ProjectsRivalry in Video Gaming
Introduction
The video gaming industry has undergone a number of transformations since its inception, each having a unique impact on the competitive landscape. Throughout its infancy, the industry has been heavily influenced by external sources of change; primarily technological change, and to a lesser extent, changing customer demand. As the eras of change in this industry are broadly defined by the processors used in gaming consoles, technological change that has provided the ability to offer increased performance at a similar price point has driven a consistent evolution in gaming technology and created new opportunities and threats at an equal interval.
The following is a recommendation for the most effective strategy to enable Microsoft’s success in the video gaming industry. The recommendation is followed by a brief assessment of the competitive position and advantage of the three primary competitors in the industry: Sony, Nintendo, and Microsoft.
Recommendation
As Microsoft is in the least advantageous competitive position of the three primary competitors, it is recommended that they take a significantly different approach to gaining market share. By pricing their console at USD$50-75, and pricing their titles at 25% above industry average, Microsoft has the opportunity to lead a significant change in the traditional revenue model of the industry. Sony’s installed base provides a significant advantage that Microsoft will not be able to contend with by traditional means. This price structure would change consumer cost outlays in a way that shifts up-front cost to incremental cost with each additional title purchased. Presuming that buyer behavior in the video gaming is largely driven by emotion, this change in cost structure would drive a large increase in installed console base thus increasing total software revenue. While this strategy would admittedly impact Microsoft’s tie ratio of games sold per console, the total impact to net sales would be very positive.
This pricing strategy should be aligned with the next generation release of Microsoft’s Xbox in order to generate significant media attention and to avoid alienating consumers who have already purchased an Xbox. While this strategy is similar to that of Sega during its exit from gaming hardware, Sega used it as a method of dumping inventory rather than a competitive strategy. Microsoft will align this strategy with dedication to game development and 3rd party developer relationships and compete with Sony in the number of titles available like no one other competitor has.
When Microsoft successfully executes this strategy, they can expect to see imitation from competitors, including perhaps Nintendo and Sony. The advantage derived from effectively executing this strategy will be short-term. As a strong offensive competitive move, Microsoft should expect strong competitive responses from competitors. However, the short- to intermediate-term benefits will close some of the gap in installed console base with Sony and likely take Sony market share, both of which will be critical to effectively compete with Sony in the long-term.
Analysis
Sony
Sony’s strategy and positioning in the gaming industry has been masterful since it first launched the PlayStation game console. Sony successfully extended its brand equity into this industry through highly effective marketing that created a significant intangible advantage. It should not be overlooked that Sony had the financial resources to support an extraordinary marketing campaign, however, Sony made a significant commitment of its resources in entering the industry rather than attempting to enter on a lesser budget. Through the choice of media for their console, Sony has been able to offer significant advantages for developers in order to support their strategy of offering the most titles on any one console.In assessing the sustainability of competitive advantage in the industry, Sony appears to have a capability that is difficult to imitate. While competitors in this industry will always be able to imitate technological advances, Sony has an instinct for what features in gaming will be important to consumers and they are adept at positioning their products as exciting in the mind of the consumer. This competitive advantage has provided additional advantages like the extremely large installed base of the Sony PlayStation console.
Nintendo
The Nintendo brand has been closely associated with video gaming since the beginning of the industry’s boom in mid-late 1980s, and many would suggest that the boom was driven largely by Nintendo with the launch of its Nintendo Entertainment System in the U.S. Nintendo has lost significant market share since that time, largely due to underestimating the importance of transferring to CD-ROM/DVD technology for games. However, Nintendo has survived Sony’s market entry through superior game and character development, for which it often owns the legal rights. While success in the industry today requires blockbuster titles and appealing characters, Nintendo has leveraged its legacy characters to maintain a viable competitive position in the market despite its lost market share.Nintendo has exhibited the benefits that may be derived from Economies of Experience as the legacy brand remaining in this ever-changing industry. Nintendo has survived through a strategy of cost advantage that both helped and hurt the firm through decisions like staying with cartridges when competitors were going to CD-ROM, yet those same advantages likely enabled them to endure the success of Sony while others like Sega were not as fortunate. The media choice of a cartridge for Nintendo’s 128-bit GameCube kept manufacturing cost low and allowed Nintendo to compete on price. While not in a comparable position to Sony, Nintendo is positioned for resurgence.
Microsoft
As a new entrant to gaming during the industry’s fifth era, Microsoft’s entry signaled to the world the true potential of gaming consoles as an integrated point of communication and entertainment. They have brought with them tremendous recognition as they look to leverage their brand equity in a new, yet related, domain. However, Microsoft’s initial Xbox strategy has been to differentiate through performance at a time when significant technological advances translate far less into improved user experience. The launch strategy for Xbox did not appear to model the market leader, Sony, who has complemented their innovation with a broad selection of titles. Rather, at its launch, the nineteen game titles available on the Xbox was more similar to market runner-up Nintendo. Microsoft appears to have rushed the Xbox to market as performance problems quickly tarnished its image and likely cased a long-lasting impact to Xbox sales.This analysis is based on the case "Rivalry in Video Games" by Robert M. Grant which presents the video gaming industry scenario facing competitors in 2002.