“The video game industry has become one of the most lucrative in the world.” (Gray, 2014).

Industry leaders Sony with the PlayStation 4 and Microsoft with the Xbox One are constantly

innovating to make their respective systems more realistic, more immersive and generally more

fun to use. This has created an arms race of sorts between these firms as well as other firms in

the industry such as Nintendo to come up with the fastest system with the best graphics and user

interface. “You can't be a next-gen console without the horsepower to back this fact up”

(techradar.com, 2013). Gamers reap the benefits of this intense competition as it not only creates

the best possible product but also drives prices down as Sony loses money on each PlayStation 4

sold and Microsoft looks to break even on Xbox One sales. Both firms are attempting to “capture

market share, tying users into its ecosystem of services” (Gray, 2014) and then turn a profit with

the sale of games and online memberships. As shown below, Microsoft has the largest market

share with Sony not far behind and Nintendo a distant third.

The value chain for the gaming industry is unique compared to the value chains of other

industries. Leading firms do not typically create their own games, but rather outsource to

development companies. This adds another dimension to the competition in the industry as firms

compete to get game developers to produce games for their console. This is where the actual

platforms of the consoles come into play. “While Microsoft has been widely praised in the past

for providing an open platform, Sony lost ground by complicating matters for smaller, more

independent developers.” (Gray, 2014). The ease of development for each platform is hugely

important while competing for game developers as the developer wants the easiest possible

platform in order to focus more resources on the creative aspects of the game. Once a game has

been developed distributors and publishers are brought in. This is also a critical stage in the value

chain as poor marketing and distribution can destroy any chance of a game making a profit.

While the stereotype of what a typical gamer looks like is an adolescent male, this is not at all the

case. In fact, the average age of an American gamer is 34 with roughly 40% of gamers being

female. This diverse market means that there are lots of potential market segments to target. For

example while Sony and Microsoft have produced lots of first person shooters and more mature

games in recent years, Nintendo has largely targeted families and young children, a market

which they now dominate.

In addition to consoles, video games are now played on mobile devices and computers, which

has greatly expanded the gaming industry’s reach. Apps such as candy crush which are easy to

play and attractive to a large audience have made it possible to game nearly anywhere. Computer

games like League of Legends and World of Warcraft made it so that one no longer needs to

purchase an expensive console for complex online gaming.

While the gaming industry has seen tons of great innovations such as artificial intelligence,

portability and the ability to play on one’s phone, and motion gaming, the one innovation which

stands out as having the greatest impact on the industry is the addition of online gaming.

According to inventorspot.com: “The advent of online gaming meant multiplayer games received

a lot more love than they used  to”. Online gaming has completely changed the way people play

video games. One no longer needs to be in the same room as their friend to play together. In fact

gamers can now play with others anywhere in the world as long as they have an internet

connection. This has not only made it possible for friends to play together from anywhere but

also for strangers to play. Online gaming has made it possible for massive multiplayer online role

playing games to be created. Some of the most popular games have become communities of their

own Such as World of Warcraft which has over eight million subscribers. Other games like

Madden or FIFA track one’s playing statistics and use that information to put gamers against

each other based on similar skill levels. This feature makes online gaming much more attractive

to everyone, as beginners don’t have to worry about a more experienced player ruining the game

for them, and more savvy gamers can still be challenged. In this way online gaming has greatly

improved the gaming industry as a whole. Firms are benefitting from the addition of online play

by charging money in addition to the initial console and game purchase for a consumer to access

their servers to play online.

As shown on the graph above, revenue from consoles themselves have declined since 2008,

however revenue from online gaming has greatly increased over the past few years and is a big

part of why the industry is still growing. This is supportive of the idea that the innovation of

online gaming has revolutionized the gaming industry and been the industry’s driving force for

the past few years.

The transition of games from local to online play has not only improved the industry by making

the gaming community smaller, greatly improving gameplay, and giving firms a new source of

revenue, it has also made access to games much easier. Now instead of having to go to a store

and buy a disc copy of a game, one can simply download new games through their online

account with Microsoft, Sony, or almost any of their competitors. By making games easier to

access, firms are encouraging consumers to buy more while simultaneously cutting down their

production costs by eliminating the disc and packaging. Another benefit of this is that they can

track what a user has purchased, and use that information to advertise similar products to that

specific person, which no doubt causes them to download even more content through their online

gaming account. Online gaming has truly revolutionized the industry.

Sources

Gray, Jules. "The Race for Video Game Innovation." World Finance. 21 Jan. 2014. Web. 20 Feb.

2016.

"How Xbox One Is the True Definition of next Gen." TechRadar. 13 Nov. 2013. Web. 20 Feb.

2016.

Nelva, Giuseppe. "Sony’s Kaz Hirai: “PlayStation Innovation Is Simply Unparalleled;” Hypes

Up PS4’s Project Morpheus | DualShockers." Sony’s Kaz Hirai: “PlayStation Innovation Is

Simply Unparalleled;” Hypes Up PS4’s Project Morpheus | DualShockers. Web. 20 Feb. 2016.

Pereira, Chris. "Xbox Feedback Site Now Lets You Submit and Vote on Ideas for

Xbox." GameSpot. 9 June 2014. Web. 20 Feb. 2016.

"Five Innovations That Changed Video Games." InventorSpot Articles. Web. 20 Feb. 2016.

"The Digital Capitalist." : Digi-Capital Global Games Investment Review 2013. 15 Jan. 2013.

Web. 20 Feb. 2016.