliers have the manufacturing know how, we feel the threat is

very low because Sony, Microsoft, and Nintendo have already established

themselves as brand leaders in this industry.


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BARGAINING POWER OF BUYERS

Switching Costs Switching between suppliers may lead to different ordering systems,

purchase agreements, and possible shipping standards and also consolesystems

Availability of Full Information Basic information on different products in the industry will be available

through trade groups, news articles, and key publications. Threat of Backward Integration:

Even though the industry requires a great deal of in house design teams andthird party developers, a big box store like Wal-Mart could get someone todesign a console for them. Large retailers have been known to produceprivate label items. These store brands are likely to cost less and have fewerfeatures

Buyer Size The retailers selling video game consoles are some of the largest and most

influential operators on the planet. Wal-Mart has tremendous control overtheir suppliers and vendors to get a low price. Best Buy is the leader inelectronic retail space. They have gained bargaining power with suppliersover the past few years


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SWOT ANALYSISSony Play Station 3


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STRENGTHS

Strong brand name of both Sony and PlayStation with a large

installed base of the PS3

Strong network of game licensees

Strong global market position since Sony is a highly diversified

corporation

High quality Blu-Ray function

Strong multimedia support with graphics and audio

capabilities

Best raw computing power provided by its Cell processor High vertical integration


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WEAKNESSES

A product invention backlog which leads to a delay in launch

Less innovation when compared to its competitors like Wii-

move and the Xbox-Kinect

Basic online service portal as compared to additional features

offered by other competitors

No remote control for Blu-Ray playback.

No self-owned OS that establishes loyalty of customers


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OPPORTUNITIES

Blu-Ray may become the new high-definition standard since

demand for Blu-Ray is growing exponentially

Voice controller under development which leads to

tremendous room for innovation

Synergies with other products of Sony.

Production cost could go down via manufacturing scale-up

and improvements

Since, majority of raw-materials are outsourced, up-scaling could

be used as a strategy to benefit from economies of scale

High demand of 13% CAGR for a larger variety of games could

lead to loyal customers

Capitalising on console-specific gaming could also strengthen

consumer base


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THREATS

HD-DVD may become the new high-definition standard

making the USP of the Blu-Ray player redundant

Continuous improvements by competitors may lead to loss of

market for the PS3

Sony must rapidly build a larger network to attract gamepublishers for PS3

Entering into console-specific games could be beneficial for PS3

Communication of the game console as also a Blu-Ray player

may lead to conflicting messages understood by consumers


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S-O Summary

Blu-ray emerges as one of the latest trends in the technologicalarena.

The Blu-ray market in USA grew by 58% in the third quarter of 2011.

Sonys high quality Blu-ray function exploits this opportunity sincethis type of discs enables huge storage capacity and prevents copying

of discs. Brand name, reputation and reliability plays a key role in the

purchase of a high value item like the PS3.

Production of other multimedia products creates positive synergiesfor Sony with the PS3 which works tremendously well withconsumers.

There exists great scope for different game releases every year.

Sonys strong network of game licensees enables Sony to cater to

these demands.

The best audio and video functionality can lead to develop moreadvanced products.


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S-T Summary

The PS3 has incorporated multiple functions including high-

end gaming, Blu-Ray playback and various others.

However, advances in the HD-DVD market could prove

discouraging for the sales of the PS3

Sony should market the PS3 as a core component to a homegame and entertainment system allowing various accessories

as a bundled offer.

There exists a great need of a variety of games for specific

consoles.

Sony has various licensees in order to exploit the threat posed by

various competitors.

To increase the value of the PS3, the Sony could imitate the

Wii-move, which can be called PS-move.


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W-T Summary

Competitors like the Nintendo and Microsoft surpass Sony inthe domain of innovation.

As compared to 18.2 million units of Xbox 360 sold by Microsoft,Sony sells only 10 million units per year.

Sony may further loose market share if it does not keep track of

the inventions that could be made in this sector

Level of trust in the OS by Microsoft greatly influencespurchase decision for choosing a console.

Hence, a highly developed, bug-free OS backed by the Sonygoodwill in the hardware sector must be emphasised.

The greater online experience provided by Xbox-Live could beanother deterring factor for purchasing the PS3.

Adding to features provided by Sony could sustain its stand for alonger period.


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Future Trends in Gaming

Industry Artificial Intelligence

Technological Convergence

Console Less gaming

Multi-Industry growth potential Anti-Piracy Measures

Porters Model for the Gaming Industry

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