Case Study: Lifecycle of Video Game Consoles

The rise of personal computers in the mid 1980’s spurred interest in  computer games. This caused a crash in home Video game market.  Interest in Video games was rekindled when a number of different  companies developed hardware consoles that provided graphics  superior to the capabilities of computer games. By 1990, the  Nintendo Entertainment System dominated the product category.  Sega surpassed Nintendo when it introduced its Genesis System.  By 1993, Sega commanded almost 60 per cent of Video game  market and was one of the most  recognized  brand names among  the children.

Sega’s success was short lived. In 1995, Saturn (a division of General  Motors) launched a new 32-bit system. The product was a miserable failure  for a number of reasons. Sega was the primary software developer for  Saturn and it did not support efforts by outside game developers to design  compatible games. In addition, Sega’s games were often delivered quite  late to retailers. Finally, the price of the Saturn system was greater than  other comparable game consoles.

This situation of Saturn’s misstep benefited Nintendo and Sony greatly.  Sony’s Play Station was unveiled in 1994 and was available in 70 million  homes worldwide by the end of 1999. Its “Open design” encouraged the  efforts of outside developers, resulting in almost 3,000 different games  that were compatible with the PlayStation. It too featured 32-bit graphics  that appealed to older audience. As a result, at one time, more than 30 per  cent of PlayStation owners were over 30 years old.

Nintendo 64 was introduced in 1996 and had eye-popping 64-bit graphics  and entered in more than 28 million homes by 1999. Its primary users were  between the age of 6 and 13 as a result of Nintendo’s efforts to limit the  amount of violent and adult-oriented material featured on games that can  be played on its systems. Because the company exercised considerable  control over software development, Nintendo 64 had only one-tenth the  number of compatible games as Sony’s PlayStation did.

By 1999, Sony had captured 56 per cent of the video game market, followed  by Nintendo with 42 per cent. Sega’s share had fallen to a low of 1%.  Hence, Sega had two options, either to concede defeat or introduce an  innovative video machine that would bring in huge sales. And Sega had to  do so before either Nintendo or Sony could bring their next-generation console  to market. The Sega Dreamcast arrived in stores in September 1999 with  an initial price tag of $199. Anxious gamers placed 300,000 advance orders,  and initial sales were quite encouraging. A total of 1.5 million Dreamcast  machines were bought within the first four months, and initial reviews were  positive. The 128-bit system was capable of generating 3-D visuals, and 40  different games were available within three months of Dreamcast’s  introduction.

By the end of the year, Sega had captured a market share to 15 per cent.  But the Dreamcast could not sustain its momentum. Although its game  capabilities were impressive, the system did not deliver all the functionality  Sega had promised. A 56K modem (which used a home phone line) and a  Web browser were meant to allow access to the Internet so that gamers  could play each other online, surf the Web, and visit the Dreamcast Network  for product information and playing tips. Unfortunately, these features either  were not immediately available or were disappointing in their execution.

Sega was not the only one in having the strategy of adding functionality  beyond games. Sony and Nintendo followed the same approach for their  machines introduced in 1999. Both Nintendo’s Neptune and Sony’s  PlayStation 2 (PS2) were built on a DVD platform and featured a 128-bit  processor. Analysts applauded the move to DVD because it is less expensive  to produce and allows more storage than CDs. It also gives buyers the  ability to use the machine as CD music player and DVD movie player. As  Sony marketing director commented, “The full entertainment offering from  Play Station 2 definitely appeals to a much broader audience. I have friends  in their 30s who bought it not only because it’s a gaming system for their  kids, but also a DVD for them.” In addition, PlayStation 2 is able to play  games developed for its earlier model that was CD-based. This gives the  PS2 an enormous advantage in the number of compatible game titles that  were immediately available to gamers.  Further enhancing the PS2’s appeal is its high-speed modem and allows  the users easy access to the Internet through digital cable as well as over  telephone lines. This gives Sony the ability to distribute movies, music, and  games directly to PS2 consoles. “We are positioning this as an all-round  entertainment player,” commented Ken Kutaragi, the head of Sony Computer  Entertainment. However, some prospective customers were put off by the  console’s initial price of $360.

Shortly after the introduction of Neptune, Nintendo changed its strategies  and announced the impending release of its newest game console, The  GameCube. However, unlike the Neptune, the GameCube would not run on  a DVD platform and also would not initially offer any online capabilities. It  would be more attractively priced at $199. A marketing vice-president for  Nintendo explained the company’s change in direction, “We are the only  competitor whose business is video games. We want to create the best  gaming system.” Nintendo also made the GameCube friendly for outside  developers and started adding games that included sports titles to attract  an older audience. Best known for its extra ordinary successes with games  aimed at the younger set, such as Donkey Kong, Super Mario Bros, and  Pokemon, Nintendo sought to attract older users, especially because the  average video game player is 28. Youthful Nintendo users were particularly  pleased to hear that they could use their handheld Game Boy Advance  systems as controllers for the GameCube.

Nintendo scrambled to ensure there would be an adequate supply of  GameCubes on the date in November 2001, when they were scheduled to  be available to customers. It also budgeted $450 million to market its new  product, as it anticipated stiff competition during the holiday shopping season.  With more than 20 million PlayStation 2 sold worldwide, the GameCube as  a new entry in the video game market would make the battle for market  share even more intense.

For almost a decade, the video game industry had only Sega, Nintendo,  and Sony; just three players. Because of strong brand loyalty and high  product development costs, newcomers faced a daunting task in entering  this race and being competitive.

In November 2001, Microsoft began selling its new Xbox, just three days  before the GameCube made its debut. Some observers felt the Xbox was  aimed to rival PlayStation 2, which has similar functions that rival Microsoft’s  Web TV system and even some lower level PCs.  Like the Sony’s PlayStation 2, Xbox was also built using a DVD  platform, but it used an Intel processor in its construction. This  open design allowed Microsoft to develop the Xbox in just two  years, and gave developers the option of using standard PC  tool for creating compatible games. In addition, Microsoft also  sought the advice of successful game developers and even  incorporated some of their feedback into the design of the  console and its controllers. As a result of developers  efforts, Microsoft had about 20 games ready when the Xbox became  available. By contrast, The GameCube had only eight games available.

Microsoft online strategy was another feature that differentiated of the Xbox  from the GameCube. Whereas Nintendo had no immediate plans for Webbased  play, the Xbox came equipped with an Ethernet port for broadband  access to Internet. Microsoft also announced its own Web-based network  on which gamers can come together for online head-to-head play and for  organised online matches and tournaments. Subscribers to this service  were to pay a small monthly fee and must have high-speed access to the  Internet. This is a potential drawback considering that a very low percentage  of households world over currently have broadband connections.

By contrast Sony promoted an open network, which allows software  developers to manage their own games, including associated fees charged  to users. However, interested players must purchase a network adapter for  an additional $39.99. Although game companies are not keen on the prospect  of submitting to the control of a Microsoft-controlled network, it would require  a significant investment for them to manage their own service on the Sonybased  network.

Initially the price of Microsoft’s Xbox was $299. Prior to the introduction of  Xbox, in a competitive move Sony dropped the price of the PlayStation 2  to $299. Nintendo’s GameCube already enjoyed a significant price advantage,  as it was selling for $100 less than either Microsoft or Sony products.

Gamers eagerly snapped up the new consoles and made 2001 the best  year ever for video game sales. For the first time, consumers spent $9.4  billion on video game equipment, which was more than they did at the box  office. By the end of 2001 holiday season, 6.6 million PlayStation 2 consoles  had been sold in North America alone, followed by 1.5 million Xbox units  and 1.2 million GameCubes.

What ensued was an all out price war. This started when Sony decided to  put even more pressure on the Microsoft’s Xbox by cutting the PlayStation  2 price to $199. Microsoft quickly matched that price. Wanting to maintain  its low-price status, Nintendo in turn responded by reducing the price of its  the GameCube by $50, to $149.

By mid 2002, Microsoft Xbox had sold between 3.5 and 4 million units  worldwide. However, Nintendo had surpassed Xbox sales by selling 4.5  million GameCubes. Sony had the benefit of healthy head start, and had  shipped 32 million PlayStation 2s. However, seven years after the introduction  of original PlayStation, it was being sold in retail outlets for a mere $49. It  had a significant lead in terms of numbers of units in homes around the  world with a 43 per cent share. Nintendo 64 was second with 30 per cent,  followed by Sony PlayStation 2 with 14 per cent. The Xbox and GameCube  each claimed about 3 per cent of the market, with Sega Dreamcast  comprising the last and least market share of 4.7 per cent.

Sega, once an industry leader, announced in 2001 that it had decided to  stop producing the Dreamcast and other video game hardware components.  The company said it would develop games for its competitors’ consoles.  Thus Sega slashed the price of the Dreamcast to just $99 in an effort to  liquidate its piled up inventory of more than 2 million units and immediately  began developing 11 new games for the Xbox, four for PlayStation 2, and  three for Nintendo’s GameBoy Advance.

As the prices of video game consoles have dropped, consoles  and games have become the equivalent of razors and blades. This  means the consoles generate little if any profit, but the  games are a highly profitable proposition. The profit margins on games are highly attractive, affected to some degree by whether the content is  developed by the console maker (such as Sony) or by an independent  game publisher (such as Electronic Arts). Thus, the competition to develop  appealing, or perhaps even addictive, games may be even more intense  than the battle among players to produce the best console. In particular,  Nintendo, Sony, and Microsoft want games that are exclusive to their own  systems. With that in mind, they not only rely on large in-house staffs that  design games but they also pay added fees to independent publishers for  exclusive rights to new games.

The sales of video games in 2001 rose to 43 per cent, compared to just 4  per cent increase for computer-based games. But computer game players  are believed to be a loyal bunch, as they see many advantages in playing  games on their computers rather than consoles. For one thing, they have a  big advantage of having access to a mouse and a keyboard that allow them  to play far more sophisticated games. In addition, they have been utilizing  the Internet for years to receive game updates and modifications and to  play each other over the Web.

Sony and Microsoft are intent on capturing a portion of the online gaming  opportunity. Even Nintendo has decided to make available a modem that  will allow GameCube users to play online. As prices continue to fall and  technology becomes increasingly more sophisticated, it remains to be seen  whether these three companies can keep their names on the industry’s list  of “high scorers”.

Questions For Discussion

  1. Considering the concept of product life cycle, where would you put  video games in their life cycle?
  2. What are the implications of each product’s life cycle stage?
  3. Should video game companies continue to alter their products to  include other functions, such as e-mail?

Credit: Marketing Management-BU  (Marketing Management: Text and Cases  By  S.H.H. Kazmi)

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