Battling Video Game Piracy

CASE STUDY

"Battling Video Game Piracy"

Nicholas Degaetano

Econ 136 - Business Strategy

January 28, 2007

Industry Profile

The video game industry has grown to take in over twenty-two billion dollars in revenues since 1997, with the three major players being Sony's playstation, Microsoft's Xbox and the soon to come Nintendo Wii. In 2004 Asian gamers spent a reported $7.6 billion dollars on game software while the U.S. spent some $7.4 billion dollars translating into about 300,000,000 copies sold. 2004 marked the biggest loss for video game industry in years when a new statistic showed that almost 70% of circulating games were actually pirated copies. This large percentage sums up to about four billion dollars in losses from piracy alone. Piracy started off as a small problem in eastern Asia and the industry just ignored the problem hoping it would subside. In 2002 Sony teamed up with Microsoft to sue Lik-Sang, the largest distributor of chips on the market, hoping that this would end the mod chip craze and return profits to an elevated level. Even though this industry is obviously susceptible to piracy, the barriers to entry are so great that the threat of possible substitutes or new entrants is next to none.

2004 Market Share

Sony struck early in the video game battle, releasing its playstation a full year early in Japan, which enabled them to sell over 20 million units before the Xbox even hit the market. "Between 2000 and 2006 Sony (Blue) had sold 111 million playstations, while Microsoft (Green) sold 24 million Xbox units and Nintendo (Purple) only sold 21 million of its unpopular gamecube. "

Razor & Razorblade Strategy

The video game industry's image has become that of state of the art high definition interactive home entertainment. By combining the latest processor chips, graphics cards and new interfaces, such as the Nintendo Wii's wireless motion sensitive joystick controller with cutting edge games, Sony, Microsoft and Nintendo are able to capture and hold the entire market for gaming.

The razor and blades, or the bait and hook, model works by selling the console at a loss and making profits by selling high margin games. The console is purposely sold below cost in order to capture the customer and force him or her to buy the games at a markup. Microsoft reported that it looses an estimated two hundred dollars on each console it sells, but earns royalties from games produced by outsourced vendors as well as from in-house games.

SWOT Analysis

Strengths

_ Already loyal customer base provides a constant source of income.

_ The 3 main competitors have a stranglehold on the industry.

_ Ability to market to a large number of demographic groups.

_Wide variety of games caters to all age groups and mindsets from sports to education.

_Parents able to set locks on newer systems preventing young children from playing games designed for a mature audience.

Weaknesses

_ Keeps Children cooped up indoors watching television all day.

_Players lack social skills learned from playing with other children outside; Lack of human contact.

_ Inherent health risks associated with a sedentary lifestyle.

_ Introduces children to graphic violence at a young age and desensitizes them to it.

_Possible correlation between video games and increased homicide rate in urban settings.

Opportunities

_ As long as there is a market for video games there will be opportunities for the video game giants to expand, creating more jobs to design new systems and games.

_ Acquisition of new technology firms could lower production costs on future consoles.

_ Introduction of new game interfaces