In the current economic environment where big industries are finding it hard to survive in the market and when even the government has to interfere with the free market mechanism in order to save the economy from crashing and when many companies have filed for bankruptcy in order to get government help, there is an industry which has recorded one of its highest growth rate in the history. The video game software development industry has seen some of its epic years during the worst recession of the country. Even though the sales have slowed to an extent, the video game software development industry has recorded on increase of around 23% with an increase of $1.9 billion dollars. But many companies associated with this industry have recorded losses in the recent years. This research is directed towards the study of the reasons behind the losses recorded by the companies and make necessary recommendations that would help them in turning the business into profit-making entity.
In the current world scenario, the economic situation has been the center of people’s attention. The whole of world has been affected by the greatest financial meltdown since the great depression of the 1930’s. The whole world has been affected by the economic crisis and has felt the great pressure of the credit crunch. The markets around the world have seen a major setback in the business and in the process many investors have lost millions. Many businesses have seen a major setback in their respective fields and have suffered really heavy losses. Some businesses have passed the test of survival either on their own or by some help from the government. Many businesses were not so lucky and had to apply for bankruptcy and ended up winding up their businesses. The auto industry was forced to take help from the government and even though they acquired financial assistance from the government had to retire some of their product lines and had to sell some of their product lines to other businessmen. The so-called “Greatest Depression since the Great Depression of 1930’s” has affected the whole world and has changed the whole business environment.
In the same business environment there is one industry that has been able to attain unimaginable sales figures and has been able to make sure that they earn huge rewards in the form of bumper sales. The industry has also been affected by the economic setback but that has not been able to slow the pace of innovations and progress in the industry. The industry that has progressed even in the times of economic setbacks is the “Entertainment Software” industry. The industry has been able to innovate and progress even when all the other businesses are struggling to survive. The industry has seen rapid growth in recent years. The introduction of new advanced technology in the market has helped in increasing the sales of video games and hardware related to video games. The entertainment software industry has seen a growth in United States from $7.4 billion in 2006 to $11.7 billion in 2008 (ESA, n.d.). The industry has seen recorded growth in units from 73.8 million units in 1996 to 196.3 million in 2001 to 267.9 million in 2007 (ESA, 2008). It is estimated that the entertainment software sales will reach $15 billion in 2009. The entertainment software industry has grown by leaps and bounds and from an industry that was not taken seriously in the 1980’s has proved to be a attracted a lot of attention in the recent years. The entertainment software industry and also contributed a great amount to the GDP of United States. In 2006 the industry added $3.8 billion to the GDP alone. From 2002-06, the industry has recorded a growth exceeding 17% (ESA, n.d.). According to company sources, the game GTA IV by Rockstar Games that was launched in the last part of 2008 grossed $310 million worldwide on the 1st day of its release and over $500 million in the 1st week (Rockstar Games, n.d.). But recently, a game designed by Infinity Ward, a company consisting of under a 100 employees launched a game on the 10th November,2009 grossed $310 million on its 1st day only in the US and UK markets (Activision, n.d.). These games grossed more than the many of the biggest Hollywood Blockbusters of all times such as Spiderman 3 and Batman: The Dark Knight and have become the biggest launches in the history of all forms of entertainment.
The entertainment software industry has seen a high increase in the employment too. From 2002-06, during the 4 year period the employment in this industry has increased by 4.4%. Currently the industry employs more than 80,000 people from 31 states whether directly or indirectly. It is estimated that the industry will generate employment opportunities and support over a quarter million jobs of the American people. The job generation capability of the industry has risen due to rise in the demand for new games and the high demand for people to design and develop games that have high technological and graphical standards. The industry also supports indirect jobs such as job opportunities in stores dealing in gaming software and hardware like the GameStop INC. It has also helped in supporting the technological advancements in the computer and gaming hardware producing companies such as Sony, Nintendo, Microsoft, SEGA etc. The entertainment software industry has been developing software’s for these gaming consoles. So the industry is turning out to be a major player in the economy and its profit generation capabilities is unquestionable.
The Entertainment Software can be described as special computer programs that are designed for specific purpose of entertainment. These programs consist of complex graphics and sounds and need special hardware to run efficiently. These software’s may run on computers or dedicated gaming consoles such as the Playstation’s and XBOX’s. The video games are usually platform specific and a game that is designed to be played on certain platforms cannot be accessed from a different console or computer. In the earlier days the games were designed to be platform specific and they cannot be played on other systems. But in the current times, the same game is launched for different types of platforms. Like the GTA series developed by the Rockstar Games was launched for PC, PlayStation and XBOX. Different copies are sold for different platforms.
There is a big difference in the earliest games and the games that are developed in the current times. The technology has progressed a lot in these years. If you compare the first ever game produced that is 1958 by Willy Higinbotham designs an interactive “Tennis for Two” that is displayed on an Oscilloscope to keep the visitors to the Brookhaven National Laboratories in New York from being bored to the currently launched “Call of Duty- Modern Warfare 2” that has created a sensation in the modern world is like comparing a Ford Model T with a Lamborghini Reventon. The difference can be seen clearly and so the whole concept of gaming and the various technological advancements can be understood from the comparison. The earliest games were very less graphic and sound qualities while the recent games contain advanced 3-d graphics and sound. The games in the current environment have a storyline that can compete with a Hollywood movie and provides an immersive gameplay through various episodes that will help the gamer to advance to the next level and hence play the game forward from that point and see the twists and turns that are thrown towards it.
But to understand the world of video game and entertainment software, the various genres in which a game can be divided should be understood. This will provide a better view about the business of entertainment software production and the various aspects of it.
A genre can be defined as a class in which a specific type of game can be put into. In order for a game to fall into a specific class, it has to have a certain types of qualities. These qualities can be decided by the gameplay of the game in question. The type of gameplay and the experience it delivers to the gamer can be helpful in putting the game in a specific genre. The various genres’ of video games can be classified as follows:
The definition of a video game developer can be put as “A video game developer is asoftwaredeveloper(a business or an individual) that createsvideo games.” (Merriam Weber, 2009). In general terms, a video game developer is in the business of designing video game software and his business is limited to the designing part of the video games only. He does not engage in the process of marketing or publishing the video game. The developer simply develops the video game and then sells it to a publisher in order to manufacture and market the game on the developer’s behalf. In return, the developer is either paid the share in the profit earned by the sales of the game or in other words a royalty from the shares or is paid the asking price for the whole software at the same time with no further obligations for any future payments.
The developer therefore relates to the development of the game. Many big software developer/publisher companies hire outside developers to develop games for them and they are just concerned with the publishing and sales of the games. There are many examples in which many companies hire developers to design games for them while the big company is investing all its resources into developing big budget games that have a big gestation period i.e. they have a long time from their initial development to the actual product realization. As a result, in today’s entertainment software industry, private software developers now play a huge role in developing games and are creating a large number of jobs. In the current state of the industry, there are 1,268 game developers of which 430 are in United States. (Gamedevmap, 2009)
A video game developer/publisher can be described as ,” An individual or company engaged in the business of developing video games and publishing the video games can be defined as a video game developer/publisher.”. These video game developer/publishers are big giants of the video gaming industry and that these companies have been in this business for a many years and some of these big companies are responsible for the mammoth status that the industry has taken in the recent years. These companies make huge amounts of profits and generate the highest number of employment in the whole industry. The companies that are engaged in this type of business not only develop their own games, but sometimes they hire some outside developer to design a game for them and they produce them under their brand.
These giants buy the games from the developers for a specified amount of money or they are promised a share from the profits, or royalty form the sales. Some of these companies have their own developing studios that operate separate from them and they provide all the product support for the company. Many companies have multiple game developing companies working for them and supplying them with new and advanced games every year.
The video game developer/publishers constitute a major part of the video game industry. In the whole world, there are 167 firms that are engaged in the business of developing and publishing video games. Of the 167 firms, 57 firms are based in the United States alone. Of all these companies, 27 companies are the members of the ESA. So it can be seen that the definitions of video game developers and developers/publishers is very important to know the details about the industry.
ESA (Entertainment Software Association) is the association that has been established by the entertainment software producers operating in the United States to overlook the actions of all the industry and establish an authority overlooking the functions of the industry. According to the ESA website, “The ESA is the U.S. association exclusively dedicated to serving the business and public affairs needs of companies that publish computer and video games for video game consoles, personal computers and the Internet.” (ESA, n.d.)
The ESA also offers a range of services to interactive entertainment software publishers including a global piracy program, business and consumer research, government relations and intellectual property protection rights (ESA, n.d.). The entertainment software association helps the entertainment software publishers by acting as a connecting rod between the government and the companies. The ESA undertakes many issues that bother the member companies to the government and sees to that that the issues are resolved.
The ESA was first established in April 1994 under the name of Interactive Digital Software Association (IDSA) but was later named as Entertainment Software Association (ESA) on July 16, 2003 (Economic expert, n.d.). The company consists of 27 members in the US. It can be said that every company producing entertainment software across the world or any of its US subsidiaries is a member of the ESA. The ESA takes the role of the authority and makes sure the member companies follow the rules and regulations set forth by the Congress. It also presides over the functions of the Entertainment Software Association Rating Board (ESRB) (ESA, n.d.).
The Entertainment Software Rating Board (ESRB) is a non-profit, self-regulatory body established in 1994 by the ESA. The ESRB assigns computer and video games content ratings, enforces industry-adopted advertising guidelines and helps ensure responsible online privacy practices for the interactive software industry. The organization’s mission is to empower customers especially parents, with the ability to make informed decisions about the computer and video games they choose for their families through the assignment of age and content rating, and to hold the computer and video game industry accountable for responsible marketing practices (ESRB, n.d.).
The ESRB sees that all the games are rated considering their content. On the basis of the level of violence and other factors contained in the game, the ESRB rates the game on an eC (early childhood 3+), an E+6 (everyone 6+), an E+10 (everyone above 10 years of age), a T (Teen 13+), an M (Mature 17+) or an AO (Adults Only 18+) (ESRB, n.d.).
In the recent years, it has been seen that the companies producing video game software’s have been suffering losses. The sales have shown a huge increase in the past recent years and the industry has shown a constant rise but that has not helped the developer’s in making profit.
So the main objectives of the research can be outlined as follows:
The research paper will look into the financial functions to the entertainment software developers and look for the reasons why the major developing companies have registered losses in the previous years even though they have seen an increase in their business over the past few years and they have seen more bumper sales compared to 10 years ago. The Rockstar Games Inc., a subsidiary of the giant Take-Two Interactive Software Inc. launched the game GTA IV in December 2008. The company invested $100 million in the development of the game while the game was able to collect $500 million in the first week alone.
So this research paper will deal with the problems that the companies are facing with their functions and seek out solutions for these problems that have turned these huge businesses into loss making giants.
History of the video game software industry
The word “history” is derived from the Greek word “historia” meaning “learning or knowing by inquiry” (Merriam Webster, 2009). According to the Britannica Encyclopedia, “A sense of the past is a light that illuminates the present and directs attention toward the possibilities of the future. Without an adequate knowledge of history, today’s events are disconnected occurrences.” (Britannica Encyclopedia, n.d). In this context, without the adequate knowledge of the history, it would be difficult to understand the current events and to forecast the future of the entertainment software development industry.
The industry is just 51 years old. It can be traced to 1958 when the first video game was designed by Will Higinbotham. The world of video games continues to evolve. By reading about the past of video games, perhaps a glimpse of the future can be seen. The history of the entertainment software is closely connected to the development of the video game hardware as the sole purpose of developing the video game software’s was to compliment the development of advanced technology in the hardware field. So to understand the origin of the video game software’s it is necessary to study the development of the video game consoles at the same times. Video game historians, Leonard Herman, Jer Horwitz, Steve Kent and Skyler Miller have divided the history of the industry into 8 eras’. The 8 eras’ can be noted down as follows:
This is the age where the video game world had the biggest developments and the technological advancements that would change the face of the industry as a whole and set the foundations on which a huge industry would be established. This age can also be called the age of “Programmable Game Consoles”.
Sega releases Monaco GP, a driving game with a top-down perspective, which is followed by the similar Pro Monaco GP in 1980 and the realistic 3D racer Super Monaco GP in 1989
Milton Bradley Electronics releases the Microvision, a handheld device which has its own LED screen.
The main reason for the Great Crash was the volatile market of North America and the over-optimistic approach of the game developers. The game developers were not able to sell the stock that they had produced due to over-estimation of sales. This lead to a lot of stock on the shelves and the number of bad games released was very big. As a result of that, the sales of video games declined in this era. Moreover, at this time the personal computer was getting popular and so the parents thought of it as a better investment than a video game. This also contributed as a factor and lead to the decline of video games.
This year saw the release of the most addictive game till date, the Myst. It is initially released on the Macintosh, but finds its way on the PC after a while. It also becomes a hit on future consoles like the Sony PlayStation, the Atari jaguar and the Nintendo N64.
During the Christmas of 1996, Sony recorded bumper sales of $12 million a day for the Sony PlayStation. This year also saw the opening of a travelling video game museum exhibit in Pittsburg Carnegie Science Center.
In the same year, rumors about a possible higher version of the PlayStation, the PlayStation 2 start to surface.
This age saw the development of Sony’s latest console that would stand all the challenges and competition and would go on to rule the market for more than 7 years until the new console is released to replace the Sony PlayStation 2.
This year also welcomes “PokA©mon” to US, a marketing sensation in Japan. “PokA©mon” when released in US after necessary editing to avoid any epileptic seizures, becomes Nintendo’s fastest selling game ever.
This age sees the heavy weights in the business namely Sony and Microsoft battle it out in the video game console arena with their offerings the PlayStation 2 and the XBOX respectively. The age can be called the age that is currently running in the current time where video games are bigger than ever and where the video games are launched like some Hollywood blockbuster and they end up grossing more sales than major Hollywood blockbusters. For eg: Rockstar Games Inc’s GTA IV released in 2008, its first day sales were $310 million worldwide while its first-five day sales amounted to $500 Million compared to the first 5 day sales of the biggest Hollywood blockbuster of all times “Batman: The Dark Knight” which grossed $203.8 Million and the highest book sales recorded by a book “Harry Potter& The Deathly Hollows”, which happened to gross $220 million in its first day. But GTA IV record was soon broken by the release of the huge hit Call of Duty- Modern Warfare 2 on 10th November, 2009 which grossed $310 million in its first day in just 2 markets and $550 million in the first-five days making it the highest selling release across all forms of entertainment. (Activision.com, Nov 18, 2009).
It also set new sales records on the online game front when 5.2 million users logged on to play the game online out of which 2.2 million gamers logged on to XBOX Live alone making a new record for online game play on the first day.
The popularity of video games’ encourages Hollywood film-makers to make movies based on these games. Lara Croft: Tomb Raider, starring Angelina Jolie is released which will pave the way for other movies based on video games such as Doom, Max Payne, Hitman etc.
This year also sees the launch of the Sony PSP (PlayStation Portable) which revolutionizes portable gaming with a higher level of graphics capability than ever offered on a portable gaming device.
The Video game industry has made its presence felt in the recent times and the industry has seen its shares of highs and lows but that has not stopped the industry from establishing itself as a profitable industry and the contribution made by the industry as a whole to the annual GDP is noteworthy. But this would not have been possible unless the various technological developments that would have taken place in the industry. So it is very important to study a detailed history as it would help in predicting the future of the industry and by studying the history, you can recognize a trend that would help a person in searching for solutions of a problem. As Machiavelli puts it, “Whoever wishes to foresee the future must consult the past; for human events ever resemble those of preceding times. This arises from the fact that they are produced by men who ever have been, and ever shall be, animated by the same passions, and thus they necessarily have the same results.”
There have been major changes in the type of population playing games. This contributes as a major reason in the increase in the sales of video game software’s that have shown a strong position even in the times of depression and economic downturn. The age and sex of the gamers have shown a major diversity in current years. The age of the average gamer has increased and the ratio of female gamers to male gamers has increased in the recent years.
The average age of gamer has increased in recent years. The main reason for the age of the gamer increasing is because of the fact that the generation who started playing video games such as PAC-MAN and Street Fighter in the arcades has not stopped playing games and new gamers in the form of the young generation are being added every moment. So the numbers of gamers have increased in the recent period and as a result of which the age of average gamer has increased to 35 years in 2009 as compared to 25 years in 2000 (ESA, 2009). This shows the rising popularity of video games across various age groups.
This can be cited as one of the main reasons of the increase in the average gamers’ age. Moreover, the various gamers can be classified into various age groups in the following manner. The age diversification data as on in 2008 can be classified as follows:
It can be seen that 49% of the average gamer is between 18-49 years. This includes people who started gaming when the video game industry was in its infant state and some gamers consist of the people who started playing games in its latest developments. The surprising factor is the high proportion of gamers who are above 49 years of age.
The gaming community has been stereotypically been male-centric. The ratio of male gamers to that of female gamers has always been high. In the earlier stages, female gamers did not consist of a major part of the total gaming population. This can be attributed to the concept of “Gamer Shame” which can be found among women (ESA, 2005). This was one of the main reasons of the proportion of female gamers being less. But in recent times, this has changed to a great extent. The proportion of women gamers has increased from 14% in 1987 to 31 % in 2005 to 40% in 2008. The proportions of women gamers have increased by leaps and bounds and as a result games designed for all genders have gained momentum (Crandall, & Sidak, 2005). The increase in the percentage of female gamers can be better understood by a graphical presentation.
This rising proportion of female gamers gave rise to several games like Nancy Drew series, Ms PAC-MAN, Princess Isabella series, Tomb Raider: Lara Croft series where women are the leading characters of the game and which are specially designed for targeting women audiences have rose in the last couple of years.
On the other hand, it has been observed that online gaming has become more popular among the female gamers and that has lead to an increase in the number of females playing online games. It has been noted that female comprise of 43% of the total online gamers (ESA, 2009).
As jack Kyser, the chief economist at the Los Angeles County Economic Development Corp. has put it, “The video game sector is no longer an interesting little industry, it’s serious money.” The video game industry has evolved into a financial juggernaut that has made huge developments in the financial sector. The video game software market in US alone has increased from $2.6 billion in 1996, to $5.6 billion in 2000, to $9.5 billion to a staggering $11.7 billion in the fiscal year 2008 (ESA, 2009). The total sales in the US markets can be better understood from the following table.
As seen in the figure, the US market for the entertainment software industry has been increasing greatly with the exception of 2005 where we saw a drop of 4% which can be attributed to less titles were released during 2005 and two major console makers Microsoft and Sony were waiting for 2006 to release their new consoles namely the XBOX 360A° and the PlayStation respectively. Both the company had made the announcement of the development of these consoles which resulted into the customers holding back their purchase in anticipation of these consoles which also slowed down the sales of major titles that were released for the old console. As a result of that, the industry saw a slump in the sales. This shows the impact of technological changes in the industry and how new technology out-phases old technology. As a result of the announcements and Sony shipping out 10,000 PlayStation 3 development kits to game developers, all the major gaming giants started designing games for the next generation consoles. The resultant shortage of new titles for the old consoles spelled the slump in 2005.
The consideration of sales according to the genres is also very important as the future plans about the product line can depend on the sales of a particular genre. A developer has to develop a video game taking into the limitations of various factors of production and as a result has to divide his resources at the optimum level. So it would not be wrong to say that the sales of a certain genre of games produced by a certain company would affect the production plans of that company to great extent.
According to the ESA’s Essential Facts about the Computer and Video Game Industry 2009, the sales of various genres’ on all platforms have been divided into two categories, computer games and console/portable games. But in order to consider the whole industry, it is very important to consider the average of both the markets and as a result, a perfect big picture can be achieved. The table can be constructed as follows:
The chart shows that the most popular genre across all platforms is the strategy game. But in order to get a better understanding of the situation and take decisions according to the type of platform the company is going to design the game for and that will decide what genre of the game would be beneficial for the company and which would be the most beneficial for the company to invest its resources into.
The Industry’s various giants like Electronic Arts (EA), Take-Two Interactive (T2), THQ, Activision Blizzard, etc. have seen fall in the profits in the recent years. In some cases, the revenues have risen by leaps and bounds but the costs of developing the games is so high that it is undermining the huge jump in revenues leading up to the resultant losses. Taking into account the recent record established by Activision’s “CALL OF DUTYA®” franchise whose sales surpassed $3 billion worldwide with the release of its latest installment named the “CALL OF DUTY: MODERN WARFARE 2” which recorded sales of $550 million in its first week of release making it the most successful franchise ever to be released on any entertainment platform. Moreover, if the game hours put in by players across the globe, it can be called the most viewed entertainment media of all times (Activision, 2009).
Many times that have been attributed to the downward spiral of the economy around the world as this economy has discouraged the people for making more purchases and as a result the sales of all sectors has gone down and the video game industry as a part of the market at large is also subject to the effects of recession. According to Daniel Terdiman, the video games industry will not breeze through the recession (Terdiman, 2008). Even the video game industry will have to take steps to minimize their expenditure and take to business tactics to maximize their sales to the limit in order to achieve maximum returns for the shareholders.
The economic downturn also affected the video game industry and its shareholders. The NASDAQ and Dow Jones crash also took toll on the share prices of these video game developing giants’ like EA, Take-Two, Ubisoft etc. When the Dow dropped about 28.16% in the period of September 2, 2008 to November 2, 2008, and in the same time period NASDAQ lost 36.91%, six video game giants namely EA, Take -Two, Activision, THQ, GameStop and Nintendo jointly recorded an average fall of 52.53% in their share prices (Terdiman, 2008). As a result it can be said that even the video game industry, taking into consideration it’s record sales and the nature of business, also saw its business and sales affected in the recession.
In the figure above, it can be seen that 3 out of 5 companies has either suffered a loss or a decrease in returns in 2008 as compared to 2007. Looking at EA, one of the biggest developer/publisher in the industry, we can see that its losses have increased in 2008 as compared to 2007 by $(634) million and at the same time THQ, another huge developer/publisher in the market has suffered a loss of $431.112 million in 2008 as compared to $35.337 in 2007. The only exception is the growth buy Activision which recorded a profit of $344.83 million in 2008.
This leads to a question about the reasons behind the huge losses made by EA and THQ compared to the profit’s recorded by Activision.
In the recent times of recession in the US economy where every company is struggling to survive to the end of the recession and see better times, the companies have to walk a fine line. Companies are incurring losses that amount to hundreds of million dollars even while they are breaking all sales records. This calls for a descriptive research looking for the reasons why a company can make a profit of hundreds of millions of dollars and at the same time, a company in the same industry performing at the same level of efficiency and magnitude of the business can end up registering a loss of millions of dollars. This research is undertaken so as to look for possible reasons for a company to make a loss even when its video game software’s are in demand and what could be the possible solutions that can help the company to turn around its business and once again be the profit making machines they were in the past.
The recessionary atmosphere that is prevalent in the world right now is very dangerous for the companies and they have to be extra smart and cautious when they devise the plan for operation so that they could survive through the recession. This current study is devised to look for the possible flaws in the operations of these video gaming giants and to make suggestions for possible ways that can help the in making profit.
The research method is very important while conducting a study that deals with the business tracts. The research methodology plays a very important role in such a study. So the selection of the research method is very important so as to make sure that the correct results can be achieved. Research methods can be divided into quantitative, qualitative and participatory research methods. The choice of the method would depend on the nature of the study undertaken and the objective of the study. Each method of research has its own tools, techniques, approach and interpretation. Each research method has its’ own individual way of interpretation and correct interpretation of the research is very important to get the optimum return from the research. Qualitative research combines collecting, analyzing and interpreting data by examining the behavior of people and looking into their wants and opinions. Qualitative research is focused on the wants and behaviors of the participants in a given situation or environment. Quantitative method, on the other hand, is an inquiry into a recognized problem which can be measured in form of numbers based on a pre-existing theory and which can be interpreted by using statistical methods. The purpose of the quantitative method is to identify the current environment and to measure the cause and effect by comparing different things. Qualitative research tends to be subjective while the quantitative is more objective (Neill, 2007).
In order to decide on the best type of research for the study, it is very important to know the types that constitute a certain research and how can they be helpful in bringing out the correct result. The four major constituents of a qualitative research method are interviews, surveys, questionnaires and focus groups while the parts of a quantitative research method are Descriptive survey method, Co-relational method, Casual Comparative method and Experimental method. Each constituent have their certain and exclusive characteristics and these characteristics would initiate the choice of that method. But due to the immense complexities in today’s business world and the effect of a decision on various participants in the economic process, a mixture of both the types of methods viz. qualitative research and quantitative research gas become very popular because in order to learn the effects of a decision on the company can be known by using quantitative research method while the effects on the customer can be known by qualitative method (MacDonald, 2005).
The author has decided on using both qualitative and quantitative method in the study because of their exclusive characteristics and how both these methods can be used to get a perfect picture about the situation and the results of both the research can be used to generate the optimum outcome and taking decisions that can generate the optimum revenue for the company as well as satisfy the customer’s needs and wants. But this mixture of methods and their efficient use of the results generated are dependent on the interpretation of the findings and so it may be possible that different persons doing the same study may get different outcomes and the main reason for the difference is the different interpretations. The main reason behind the choice of a mixture of both the research methods is due to the subject of the study and in order to make a perfect suggestion towards the operation about the industry in question.
In order to make a suggestion that can help the company turn around its’ operational efficiency, it is very important to choose the correct type of instrument for the research. The author has selected company comparison and consumer survey as a research instrument for the developer. This mix use of qualitative research method i.e. consumer research and quantitative method i.e. studying the financial statements and the company profile would be able to give a better understanding of the business of the competitors and various other parts of the industry and the areas that could help the company to turn around its’ financial woes and turn its business in the rising industry into a positive tone.
This potent mix of research method will also help the developer in finding the causes of its losses and by comparing its business strategies with its competitors, the entity can also monitor its competitors and modify its strategies accordingly in order to compete in a more aggressive manner. As the Chinese General and military strategist Sun-Tzu in 400 BC put it, ” Keep your friends close, and your enemies closer” (Tzu, & Lionel, 2007), this mix of research method would justify the saying. Monitoring the competitor and devising a plan accordingly can be profitable.
The data related to the study have been collected from the balance sheets of various companies, the Essential Facts released every year by the Entertainment Software Association and various other news articles related to the subject. The annual reports provide details about the financial dealings of the company in question while the share-holders address gives an insight on the financial dealings of the company and the business strategies as well as the cash-cows of the company in question. All these information is very important to consider the actual situation of the company’s business and make necessary and accurate predictions about the future of the company.
At the same time, the consumer survey has used to support the author’s findings and providing commercially profitable and feasible solutions for the company’s troubles. The author’s study is widely related to the production-line strategy to improve the profitability of the company and a consumer’s wants play a very important role in deciding the direction of the production strategy that has been adopted by the company. As a result of the nature of the study, data has been collected from the financial documents that have been filed by the company and the various documents that have been presented at various E3 meets by the regulatory board of the entertainment software industry, the ESA.
The following questionnaire was given to the customers in order to get a better idea about the target audience and the various aspects of the consumer’s wants and demands and the best way to deal with it. The author used personal approach as well as the use of the internet has been done in order to get the responses from the consumers. The questionnaire was designed in such a manner so as to know all the factors that can affect a person’s decision to buy a video game.
The companies that are involved in the video game industry operate on a similar basis and those companies share a similar environment in which they have to carry out their business. Therefore, it can be said that a company which is making a loss in the current environment can follow another company’s business model which has been proved profitable by the company. So in order to fully analyze and understand the importance of presence of certain characteristics and straits in a company’s business model and therefore it can proven that in a technology-driven industry, the business structure can make a big difference and therefore can turn a company into a profitable entity.
In order to achieve the goal of the study, the author has decided to compare the business model of two companies and see whether a company’s business can be adopted by another company profitably or the business strategy on one profitable company can help turn around a loss making company. The author has decided to use Electronic Arts and Take-Two for the study.
In order to find solutions for the financial woes of the companies in the video game development industry, it is very important to know the reasons for the video game giants ending up making losses.
The companies undertake huge development costs in order to develop their games. In recent times, the games have grown bigger than movies. The magazine Rolling Stone has rightly described the Grand Theft Auto 4 as a movie. It wrote, “This is a review of Grand Theft Auto IV the M-O-V-I-E. And I have to say, it’s better than anything I’ve seen at the multiplex so far this summer, except maybe Iron Man.” (“Is Grand theft,” 2008). As a result immense costs are undertaken in order to make sure that the final product is as advanced as possible. The new hardware developments in the markets and the introduction of new benchmarks in the graphical content of the games, it has been possible that the gamer is given a near real life experience. Now-a-days video games are also used as simulators for training purposes for pilots and car drivers. As a result the increase in the realism in the video games has increased to a great extent and as a result the companies have to invest a lot of money in developing the games that are technologically superior in every aspect.
As the author has selected Electronic Arts and Take-Two Interactive as the subjects, the development costs that have been undertaken by the companies have to be reviewed. As a result, the development costs undertaken by both the companies in the fiscal year 2008 are listed as follows:
As a result there has been increase in the development costs of both the companies, but the development costs of EA is more than the development costs of Take-Two. As a result, it can be seen that the development costs play a major role in the profit making capability of the company. It can be better understood in a graph:
As a result it can be seen that a greater development costs can be bad news for the company and can well spell doom for the company. So it is very necessary for the company in question to control its developments costs.
The bigger the games, the longer does it take to develop a game. In recent times, record development times have been recorded in the video gaming industry. For eg: Take-two Interactive sub-ordinate Rockstar Games took 4 years and $100 million to develop the GTA 4. As a result, long gestation period games consume a lot of time and the actual realization of revenues from the games is very long. As a result, the company takes a lot of costs in developing the video game and as the development process takes a lot of time and it takes up a lot of the company’s resources and as a result the company is not able to dedicate its resources to other games that have less gestation period.
So the gestation period of a game design also plays an important role in profit making capacity of the firm in question.
The production line is a very useful weapon whose efficient use can make the company profitable as a whole. Many companies have multiple production lines and each line takes up the job of developing a particular game or title. Some companies also hire outside developers to develop games for them as well as they publish games that have been developed by other developers and as a result, they have many games launching at the same time.
EA published 132 games in 2008 across all platforms, some of which are available on all platforms and thus have been counted multiple times. Individually, EA has developed and published about 40 games. At the same time, it has published 35 games developed by different developers (EA, 2009). At the same time, Take-Two has developed and published a total of 28 games out of which 9 games were developed by individual developers a T2 published them. The rest of the games were developed by various subsidiaries of T2 who perform independently. So it can be seen that the production line and the efficient allocation and use of the production line can help change the future of the company as a whole.
The video game companies develop the games and present them to the public for sale. Many times a company develops a title and puts a lot of resources into it. But the title fails to achieve the company’s financial sales forecast because of the fact that it is unable to interest the public at large and as a result the company fails to cover up for the lost time and resources put in the development of the game. As a result, the company incurs a loss.
In order to prevent this kind of a situation, it is very important for the company to design the game that contains what the public needs. The company needs to design the game keeping the consumer in focus. In the fiscal year 2008, EA incurred a loss of $1,088 million from its operations worldwide. It invested $1,359 million in research and development of its games. From the respective sales, it generated revenue of $4,212 million worldwide while its revenue generated from North America alone stands to $2,412 million in 2008 but none of its title amounted to more than 10% of its total revenue in any market. That can be termed as a title failure for the company. In the same year T2 released Grand Theft Auto 4 in the last quarter of 2008 but the game generated $500 million in its 1st week alone and that accounted to about 40.66% of the total revenue generated by T2 in 2008. This shows the effect one good title can have on the total net revenue generated by a company. T2’s subsidiary Rockstar Games handled the production of the GTA 4 while T2’s other subsidiaries took on the job of developing other titles, thus generating revenues continuously.
The author designed a questionnaire in order to know the consumer’s preferences regarding video games and their sole reasons to buy a video game. This questionnaire was filled up by 50 people and the findings were recorded as follows:
A major part of the group was in the age group of 25-35 years consisting of 23 people i.e. about 46% of the total group. It was followed by the group 18-25 at 30%, 35-45 was 20% and 45 & above just 4%.
Males consisted about 58% of the total study while females were at 42%. That study co-resides with the industry average of 40% female. That shows the importance of female in the industry and their increasing importance.
The main leaders in this pack are the consoles. There were 36 people who owned consoles. But at the same time for some games they use PC to play. Many people owned multiple platforms and so the number of consoles in the group reached a total of 96 units.
This question shows the intensity of gaming undertaken by a gamer. This question depended on the gamers’ own measure and ability. The major part of the population was casual gamers at 54%, followed by Family-Casual gamers at 30% and the least were hard-core gamers at 16%. This shows the importance of casual gamers in the industry.
In this we can see that a majority of the population spends about $500-$1000 dollars a year on buying video games. They consisted about 46% of the total population. The second biggest group was a surprise. People spending over $100-$500 came as the second biggest group with 34%. The reason for this was given by many people as the recessionary period. The third largest group was people spending $1,000 and above and they consisted of 20% of the population.
It has been noted that a majority of population plays video games a lot in a whole week. This is an interesting find as individuals spend a lot of time playing video games. But this has taken priority over the family in certain matters. 23 people play video game foe about 20-30 hours in a week.
The genre of the game most played by people plays a very important role in the company’s decision about game development and the allocation of resources. This can help the company in deciding the correct game to design.
In this question the participants were given the option to set their preferences for the video games. The preferences set by the consumers in the study were as follows:
The leader in the pact was Super Mario Bros. the highest selling game in history of the industry is still going strong. 40% of the people called this game their favorite. After it was the Guitar Hero. This was mainly because of the high number of consoles owned by people. After that came the Character/Action games Call of Duty and Grand Theft Auto with 20% and 60% respectively.
Surprisingly, the other favorite game in 80% of the case was Namco’s Pac-Man.
This question deals with the new idea of physical gaming that had been launched by Nintendo with the introduction of its game console Nintendo Wii and the people’s reception to the idea. 75% of the total population thought that it was a good idea and they would prefer the physical participation of the games on Wii and according to them they were fun.
90% of the people covered in the study would like to buy the Pac-Man if it is released again. The main reason behind the question was to prove the mass appeal of the old games. Pac-Man was the favorite game of the majority of the people, and this shows the mass appeal of the old games and the fun part in them that would make the people buy the game. This shows that a game need not be graphically superior to be fun.
In this question, the author has tried to prove that the people are ready to get one good game a year rather than wait for a game for 4 years. 60% of the gamers preferred one Call of Duty a year rather than wait for a Grand Theft Auto for 2 years or more. But many GTA fans agreed that they would not mind waiting for a good game for 2 years.
This question had a very common answer. Majority of the people bought the latest installment of the Call of Duty series, the Modern Warfare 2. The main reason was its availability across all consoles including a special edition for Wii consoles. This can be termed as a great marketing scheme.
The main reason for the purchase was seen to be brand loyalty. People have been big fans of the Call of Duty series and that was one of the main reasons for purchase. Nintendo Wii owners bought the game due to the physical immersion of the player in the game.
In recent times, after the introduction of XBOX 360 and the PS3, online gaming has become very popular. Many subjects bought their consoles due to the service of online gaming. As a result developers have to be considerate about the need for good online multiplayer games like the Call of Duty-Modern Warfare 2, Halo3. Even Grand Theft Auto developers have included online multiplayer mode in their latest installment the GTA 4.
This was the decisive question but the answers were dependent on the game in context. The subjects agreed that price is a factor in deciding for their purchase but at the same time, the person would not mind paying hundred dollars for a game he loves to play. This can be termed as a “Title Loyalty”. 90% of the population agreed that they price would not be a deciding factor, if the game in question is their favorite game of is technologically superior.
The average of the games owned by all the subjects amounted to 8 games at a time. Many subjects trade-in their old games for new ones when they finish the game.
This question addressed the need of a company having a big title under its belt. 89% of the people agreed that “brand loyalty” did exist in the video game industry. But the “brand loyalty” is not directed towards a particular developer/publisher. This loyalty is directed towards games titles such as the Grand Theft Auto, Super Mario Bros, the Need for Speed series and the Call of Duty title series of games.
It has been noted that the video game industry is technologically driven and the technological changes in the industry are consistent with the times. So the technology fades out pretty fast and the companies operating in this industry have to catch up with the technology and make sure that the company is developing the entertainment software that would do justice to the new and improved technological hardware and so they have to adopt the new changes very quickly. As a result, the companies have to develop the games as quickly and efficiently as possible. It is hard and complicated process and so the company has to make sure that they develop their software keeping in mind future technological changes. The software’ should be compatible with both the present and the future technological advancements in the field of video game hardware.
Moreover, video game software being a set of computer programs has to be developed and the gaming atmosphere has to be created in order to give the gamer, the best possible experience. This calls for large research and development costs. For e.g., the developers of the Grand Theft Auto 4 recreated the whole New York City for their latest installment, while the developers of FarCry series, in order to give the player the freedom to move freely in the world, as they call it “Open World” effect, the developers had to design 20 sq miles of country and were able to give the player the effect (McInnis, 2008). As a result it is very hard to control the research and development costs because of the nature of the business. So the company has to look for other solutions in order to change its financial state and start generating profit.
A look into the financial data of the 2 subjects i.e. Electronic Arts (EA) and Take-Two Interactive (T2) would be helpful in reaching a solution. On reviewing the financial data and the operations of both the companies, the following points have been noticed that could affect the profit making capacity of EA, and which are helping T2 make immense profits.
On studying the profits of both the companies in the fiscal years of 2007 and 2008, it can be said that both the companies have been making loss for the last couple of years but at the same time, T2 managed to make a profit in the fiscal year 2008. The profits of both the companies can be listed as follows:
It can be seen that EA has made a loss of $(1,088) million in 2008 compared to a loss of $(454) million in 2007. This shows that EA’s losses have intensified compared to last year. At the same time, Take-Two has earned a profit of $97.097 million compared to a loss of $(138.406) million in 2007. This shows an increase in the earnings of Take-Two by $235.503 million. This rise in the profits can be attributed to the last installment of the Grand Theft Auto series that generated more than $500 million in the last quarter alone.
But it is not possible for every company to have a big and profitable title like Grand Theft Auto. So in order to fill the void in revenues, the other companies will have to balance their games developments in such a way that the company can operate smoothly in regular business environment while at the same time working on projects that can yield big revenues having long gestation period.
It has been noted that big games like the World of Warcraft, Halo 3, Gears of War 2, Spore and Grand Theft Auto have huge development costs. As a result, the break-even-point for such games is usually in millions of units. Suppose a game is developed with $40 million, the company will need to sell nearly 2 million units to break-even. For e.g. Rockstar games developed Grand Theft Auto 4 at a total cost of $100 million. If the selling price of a unit is $50.00, the developer will have to sell about $2 million copies to break even.
Sometimes, these huge developmental costs make it harder for the developers to realize the full costs that they have invested in developing the product. On the other hand, all the resources present with the company are allocated towards the development of these products and as a result of the limitation of these resources; no other games can be developed while the development of such games are undertaken. As a result, in the gestation time period of these Hollywood-style games, the company does not generate any revenue by launching new titles and hence, is not making any money to cover up the developmental costs and its day-to-day administrative expenditure. As a result of that, the developers do not get the return on the investment unless the game in launched. Thus, the developers earn huge losses during the time period and when the game is finally launched, the losses are so high that the game sometimes fails to meet the company’s expectations. Hence, that turns into a loss making business.
Thus in order to keep the businesses running smoothly and to make sure that the day-to-day expenditures are met, the company should have multiple production lines. One production can be dedicated to the development of the “Hollywood-style” games while, the other production lines can churn out games and make sure that the business is generating the necessary revenue that would finance the development of the big games as well as earns the company some profit. For e.g. games like Portal, Pac-Man, Super Mario Bros do not need big developmental budgets and at the same time, as the questionnaire has already proved that such games are more popular and are bound to generate sales and keep the company profitable.
For e.g. Portal, a first person puzzle game was started by a student as his school project. Valve Software bought the rights to the game and then offered the final polished product to EA which included the product in its “Orange Box” collection. By the end of 2008, EA had already sold $3 million copies of Portal but the research and development costs at EA were so high that they absorbed all the revenues generated by Portal and so they never saw the games huge success materialize. (Evan Van Zelfden, 2009)
So the company should develop a production line that can design games that are not so cumbersome to develop and multiple games can be developed during one year. Similarly, the developers instead of developing all the game by their own, should commission other developers to develop games for them so that they do not have to incur the various production overheads and as a result, the costs can be lowered. The costs of developing a game can be controlled by making sure that the company maintains a certain revenue generating capability.
Moreover the company should encourage the development of short game such as Super Mario Bros, Pac-Man, Portal and other games that have the factors of fun and challenge in them. In addition to that, other short games as well as expansion patches for games that are already present in the market can be developed that would give the gamer a few extra hours to play and as a result generates revenues for the company. Therefore, the company should develop multiple production lines as well as hire external developers to develop games for them.
Take-Two interactive follows the multiple production line theory and as a result of that it has been able to develop from a small company established in 1993 to a video game software developing and publishing juggernaut. Take-Two has two major production lines:
This development studio is concerned with the development of major “Hollywood- style” titles such as Grand Theft Auto, Max Payne, Midnight Club and Bully. (Yahoo Finance, 2009)
These development studios develop all the other titles not related to Rockstar Games. The other studios such as 2K Games, 2K Sports and 2K Play are parts of 2K. All these studios jointly develop all the games that are published by Take-Two like the NBA 2K, Major League Baseball 2K and NHL 2K. The 2K is responsible to provide the parent company games that can be developed within a short time frame.
Thus, Take-Two is successfully operating a multiple production line system where one production line is dedicated to developing epic titles concerned with big games and while one production line helps in developing games that can be released multiple times during a given period of time.
Companies like Electronic Arts, Take-Two and Activision are known as developer/publishers. They not only develop video games but due to their developed prod uction and marketing chain, they are also able to publish games that have been developed by different individuals or developers. These developers develop the video games and then they sign an agreement with the publishers to publish the games. The publisher makes money simply by producing and marketing the games through its supply chains in the market. The publisher takes the games from one copy to a mass produced finished product in the market. These developers usually invest a lot of time and money into the development of their games. But due to their inexperience with the supply chains in the markets, they have to take help from the already established and financially strong publishers who can publish the games on their behalf and market the finished product in the market.
Moreover, many of the developers are unknown in the market. As a result, their product recognition is very less. So even if they have a masterpiece in their hands, they stand a chance for the product to fail in the market. But if they publish their product in the market with the help of big giants who are known in the market and have a consumer loyalty towards their brands, then their product recognition increases as well as hype is created in the market for the upcoming product. Brand Recognition now has a very important place in the market and so in order to make the product easily visible market and in order to garner attention towards their products, it is very important for small developer firms to take the help of big giants in publishing the final product. This gives the product a chance to succeed in the market.
In return of their services, the publishers make a huge amount of profit from the sales of such games without investing a small amount in the development overheads of the company. Thus more outside game publishing can help the company into accumulating more profit that it can use to develop “Hollywood-style” games that can bring huge financial success like grand Theft Auto 4 did for take-Two and Call of Duty: Modern Warfare 2 did for Activision.
Due to the above reasons, the developers/publishers should maintain a ratio of 1 : >1 between internal development to external development. They should try and publish more games rather than developing them on their own. The developer/publisher should always maintain a favorable production stance when it comes to internal v/s external development of games.
This is a system where a company having one huge title can employ two production lines to produce the same product. In other words, one production line is working on one installment of the franchise while at the same time; the other production line can work on the next installment of the same franchise. In this manner, the company can introduce a new installment of its biggest franchise every year which can generate huge revenues for it every year. The company can make huge profits in this manner. But there is a huge pitfall in this method. The company has to take care about not to over-stretch its luck. Certain hype is necessary in order for a product to create a bang at its launch. The publisher has to make sure that the game is being provided to the public at regular intervals so that the interest in the game is still there. If the producer tends to overdo the title, then the hype created by the title would not be enough and as a result, the introduction of every new installment would result in a decrease of the consumer’s interest in the franchise hence less sales.
Activision has been using this technique for the development of its Call of Duty franchise. Activision has employed its two development studios, Infinity Ward and Treyarch who are simultaneously developing games for the franchise. They have been launching games every year starting from 2007. Infinity Ward launched its Modern Warfare in 2007, followed by Treyarch launching its World at War in 2008 followed by Infinity Ward launching its Modern Warfare 2 on 10th November, 2009. (Activision, 2009)
So it can be seen that employing multiple lines of production in developing games can be used profitably and in the long run the company can earn profit from its operations. The market for video games is always there and even in the times of recession, the video game companies have noted an increase in the revenues. So the company will have to make sure that it is keeping its costs in check and it will help the company in making profit. The Call of Duty series as a whole has topped $3 billion for Activision. (Activision, 2009)
The video game industry is flourishing even when the giant auto industry of the United States has to seek help from the government in order to survive the worst recession US has ever seen. The Detroit 3- Ford, GM and Chrysler had to go to the Senate for the bail-out money; while at the same time, the video game software industry has seen a huge growth in its business which has turned it into a financial juggernaut. A growth rate of 28% and 23% in 2007 and 2008 respectively have been the highest growth rates that has been achieved by the industry in such years when the US economy has been on a downward spiral is phenomenal. The evolution of a small software, designed to entertain the visitors at a New York laboratory to a multi-billion dollar industry has been nothing but epic. A few years ago, computer gamers were in small number, now people who do not play computer games are in small number. In recent times, success of Hollywood has been over-shadowed by the success of the video game industry. Video games collecting more revenue than big Hollywood blockbusters would have been a dream years’ ago, but in 2009, it has been proved that the video game industry is a rising force that is coming forward as a profit-making industry and as a rising employer.
This chapter summarizes the research done in the business dealings of video game developing and publishing companies and looks into the reasons behind the recent down-turn of the profit-generating capacity of the video game developing giants. This chapter will answer all the questions that have been addressed at the beginning of the research. But as any economic and management subject, there is always room for further investigation and the author would like to encourage any such research.
Taking into consideration the study undertaken and the research done, the author has reached the following conclusions and would like to advice the companies that are involved in the business of video game development and publication.
The business of developing and publishing video games is very complicated as well as interesting. The market for video games is still blooming and hence, any company can partake in the developing industry and make huge profits. But in order to achieve the goal of revenue maximization, a company will have to be adventurous and innovator. Innovation will play a huge role in the development of the industry and initiation will have to be a chief characteristic of a company to strive in the market. So a company will have to be creative in its approach to cater to the entertainment needs of the consumer and that will prove to be the winning combination which will help the company in achieving its goal of revenue maximization.
In the coming years, the video game software industry will be a force to reckon with and will display huge growth rate. The industry is still flourishing at it is not going to reach its destination any time soon. No words could do more justice to the pace of the development and innovation in the video game industry than those of Michael Gallagher, the president and the CEO of the Entertainment Software Association, in the speech that he delivered during the E3 2009, “So, as you go to the show floor to learn about our industry’s next line of creative and innovative products, I encourage you to be confident about our future. In these products, you will see why video games are on every screen in our society, from the PC to plasma, and stimulate every interest, from SAT preparation to sports to science fiction. You will see the bold experimentation and innovation that has empowered video games to transform entertainment around the world. And you will be reminded that, as spectacular as our rise as an industry has been, our best, brightest, and boldest days still lie ahead.” (ESA, 2009)
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