Game Industry
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Home video games industry
Origins and Development
Economics
Industry Giants – Nintendo, Sega, 3DO
Lessons
Conclusion
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Home Video Game Industry
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Hardware and Software
Early stage:
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Console
Controllers
Cartridges
Developed stage:
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CD-ROM, replacing cartridges
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Development – mid 70s
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1976: an U.S. electronic company Fairchild
came out with the first video game system
capable of playing multiple games.
Format: Console, plug-in Cartridges
1977: Atari launched the 2600 VCS (“video
computer system”) onto the market.
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Development – 80s/ 90s
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1980s: Nintendo’s 8-bit decade
Early 90s: Sega’s 16-bit prominence
1993: 3DO introduced a new technology which
later became standard.
32-bit machine & CD-ROM-based software.
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Development – 90s
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Sony’s Play Station (1991)
Nintendo: N64, Game Boy Advance,
GameCube.
Sega: Dreamcast.
Sony: Play Station 2.
X Box by MS
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Economics of Game Industry
Hardware
&
Software
Licensing
New Tech
vs.
Old Tech
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Giants – Nintendo
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“One strong company and the rest weak.”
– Hiroshi Yamauchi, President, Nintendo
Nintendo introduced video game system
Famicom in 1983.
While IBM AT or Apple Macintosh were
selling for between $2,500 and $4,000,
Famicom was priced at $100, its price so low
that people believed it to be below cost.
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Complements:
Hardware & Software
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Hardware: Main Machine
Software: Cartridge or CD-ROM
They are complements:
 Each makes another more attractive.
 More game titles available
 more attractive main machine
 Faster main machines
 more games.
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Own team or Licensing?
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Companies have 2 choices:
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Develop both hardware & software,
Licensing to others
It is common for companies to keep its
own production team and license out
the technology at the same time.
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Licensing:
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When the companies license its
technology out to other production
houses, usually it would charge a
loyalty fees for every disc/cartridge they
can sell.
Nintendo and Sega charged licensee at
around $3 per cartridge, which was sold
at retail price of around $40.
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Licensing:
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A two-sided market exists when game
companies license out technology:
Game
Companies
Buy Main Machine
from game companies
Pay Loyalty fees
for each disc it sell
Consumer
Licensee
Buy cartridge/CD-ROM
from the licensee
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Nintendo’s Virtuous Circle
Cheap Hardware
& Hit games
A larger base
of machines
Drive down
Manufacturing costs
More software houses
More games
Better games
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Giants – Nintendo
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Once sales took off, Nintendo didn’t have to
do everything itself. Software houses lined up
to write games for Nintendo. The software
house couldn’t sell a game program without
Nintendo’s permission.
Nintendo had built a security chip into the
hardware to ensure that only Nintendoapproved cartridges could run on the
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Giants – Nintendo
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Nintendo’s software licensing program had some
remarkable conditions:
Each licensee was limited to just 5 titles a year.
All games had to meet a set of standards including
a ban on any excessively violent or sexually
suggestive material.
An exclusivity clause prohibited licensees from
releasing the same title for other game systems for
2 years.
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Giants – 3DO
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3DO is known for having created the
first 32-bit CD-ROM video game
architecture, bringing the game industry
to a new era.
With this new technology, games could
be created with high-quality video, CDquality sound, and impressive graphics.
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Giants – 3DO
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3DO made money by licensing software
house to produce games and collecting
$3-only royalty fee.
Its hardware technology was licensed
for free.
With main machine priced at $700 and
a title priced at around $75, only
30,000 machines were sold by 1994.
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Licensing:
chicken-and-egg problem
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30,000 machines did not constitute a mass
market to make it profitable.
3DO company found that software houses
were not willing to invest in writing games for
3DO machines.
as The limited game titles made it even more
difficult to sell the machines.
What’s wrong with 3DO?
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3DO’s chicken-and-egg
problem
Expensive
Hardware
& software
A small base
of machines
High
Manufacturing costs
Software houses not
willing to write
games for the system
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Licensing:
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What’s wrong with 3DO?
The main machine was too expensive.
3DO: $700
Sega’s Saturn: $400
Sony’s Play Station: $300
The licensee did not have an incentive
to write games for 3DO.
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What did 3DO do?
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3DO started to their own title development.
Reduced the price of machine from $700 to $500.
Offered hardware makers 2 shares of 3DO stock for
each machine sold at a low suggested retail price.
Collected “Market Development Fund” from
software developers to induce hardware makers for
more-aggressive pricing.
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Giants – Sega
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“I don’t like the idea of one company
monopolizing an industry.”
– Hayao Nakayama, President, Sega
Enterprises
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Promoted with the slogan “Genesis does what
Nintendo don’t”,
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Giants – Sega
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It developed a faster, more powerful
16-bit machine.
It took Nintendo 2 years to respond
with its own 16-bit machine.
Sega was already well established a
secure & significant market position.
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Sega’s Judo Strategy
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The Japanese art of Judo teaches how to use
an opponent’s weight against him, to turn his
strength into weakness.
Judo explains how Sega was able to topple
the video game giant Nintendo.
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Sega’s Judo Strategy
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Was Nintendo simply asleep at the
wheel?
The answer is more complicated than
that, and this is where the link between
games come in.
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Sega’s Judo Strategy
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Nintendo had been developing a 16-bit
video game system since the late 80s
but was in no rush to bring it to market.
Before Sega entered, Nintendo was
content to grow the 8-bit base and
thereby grow the potential customer
base for its future 16-bit machines.
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Sega’s Judo Strategy
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After Sega entered the 16-bit market, if
Nintendo jumped into the game, there was
competition and, hence, much lower 16-bit
prices.
By staying out of Sega’s way, Nintendo made
a calculated trade-off: give up a piece of the
16-bit pie in order to extend the life of the 8bit one.
Nintendo’s decision to hold back was
reasonable, given the link between 8-bit and
16-bit games.
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Sega’s Judo Strategy
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“The Nintendo philosophy is that “we haven’t
maxed out the 8-bit system yet.”
If Nintendo jumped too quickly into the 16-bit
game, there was even a risk that software
houses and retailers would abandon the 8-bit
market.
The 8-bit market was Nintendo’s golden
goose. Why risk killing it?
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Sega’s Judo Strategy
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The new 16-bit game and the old 8-bit game
were closely linked. When Sega launched the
16-bit game, Nintendo’s 8-bit franchise was at
the height of its value.
An organization’s core competencies in one
generation of technology can turn into “Core
Rigidities”.
That gave Sega a judo opportunity to use
Nintendo’s strength against itself.
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Sega’s Judo Strategy
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Established players often find it hard to make
the transition to the next-generation technology.
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That’s why a technological change often gives
challenging opportunities to incumbents.
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Lessons
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Nintendo’s “a good cycle”:
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Sega’s “Judo’s strategy”:
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Facing 16-bit market  “wait-and-see”
Turned incumbent’s (Nintendo’s) strength
into a handicap.
3DO’s “Relying others”:
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Dangerous to leave 2 complementary
markets to others.
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