The Video Game Market
The video game market is a portion of the entertainment industry that has quickly and quietly grown to proportions as big as the movie industry. Both the United States and Japan provide the greatest economic markets for this flowering product. Not only does the video game industry produce just games, they also provide home gaming systems, portable gaming systems and all of the necessary gadgets to play the games.
Despite the sustained growth in the industry there is still significant space for upward movement. The DRF Intelligence website, which follows market movement and news within the video game industry, explains that, “the number of U.S. household with a video game system has gone from 34 million in 1994 to 45 million today. On top of that, over 25% of video game households only own an older system. Therefore it seems clear that much of industry growth has come from increased usage with existing customers. There are still plenty of new customers waiting in the wings.”
Individual Product Pricing Component
Ever increasing technology is the most important factor in the success of video games and home gaming systems. Video games are not a necessary product but they are very successful in countries that value entertainment products highly.
There are several substitute products and many complementary products. The major home system competitors include Nintendo, Sony and Microsoft. All three of these companies produce gaming systems, video games (along with other companies focused solely on games), periphery items such as controllers and other gadgets. These companies set their prices in relation to how the competition has set theirs.
The competition between several companies has caused a decrease in price. Generally home gaming systems will be reduced in price over time to compensate for quantity demanded. This is also the case for new media that is released throughout the year. For example, Sony Playstation will sell a new game at roughly $45. Depending on how well the game sells, the price cut may be done quickly for a slower selling product or cuts will be withheld for products that continually sell well. But at some point he price is cut and stays at about half the original cost.
This impact on price has everything to do with the popularity of the game. The most recent example is with the Microsoft X-Box and its new game Halo 2. Video games are met with a great deal of anticipation as most of them will require a significant investment of time and energy. Halo 2 started selling outstandingly well before the release date due to pre-orders and had a record first week of sells, well on its way to being one of the biggest selling games ever.
What makes this interesting is the video game industry can be seen as somewhat price elastic and inelastic. Demand for the products can be so high that it doesn’t matter what the cost is. Specifically for the targeted demographic (13-25 years old) who have a large sum of expendable income. But high prices will nudge out potential buyers who don’t have the means. Eventually the price will come down and meet the consumers with demand but without the means.
The video game industry, much like the whole entertainment industry, is most successful when they can provide a product which appeals to a wide number of people. DFC Intelligence explains, “Interactive entertainment is no longer just for the kids, it is now for the teenagers, and increasingly the parents, many of whom grew up with Atari and Nintendo systems. This means more households have several users, own multiple systems and have a tendency to purchase more software per system (higher tie rates). It also means that the system targeted to the broadest demographic may be the most attractive to the growing number of households with multiple users.” This is the strategy that companies in the market will have to cater to, the growing age gap of users. Game players old and young need to find products that satisfy all of their needs.
Cost Component
Rising costs have become a major issue within the video gaming industry. “The need to expand on a worldwide basis is critical because of the soaring cost of video games. Today’s games have entire teams of programmers, graphic artists, game designers, producers and audio technicians. Many games have expensive licenses, utilize Hollywood talent and have high-quality soundtracks. Consumers now expect non-interactive introductions and cut scenes that feature movie-quality computer-generated graphics and/or video with live actors. To get consumers to notice these high-end titles usually requires a marketing budget that equals or exceeds the development budget. As an average game reaches development costs of $5 million, DFC Intelligence estimates the breakeven point is reaching 500,000 units. Unfortunately, only about 5% of SKUs will reach that level in the U.S. This means to be successful it is critical that companies 1) develop for multiple platforms and 2) release titles on a worldwide basis.” (Para. 5)
Since the gaming industry is fueled by growing technology and depends greatly upon quick production before that technology is outdated, costs will remain high in this area.
One problem that the industry has had is in product pricing and finding out how much the consumers are willing to pay. In the new market for portable hardware it has proved difficult to determine how much to charge for the smaller model, when home systems will go for much higher prices. One article (“E3 2004: The Start of the Portable Market Battle”, 2004) explains something called the Network effect. ” The network effect is where consumers tend to buy the same system their friends own. This occurs in the console market, but it is even more pronounced in the portable market. With wireless networking capabilities, consumers will want to own the same system their friends own so that can play multiplayer games. In addition, the portable market is somewhat unique because there are a significant number of households that own multiple versions of the same system. In other words, it has not been uncommon for all the siblings to get their own Game Boy Advance. This is where a significant hardware price difference could give one system a major market advantage.” (Para 12)
Market Structures
The video game market is characterized as an oligopoly. According to McConnell-Brue (2001), an oligopoly “involves only a few sellers of an identical or similar product; consequently, each firm is affected by the decisions of its rivals and must take those decisions into account in determining its own price and output.”
An oligopoly is characterized by a few large producers who provide differentiated products. These products are differentiated in that the form is the same but variations are brought out to enhance the consumers demand. In this type of market, the firms are “price makers”. The few firms like Sony and Microsoft will set the price and output levels to maximize profit levels. As McConnell-Brue explains, “oligopoly is thus characterized by mutual interdependence: a situation in which each firm’s profit depends not entirely on its own price and sales strategies but also on those of its rivals.” (p. 493, 2001)
One aspect of the video game market that has made a recent comeback has been the role of Hollywood and the movies within the video game community. An article, (The Business of Computer and Video Games 2004, 2004) explains the role Hollywood has played in the past and future of the video game market. “Hollywood ways have become an integral part of the interactive entertainment industry. This includes expensive licensing deals, negotiating with agents, packaged deals for movies/TV shows to games and even vice versa, game soundtracks, star talent in games and of course trailers featuring computer generated movie-quality videos that add nothing to game play. Consumer spending has shown that, as video games go Hollywood, they can significantly expand their appeal.” (para.8)
It is important to understand that the video game market is operating within the same frame as entertainment. The most important factors to enhance sales and to move a company into an optimal competitive position is through the development of products that will entertain the widest range of people possible. Hollywood is directly in the business of making movies that will appeal to a mass number of people. Big buzz on gaming items can garner attention outside of the gaming community, such as the Grand Theft Auto franchise that has proven to be newsworthy to more than just the hardcore video game community.
The most effective non-price strategy will always be to develop games people want to play. If this is done effectively, the video game market has shown that price will usually not be a factor when the game is popular enough. Specifically for the video game target market of kids and young adults who have the greatest amount of expendable income.
Economic Forecast
The economic factors that can hold influence over the costs and prices of other goods will also be determinants within the video game market. Since video games are not a necessity within the average American home, adverse unemployment rates, inflation rates, retail sales, interest rates and other factors can weigh heavily on an entertainment market out for your hard earned dollars.
The current economy has provided a great opportunity to the video game market. Low interest rates and inflation have given families more money work with. The low home interest rates have given families a chance to rework mortgages. This influx of money has given the video game market a shot in the arm. Since the home gaming systems have not had to deal with cutting their prices to meet the price-output demand, they have been able to have strong sales (Christmas 2004 saw most retailers unable to stay in stock) while remaining at a higher price level.
The video game market has the distinct opportunity to operate within the world market, proving to be just as, if not more successful, in Europe and Asia than in the U.S. alone. “The Risk Adverse Interactive Entertainment Industry of 2004” is an article explaining the forecasts of the video game industry, it states, “we forecast worldwide game industry hardware and software revenue to grow from $23.2 billion in 2003 to $33.4 billion in 2008. This figure does not even include the large market for game rentals, used games, accessories, books and magazines and a significant portion of the online game market. However, beneath the glossy press release numbers there are some pressing short term concerns for the interactive entertainment industry. Our latest report forecasts that overall industry revenue will be down 9% in 2004, falling another 14% in 2005.” (para 2)
This revenue dip will most likely be a factor of demand cooling as consumers have already purchased the home systems and will be looking forward to the next evolution in the video game industry.
“Casual observers of the interactive entertainment industry tend to look at the aggregate overall sales figures and draw broad observations. The fact is that consumer spending on video games continues to be near record highs. However, because of the dynamics of the game industry cycle, maintaining profit margins is currently very challenging. The mass-market consumers rack up big aggregate sales numbers, but on an individual basis they are frustratingly tight with their money. Unfortunately this dynamic is likely to continue for at least the next two years.” (Is the Industry Ready for the Mass-Market Consumer?, 2003)
Industry forecasts for the video game market have proven to be sufficient, but it is difficult to anticipate the impact that a brand-name game or new technological innovation will have on the market as a whole. Some games, such as Halo or Grand Theft Auto have come along and turned the industry on its head. This is the same situation that can occur in most markets where technology is the proven factor in promoting business.
