A New Paradigm: Setting A New Course For The Video Game Industry

Abstract
The core purpose of this thesis is to provide a recommendation concerning strategic positioning, which is
applicable for implementation by a distinct type of multi-national corporate incumbent publishers of the
global games industry. Said type is distinguished by having a history of market leadership, but being
contemporarily faced with paradigm shifts within both development and distribution of games, which are
potentially threatening to their core businesses and the future sustainability of the industry. In particular, the
heightened attention towards accommodating presence on the seemingly lucrative market for so-called
modern games, in particular mobile games, seems to offset the conventional industry mechanisms.
The research and analysis of this paper has led to the identification of a paradigm of integration
within the industry, designated Hybrid Integration. To accommodate said paradigm, a strategic framework,
dubbed Focused Adaptive Synergy Strategy, has been formulated. Underpinning this strategic
recommendation is the conclusion that incumbents with established resources and capabilities relevant for
the core business of conventional games should maintain a focus on the associated segment of the market.
Subsequently investment into the modern game types, though secondary, still signifies considerable
potential for increased value. For such selective investment, strategic partnerships are the most pertinent
approach, in turn, also accommodating internationalization. The FAS Strategy entails a dedicated focus for
quality and differentiation, thus staying adaptive to investment opportunities that facilitate synergy,
between divisions or primary and secondary focuses. In practice, the employment of cross-platform networks
and services, enabling interconnectivity and cooperative play, manifests the idea. Theoretically, the FAS
strategy drives strategic positioning in ways, which also directly reconfigure intensity of competitive forces,
resulting in a more sustainably long-term profitable industry.
The reasoning behind the above considerations has its basis in a partial industry crash in the late
1980'ies. Said crash was preceded by certain tendencies, which through the research of this thesis, are found
to be prevalent contemporarily as well: market saturation, price competition and loss of publisher control.
The analysis further uncovers that said tendencies are intertwined with an industry structure - marked by
intensive competitive forces, resulting from the paradigm shifts - which hinders long-term profitability. It is
also established that selective investment into the modern games sphere is pertinent, supported by brand
equity as a primary competitive strength. The discussion of this paper focuses on linking the researched
tendencies with the findings of the analysis. Thereby the above stated paradigm, and associated formulated
strategy, are logically reached. It should be noted that the discussion also introduces the results of the
undertaken data collection, featuring qualitative insights from a professional industry expert as well as
experienced gaming community members, which corroborate the primary arguments set forth by the
research and analysis.
Acknowledgements
Writing this thesis has been a long and challenging journey, and reaching its completion is a result
of five years dedication to our business studies, as well as a lifelong passion for the games industry.
Yet, none of this would have been possible without an external contribution to valuable inputs, assistance,
and deliberation. Therefore, before presenting the fruit of our effort, we would like to express our sincere
acknowledgements to all the people who supported us throughout the entire cumbersome process. Our
special thanks go out to the following people (listed after chronological contribution):
Niels Hasager, thesis supervisor, for guiding us successfully through the entire comprehensive
experience. Sven Junghagen, assistant professor/thesis coordinator, for revising and approving our
initial plans and ideas. Thomas Bense, industry expert, for sharing your professional knowledge
and insights on the subject matter. B Jrgensen, A. Sommer, T4bL3TT, HForce & the anonymous
contributors, the gaming community, for taking your time to give elaborate and constructive
responses in the qualitative interview. Our family & friends, for supporting our nerdiness
throughout the years. And Copenhagen Business School, for the complete educational adventure.
Once again, thank you!
_________________________
Christian Haulrich
_________________________
Michael Soelberg
IMM Masters Thesis, CBS
October, 2014
C. Haulrich & M. Soelberg
Table of Contents
Prologue ............................................................................................................................................................. 3
Problem Statement .......................................................................................................................................... 4
Project Framework.......................................................................................................................................... 4
Delimitations ................................................................................................................................................... 6
Methodology........................................................................................................................................................ 7
Research Philosophy and Approach ................................................................................................................. 8
Research Design ............................................................................................................................................ 12
Data Collection .............................................................................................................................................. 14
Interview with Industry Expert, Thomas Bense ............................................................................................... 16
Interview with Members of the Gaming Community ........................................................................................ 17
Application of Theoretical Frameworks.......................................................................................................... 18
Research-Obstructing Elements ...................................................................................................................... 20
Definitions..................................................................................................................................................... 21
Chapter 1. The Origins of the Games Industry ..................................................................................................... 24
1.1
From Past-time Activity to Corporate Practice .................................................................................... 25
1.2
Prelude to an Industry Turmoil.......................................................................................................... 26
1.3
High-Profile Failures: The Atari Shock ............................................................................................... 29
1.4
The Aftermath of the Industry Crash ................................................................................................... 32
1.5
Subset ............................................................................................................................................... 34
Chapter 2. The Structure of the Games Industry .................................................................................................. 35

2.1
The Traditional Structure ................................................................................................................... 36
2.1.1
The Industry Spiral ............................................................................................................................ 37
2.1.2
Alterations on the Conventional Integration ....................................................................................... 40
2.2
The Modern Structures of Integration ................................................................................................. 45
2.2.1
Digital Distribution Platforms ............................................................................................................ 46
2.2.2 Independent Developers .................................................................................................................... 48

2.2.3 The Mobile Games Market .................................................................................................................. 50
2.3
Subset ............................................................................................................................................... 51
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Chapter 3. Industry Analysis ............................................................................................................................... 52

3.1
Industry Overview ............................................................................................................................. 53
3.2
Competitive Forces Analysis ............................................................................................................... 56
3.2.1
Threat of New Entrants....................................................................................................................... 57
3.2.2 Power of Suppliers ............................................................................................................................ 60

3.2.3 Power of Buyers ................................................................................................................................ 62
3.2.4 Threat of Substitutes .......................................................................................................................... 64
3.2.5 Complements and Strategic Partnerships............................................................................................ 65
3.2.6 Rivalry among Incumbents ................................................................................................................ 67
3.3
Subset ............................................................................................................................................... 69
Chapter 4. Investment Prioritization .................................................................................................................. 73

4.1
Industry Attractiveness ....................................................................................................................... 74
4.2
Competitive Strength.......................................................................................................................... 75
4.2.1
Brand Equity ..................................................................................................................................... 76
4.3
Subset ............................................................................................................................................... 79
Chapter 5. Discussion ......................................................................................................................................... 81

5.1
Market Oversaturation ....................................................................................................................... 82
5.2
Price Competition .............................................................................................................................. 88
5.3
Loss of Publishing Control .................................................................................................................. 94
Chapter 6. Recommendations .......................................................................................................................... 103

6.1
Implementing the Focused Adaptive Synergy.................................................................................... 104
6.2
Feedback and Criticism from the Games Community......................................................................... 111
Conclusion ....................................................................................................................................................... 112

Epilogue .......................................................................................................................................................... 116
Bibliography ................................................................................................................................................... 117
October, 2014
Prologue
From a historical perspective, video games (or games in short) have been around for several decades
and have advanced the landscape of interactive entertainment though a persistent flow of
innovation. Todays games market is immense and lucrative, while at the same time, dispersed
amongst everything between simple titles for mobile devices, and the elaborate PC and console
productions with budgets exceeding Hollywood movies. More importantly, however, the medium is
no longer blatantly regarded as childs play, as having a huge economic and social impact, games
have become a ubiquitous and essential element of modern culture. In fact, this has occurred to such
a vast degree, that games are found, and have become accessible, everywhere. Moreover, as
suitably noted by Williams & Kahn (2013), games helped usher in a new kind of consumer who
was increasingly aware of new tools and new possibilities. Having played video games, this consumer
was not going to go back to wooden blocks and dice. These new tools and possibilities will represent
the focal point of interest of this thesis, especially in context to the challenges and opportunities
presented by the transition into modern industry structures, driven by the paradigm shifts of the
digital era. This perspective will put an emphasis on not solely defining the games industry as a
catalyst for fun and entertainment, but rather as the immensely dynamic, turbulent, and inventive
business-environment that it is. Furthermore, a specific attention will be placed on analyzing how
the traditional market leaders are coping with these substantial changes, and how these will assume
strategic dispositions to remain competitive and secure long-term sustainability. Dear reader,
welcome to the world of the games industry.
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Problem Statement
The problem, which this thesis sets out to address, concerns the global market and industry of video
games. The Games Industry - as it will be referred to - is undergoing paradigm shifts within
development, publishing and distribution of games. As a result of this, the industry is seeing
tendencies akin to those preceding a partial crash in the 1980's. Consequently, a group of multinational publishers, considered traditional market leaders of the "post-crash/pre-contemporaryshift" games industry, are facing both challenges regarding their core businesses, as well as pressure
to concurrently adjust to the modern global gaming world. These companies, sharing specific
characteristics, collectively form the focal point of reference for this thesis. In other words, the
relevant problem, which is to be addressed, is essentially the issue of how companies of said specific
corporate type, should strategically position themselves, in regards to the different segments of the
games markets. Thus, the purpose of this paper is to reach a theoretically applicable
recommendation, regarding the aforementioned problem, which should facilitate both a healthy
and profitable industry, as well as individual profitability for a company adopting it. This will be done
through research, analysis and discussion, based on employment of concepts and theory pertaining
to international strategic management and marketing.
Project Framework
To answer the problem statement, the initial step of this thesis it is to essentially lay the foundations
for how it will be structured, and which elements will be present. For this purpose, a project
framework is depicted on the following page. This framework contains several boxes, jointly
representing the sequential work-processes encountered in the conception of the thesis.
Starting with the problem formulation, this delivers a precise declaration of the question that the
thesis sets out to answer. Moreover, it serves as a medium for the formation of research questions,
which collectively supply as the methodological point of departure for this study. The answers to
these questions will be illuminated sequentially throughout the project. To answer these questions,
however, a certain theoretical framework and empiricism will be employed, which in combination
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will provide the necessary tools for delivering a competent analysis. In this case, the theories and
the relevant industry-specific data will primarily be used for the presentation and in-depth industry
analysis, ultimately representing the groundwork for the discussion. Hereafter, the empiricism in
the form of qualitative interviews will be the focal supplemental input to further enhance the
discussion and provide support for formulating the recommendations and conclusion of the thesis.
It is worth noticing, that the chapter on recommendations will serve as the key device for answering
the overarching predicament, raised in both the problem statement and formulation. Lastly,
perspectives will be given as an epilogue and hypothetical outlook on how the games industry may
develop in the future.
Problem Formulation
"In light of current paradigm shifts and tendencies, how should the traditional market-leading publishers seek to
shape the industry, and position themselves in regards to the different segments of the games market?"
Research Questions
What were the causes for the partial game industry crash in the 1980's, and how did the industry recover?
What are the recent tendencies, and how have they interfered with the traditional structure of the industry?
What are the mechanisms behind production and integration within the industry?
How has the global games market developed in terms of spending, and how is it forecasted to continue?
What is the current configuration of intensiveness of the competitive forces within the industry?
How should investment into different segments of the games market be prioritized?
Which significance can be attributed to the contemporary tendencies of the industry?
Which factors coincide in relevance for both market leadership and impact on industry structure?
Can a strategic framework be formulated, which accounts for the new paradigm of industry integration?
Theoretical Framework
Empiricism
Porter 5 Forces Framework

McKinsey 9-Box Matrix
Aaker Brand Equity Model
Industry reports & articles

Qualitative Interviews
Qualitative Interviews
Thomas Bense(Expert opinion)
Thomas Bense (Expert opinion)
Gaming community
Gaming community
Descriptive PRESENTATION and in-depth industry ANALYSIS
DISCUSSION leading to RECOMMENDATIONS on strategic decisions

CONCLUSIONand future PERSPECTIVES
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Delimitations
To facilitate the purpose of this thesis, being as clear and concise as possible, it is relevant to specify
what will, deliberately, not be factored into the research.
In reference to the problem statement, and the purpose of this thesis, it is important to note that,
despite the fact that a defined group of industry incumbents form the focal perspective, the thesis
remains theoretical in nature, as opposed to being case or company-specific. Essentially, said group
of companies, signify a type of incumbents, which, as the research, analysis and discussion will show,
hold high significance for recent, contemporary and future shaping of the industry. Therefore the
ultimate concluding strategic recommendations, although in the immediate sense, directly meant
for implementation for said type of incumbents, will have relevance in sustaining a general healthy
and profitable industry. The implication in terms of limiting the research, is that aspects, such as for
example individual profitability, or good/bad brand equity, specific to a certain company, will not
be accounted for, unless they define the structural foundations of the industry.
In extension of the above, it is worth mentioning that the thesis will not seek to research individual
or sampled consumer demand and behavior. Instead spending reports and prior research will be
used as proxies for the significance of various segments of the games market. Individual opinions
will however guide the reasoning of how certain strategic considerations may create the optimal
foundation for shaping the configuration of the industry.
The thesis will also not delve deeply into the impact of the macro environment on the games
industry, i.e. factors such as national economies, natural forces and governmental-, legal-, or
political conditions. This is because this thesis is not a case research of internationalization of a
specific company to a specific market. The thesis will however show that the concluding formulated
strategy, accounts for internationalization as a response to differing legacy/forecasted spending
compositions, across international markets.
Lastly, in terms of a concrete topic, which will not be included in the research, it is worth mentioning
violence among youths, supposedly caused by gaming. Research into this topic extends beyond the
confines of the relevant educational theoretical basis, on which this thesis is formulated.
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Methodology
This opening chapter will serve the purpose of explaining the methodological basis of the project.
This will include presentation of the theory of science, including research -philosophy, -approach,
and -design, which has facilitated the formulation of this thesis. Naturally, this chapter will also
present definitions of theoretical frameworks, which have been used in the research, as well as the
methods of collecting empiricism. Lastly, the chapter will feature a section on elements, which served
as obstructions to the research, as well as a section presenting definitions of some key self-defined
concepts, which are essentially for the comprehension of the paper. These contents are chosen with
the ambitioned rationale of acknowledging the required knowledge for a competent approach
towards the project's problem formulation.
October, 2014
Research Philosophy and Approach

Research philosophy is essentially a set of assumptions on how the researcher perceives the world,
and within it, the nature of reality and knowledge. The significance of reflecting on research
philosophy, is to establish the most appropriate philosophical considerations, in regards to
answering the problem statement and research questions of the thesis (Saunders, 2012).
With the foundational concept established, it can be alleged that the research of this thesis has been
carried out under assumption of a pragmatic nature. Pragmatism refers to the philosophical stance
that positions, within branches of philosophy, only have relevance when supporting actions, which
in the case of a thesis, is the answering of research questions (Saunders, 2012). Furthermore
pragmatism entails the view that the questions of reality and acceptable knowledge do not have
absolute truths to them, seeing as the world can be interpreted in multiple ways. Thus a certain
philosophy, in the context of a research question, should be adopted with the distinct purpose of
collecting the most credible and relevant data. The notion that pragmatism is the philosophical
foundation for the research of this paper, can be supported by considering the various branches of
philosophy, and their underlying alternate positions, relative to the problem statement and
research questions of this thesis.
The first philosophical paradigm is the study of ontology, which concerns the question of the nature
of reality or existence. In other words, it deals with the perception of the world, its elements and
relations (Saunders, 2012). In the context of this thesis, it is for example relevant to consider the
reality of the recent tendencies of the industry, or the strategic decision making process of
incumbent companies. The ontological consideration has two major aspects or positions. The first
is objectivism, which signifies that reality is external, and independent of social actors. Taking the
example of the research question regarding tendencies of the industry, the objectivist position
would be that the reality of properties and causes of said tendencies could be definitively
established. Consequently, the reality of the tendencies also exists independent of the researcher.
This relates to the concept of axiology, the philosophical study of values, and the underlying
standpoint that research is value-free, in the contextual sense that the values of the researcher
cannot alter the reality of, for example, the above mentioned industry tendencies. The second
position is subjectivism, which implies that reality has multiple interpretations, which are based on
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individual perceptions and actions of social actors, and their mutual interaction. In reference to the
research question on investment potential of segments of the market, the subjectivist position
would be that the reality of said potential is a social construct of both company decision-makers and
consumers, and can thus be continually revised. In addition, it is implied that the researcher takes
part in constructing the reality. From the perspective of axiology, this means that research is valuebound in the contextual sense, that the values of the researcher actively shape, for example, the
above-mentioned reality of investment potential.
The next philosophical paradigm is epistemology, which refers to the reflection of what can be
considered acceptable knowledge, and how it is obtained (Saunders, 2012). In other words, and in
context, it is the concern of how to gain knowledge on the realities associated with the research
questions, mentioned above. One position regarding this is to consider only observable data as
acceptable knowledge. This would be relevant in relation to the research question regarding market
growth and forecasts. Knowledge of the existence of spending tendencies is best obtained through
collection of observable and factual data on, for example, certain types of games having higher
annual revenue growth rates than others, which in turn can then be used to conclude
generalizations on, for example, the growing popularity of said game types. The opposing position,
however, is to consider subjective meanings as acceptable knowledge. This would be relevant in
relation to the, before mentioned, research question, regarding investment prioritization. In regard
to the knowledge on the existence of investment potential, or perhaps the reality of a lack of
investment potential, it can argued that there may be different deeply rooted subjective
understandings, which may not contemporarily be accurately represented in observable data, such
as downloads or revenues. However, these will still have paramount importance for the essence of
the reality in the longer run. It can be argued that the subjective meaning can be collected and
measured in the narrative of perceptions and perspectives of relevant social actors, thus resulting
in insight into detailed properties of a specific existence, deemed too complex for generalization.
It should be evident, from the use of contextual examples, that this thesis incorporates both
research questions that are most appropriately answered based on subjectivist positions, as well as
ones that are most appropriately answered based on objectivist positions. Furthermore, in the case
of some research questions, it is not unambiguously clear that a particular philosophy is the most
October, 2014
appropriate. These considerations thus support the notion that this thesis has its foundation in a
pragmatist view (Saunders, 2012), as opposed to the alternatives (see appendix 1).
Research approach is the next relevant consideration, having explained and supported the
pragmatist philosophy. Research approach refers to the consideration of the logic reasoning
between premises and a conclusion (Saunders, 2012). The first research approach is deductive
reasoning, in which research takes its starting point from a theory based on a set of premises, which
is then tested through data collection, subsequently concluding in either a rejection or confirmation
of the theory. The second approach is inductive reasoning, in which research conversely starts with
observations or data collection, the recognition of a pattern, finally concluding in a theory that is
likely, but certainly, true. These two approaches have long been the basis for the consideration of
research approach. However, seeing as it is reasonable to argue that in practice, no research is as
straightforward as being a singular process from theory to data, or vice versa, the concept of
abduction has been developed to explain the approach of moving back and forth, essentially as a
combination of deduction and induction (Suddaby, 2006).
Regarding the reasoning used in the research of this thesis, an abductive approach has been in
effect. This first example of this can be seen through recounting the process of how the current
problem formulation of the paper came to be. The original basis of the thesis was a theory on the
relation between, on one hand, the multi-divisional, or rather multi-national, nature of certain
gaming companies, and on the other hand, the creative autonomy and game quality of acquired
subsidiary development studios. It may be argued that said theory was in fact the result of a
subconscious inductive reasoning, being based on observations and patterns, noticed in the industry
from the perspective of consumer1. Having said that however, within the context of the actual
research, deductive reasoning could perhaps be considered the original intended approach.
However, upon initiating the research, the project was faced with two revelatory circumstances.
Firstly, it was intended that some manner of correspondence with a company, relevant to the
original theory, would form a partial basis for primary data collection, however this was not possible
(see section: Research-Obstructing Elements). Such limitations of access on data can be argued to
actually emphasize the importance of knowledge on research approaches, as a way of adapting the
1
As will be detailed further on, both authors are game consumers and observers of the gaming community
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research as a continuous process (Easterby-Smith, 2008). Secondly, collection of secondary data,

mainly from various expert sources, led to certain realizations or so-called "surprising facts", which
are said to instigate abductive reasoning (Ketokivi & Mantere, 2010). These are now manifested in
the current topic and problem formulation of the thesis. The primary surprising fact, which helped
shape the refocus of the thesis, was that the industry contemporarily is subject to a number of
tendencies, which are similar to circumstances that caused a partial crash in the 1980's, and that
said tendencies are a result of the paradigm shifts of the industry, or by extension modern gaming.
The implication thus ultimately is that the sustainability of the market of conventional games, which
represents the core business of the traditional market leaders, is at risk, due to the pressure from
games and gaming in the modern perspective. It is important to note that the surprising fact is not
that the current industry is going to crash, which without evidence would of course be nothing more
than speculation or an assumption. Instead, simply the fact that the tendencies seen in the 1980's
are similar to those today, signifies that there are certain worrying contemporary issues within the
industry. These considerations were then used as premises to form a theory saying that:
due to the fact that said issues are a result of the shifts in the industry,
due to the fact that sustainability of the conventional games market is pressured,
and lastly, due to the fact that the issues, or tendencies, are identical to those, which in the
past have been observed prior to a partial crash of the industry,
... It seems a plausible theory that there is a level of incompatibility between traditional and
modern gaming paradigms.
This theory is thus represented in the problem statement, which states the intent of researching the
most pertinent strategic positioning, which accommodates both individual and industry-wide
profitability. In terms of the further flow of the paper, with the above theory, the problem statement
and the research questions, which are associated with the premises of the theory, as starting points,
the reasoning becomes deductive in the sense that research will seek to test said theory. However,
as will become evident over the course of the paper, induction will also happen, seeing, as the
collection of both primary and secondary data, as well as data analysis within established theoretical
frameworks, will facilitate new realizations, which will then continuously enable modification of the
theory. This process of back-and-forth between theory and the data determines that in the big
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picture, abduction is the research approach of the thesis. It follows from the line of thought
associated with abductive approach, that the above mentioned theory of a status quo of a degree
of incompatibility between traditional and modern gaming, is reasoned to be sufficient, or nearly
sufficient, in explaining the worrying contemporary tendencies of the industry (Saunders, 2012).
Assuming that said theory can be supported, it will accordingly be possible to make a conclusive
strategic recommendation, targeted at the before-mentioned traditional market leaders, regarding
how to face the current and coming challenges, or in other words, mitigate the reality of the theory.
Research Design
The formulation of a research design is a key concern, since it facilitates a deeper understanding of
how the relevant research questions, and the problem formulation, which they support, will be
answered (Saunders, 2012). Firstly, it is relevant to consider the nature of the research design, which
is essentially signified by the purpose of the research questions. In seeking an answer to the overall
problem formulation, this thesis employs multiple intermediate objectives, of differing nature. The
first few chapters of the paper, and the industry overview given at the start of the analysis, reflect
those research questions, which seek to describe the history and current tendencies of the industry.
This thus signifies a partial descriptive purpose of the thesis, which is meant to create a basis for the
analysis, discussion and conclusive recommendation (Saunders, 2012). Consequently, the analysis
chapters, as well as the discussion, of the paper, reflect those research questions, which seek to
uncover in-depth insights into the problems that have been profiled. This signifies an exploratory
purpose, seeking to build on available knowledge, by offering a new perspective to the relevant
problem (Saunders, 2012). In concrete terms, in this paper, this is done through both applying
secondary data to analytical frameworks, which in turn are adapted for the purpose, as well as
conducting qualitative primary data collection. It should be mentioned that the exploratory
element, in light of its adaptability, is also made evident by the before mentioned dynamic process
in which the present project framework came to be (Saunders, 2012). The core problem
formulation, in combination with the second-to-last research question, regarding the likelihood of
an impending industry deterioration, together signify an element of explanatory purpose, also
present in this thesis. Explanatory studies seek to set causal relations (Saunders, 2012). In other
words, the thesis ultimately seeks to find causality between, on one hand, the preliminary events,
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in this case the industry paradigm shifts, and on the other, the potential effects, which would be the
positioning of the traditional market leaders, as well as the long-term sustainability of the industry.
The research strategy adopted for this thesis is primarily based on grounded theory methodology,
in the context of it being a way of conducting research. The foundational aim of grounded theory is
to establish theory, grounded in data, which is based on accounts of social actors (Saunders, 2012).
As such, it should be evident that it is explicitly related to the exploratory and explanatory elements
of this thesis. This also fits with the fact that an abductive approach has been utilized in the research.
Grounded theory requires the researcher to collect and analyze data concurrently, developing what
can be referred to as "codes" (Saunders, 2012). Open coding is the first step, in which data is
categorized. In the context of this thesis, this primarily refers to establishing the significance of data
into the various segments of the market for games, since it at the core of the problem formulation
of the thesis to consider these relative to each other. Focused coding, in turn, refers to considering
the data as potential analogies for the larger picture (Saunders, 2012). In other words, the research
of this thesis will continuously asses the obtained secondary and primary data, for its significance
for establishing a theoretical basis, which may solve the relevant problem. Simultaneously, the
research of this paper will also use axial coding, in which relations are sought, between the
categories established in open coding (Saunders, 2012). This will facilitate assessment of the game
categories as not being necessarily mutually exclusive, in terms of business focus, but rather,
potentially, complementary to each other. The coding process is supported by constant comparison,
meaning that data is continuously compared, and held up against the established categories. This
also underlines the use of abductive reasoning, since when new interpretations arise from finding
relations or similarities between data, new tests are necessary (Saunders, 2012). Here, this is both
manifested in an ongoing broadening of the analysis of secondary data, as well as, what has been a
process of reconfiguring the primary data collection between participant groups, mainly from the
industry expert to the community participants. In reference to this, the grounded theory strategy
also aided in the actual choice of data collection sources, with the starting point being the industry
expert, where after it was found relevant to include community participants. In both cases, the data
collection was qualitative in terms of method, as will be elaborate on in the next section. It is worth
noting however that this choice supports the theoretical sampling of grounded theory, in which the
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participants are deemed to have relevant knowledge pertaining to a specific issue, rather than
because they represent a certain group or segment of social actors. The data collection was not
expanded further due to it being reasoned that theoretical saturation was reached, meaning that
all properties relevant to the research were found, understood and put into context (Saunders,
2012). In other words, it was deemed redundant to undertake a quantitative survey, since the
findings, which could realistically be expected to be obtained, would be irrelevant in substantiating,
forming or testing the relevant arguments, theories and ultimate recommendations of the thesis.
Data Collection
The principal basis for the research of this paper, has been secondary data, which entails certain
considerably advantages, however also a few constraints. In terms of advantages, it is firstly relevant
to consider some of the inherent properties of secondary data (Saunders, 2012). In general, and
with only few exceptions, secondary data is both time and money saving, relative to primary data
collection. If secondary data is available, concerning expert opinions or company-specific
information, it is also unobtrusive and less complex to gather, as opposed by establishing and
maintaining a personal correspondence. In terms of its significance for research, secondary data can
be used to either lead to, or substantiate, primary data. Moreover, in the specific context of this
thesis, the focus on secondary data, was central to the, before mentioned, process of facing
surprising discoveries, which altered the direction of the research. Furthermore, certain advantages
relate to the decision of not undertaking a quantitative primary data collection. In regards to
uncovering the relevant industry tendencies, primary data would be subject to questionable
reliability, whereas prior studies from, for example, an esteemed consulting firm, are readily
applicable. Secondly, when analyzing for the impact of said tendencies and the configuration of
competitive intensity, the structural underpinnings of the industry are needed, to which objective
secondary data is necessary. Lastly, in regards to assessing and discussing strategic position relative
to the different game markets, a quantitative data collection would be constrained to a static outline
of individual consumer inclinations. What is in actuality needed, are opinions founded in a deeper
understanding of how the industry has changed, how incumbent actions are known to impact
consumers, and perhaps most importantly, what is feasible in terms of future change. The latter
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insight are of course facilitated by professional and amateur expert opinions in the form of both
secondary and primary qualitative data.
There are however, as mentioned, also a few ways in which a disproportionate focus on secondary
data, runs the risk of constraining the validity of the data basis on which the research questions are
answered (Saunders, 2012). However, by being conscious about these disadvantages, said risk is
mitigated considerably. The first potential constraint is that it is necessary to be observant of the
context in which the secondary data was collected, and making sure that its original purpose does
not somehow render it inappropriate for its new application. Similarly, the sources of secondary
data can have an agenda, which may lead to them obscuring, distorting or leaving out information.
Therefore, it is necessary to consider the validity of sources, in particular articles, where the control
over data quality is the least. In response to this, in cases of secondary data, which is not fully
objective in nature, it has been a priority to use reliable sources, based on their image, influence
and position in the industry, such as for example the GamesIndustry.biz news site, a part of the
award-winning Eurogamer gaming news network. Furthermore, special care has been put into
careful application of articles containing industry expert opinions, which have been primarily
relevant regarding the discussion. Currently there is a relatively lack of scientifically objective
experts in the field, the main reason being that the games industry is so dynamic, that it quickly
outdates published literature. As such most industry experts have some kind of vested interest in
the industry, in light of their primary occupation, meaning that it is important to let their statements
guide and substantiate the reasoning of the discussion, rather than dictate it.
Last but not least, on a different note, an important constraining factor of secondary data, is that,
while, as mentioned above, it usually constitutes savings in both time and money, on occasion
access to up-to-date contemporary data can come at a cost. The primary example of this is the
Global entertainment and media outlook by PwC, which forms the basis for the industry overview
regarding consumer spending in this paper. Access to the most recent iteration of this report is very
costly, whereas an older version is made available free. The lack of the most recent data in this
context, is however ultimately not of high importance. Analysis into the data is fairly limited, and
primarily seeks to establish a point concerning the simultaneous continuous significance of different
segments of the games market, in light of the multi-focused approach by the traditional market
leaders, which are the focus of this paper.
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October, 2014
The following section outlines the qualitative interviewing method used in the consultation with
industry expert, Thomas Bense, and the individual members of the gaming community. The
qualitative method is based on semi-structured interviewing approach. This type of interview is
divided into exploratory and in-depth interviewing. The exploratory questions aims to obtain
information on topics where no research or other disseminated knowledge is available, whereas the
purpose of the in-depth interviewing targets detailed information and knowledge on particular
topics. The semi-structured interview, as the method interpreted by, is therefore based on the
hermeneutic thinking, where the principles of particular relevance to qualitative interviews are the
relationship between preconceptions and understanding, and between part and whole (Fuglsang,
2007). Thus, it is important that the hermeneutic interview techniques presented in the paper
emphasize the aim of the authors, and that preconceptions are continually challenged and revised.
Essentially, this is attributable to the limited knowledge in relation to the paper's study area, namely
the positioning of the traditional market leaders in reaction to the ongoing paradigm shifts and
tendencies of the games industry. This is also the primary reason for selecting an industry expert
and a group experienced gamers as the sources for external knowledge.
Interview with Industry Expert, Thomas Bense

Thomas Bense is arguably the foremost gaming expert and journalist that Denmark has to offer. His
occupational history boasts more than 10 years as a TV host, -editor, and developer of original ideas.
Thomas has intricate knowledge of the games industry, in light of his journalistic work. In 2007,
Thomas co-founded Pixel.tv, which beyond being the first independent Danish web-based TVstation has grown to be prevalent game media site in Denmark. Simultaneously, he is the resident
gaming expert of the breakfast talk show Go'morgen Danmark on the Danish TV2 television station
(TV2, 2009). On a personal level, Thomas finds the most intriguing features of gaming to be the
interactivity and competitive elements, and thinks that popularity of gaming has been driven by the
ease of use and addictive nature of the medium.
The initial goal was to conduct a qualitative interview in person, however this approach was not an
option for Thomas. Instead, the interview was performed through an email correspondence, where
two different questionnaires were sent out in total (see appendix 8). Both were qualitative in
nature, and structured exclusively around open-ended answers. The first survey was comprised of
16
October, 2014
22 questions on the subject of a personal introduction, digital distribution, industry consolidation,

and developer-publisher relationships. Of these, only nine were answered. However, this was not
critical as the majority of the missing questions regarded the initial scope of the project, which was
consequently altered following the obstacles described in the Research Obstructing Elements
section. Therefore, in order to generate more complete and relevant interview data, Thomas was
contacted again with a second survey. This contained three questions surrounding his personal
judgment on the current and most prevalent tendencies of the games industry. Lastly, it is important
to mention that while the questions were formulated in English, the answers received from Thomas
were in Danish and will be translated accordingly.
Interview with Members of the Gaming Community

Additionally, a second sequence of qualitative interviews was performed with the purpose of
generating data that could supplement the expert opinion of Thomas Bense (see appendix 9). The
survey used in this context was specifically designed to target experienced consumers from the
gaming community, following the overarching rationale of acquiring an insight into their perspective
on the core topics of this thesis. It was presented in a digital format containing 24 open-ended
questions and similar to that of Thomas Bense - encouraging the respondents to answer freely in
terms of content and comprehensiveness. Moreover, the survey was developed using the online
survey tool Typeform, which is a cloud-based application that conveniently served the purpose of
collecting and displaying the results.
In total, 12 members participated in answering the questionnaire. These were selected on a semirandomized principle, meaning that in order to reduce the possibility for potential biasing, only two
out of the 12 participants have personal relations to us - the authors. Initially, these two participants
were selected as "leading respondents" who had the responsibility of inviting members of their
respective gaming communities to fill out the remaining spots. To reduce biasing further, all
participants were kept anonymous, but were given the option to leave a so-called gamer tag
(gaming alias) if desired. Out of these 10 participants, however, only seven returned a fully
completed response, deeming the remaining three unusable.
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October, 2014
To create a profile based on the valid responses, the participants of this qualitative survey spend
anywhere between 1-2 hours a day to 20-30 hours per week on gaming. The most popular genres
amongst the respondents were roleplaying, real-time strategy, first-person shooters, and massive
multiplayer online games, of which the majority were played on PC and console platforms.
Moreover, games were mainly purchased through digital distribution platforms, while physical and
online retailers were mainly used as alternatives in the case of discounts. Three of the respondents
had also been part of professional gaming environments, such as playing in tournaments, hosting
events, and beta testing. Yet, the most central part of the respondent profile is that they were able
to give valuable input throughout the entirety of the questionnaire.
Lastly, it is also essential to mention that a second survey was created as an emergent approach to
collecting feedback and criticism surrounding the devised recommendations, consequent to the
discussion of this thesis. Once again, Typeform was used to formulate the questionnaire, however,
this time it only contained seven questions, which were specific to the elaborate introduction,
detailing the findings and recommendations of the thesis. The survey was spread amongst the same
gaming community members, yet only two responses were received. The answers were however
highly comprehensive and fulfilled the purpose of providing an overlying insight into the gaming
communitys attitude towards the proposed recommendations. While the decision of performing a
second community survey was rather impulsive, it fits the research design adopted in this thesis.
Application of Theoretical Frameworks

The Five Forces Framework by Michael Porter, is used to define the competitive forces of an
industry, and the underlying sources and suppressors of profitability (Porter, 2008). The significance
of the framework comes from the notion, that it is too constricted to merely define competition in
an industry by direct rivals, which is why 4 additional competitive forces are added, namely:
potential new entrants, suppliers, customers and substitute products. In response to prevalent
criticism of Porter's framework, a sixth force is has been included, accounting for strategic
partnerships (Sondhi, 2008), and complements (Grant, 2010). Though Porter does not consider it to
be a separate force, he acknowledges the significance of complements (Porter, 2008). Therefore
including the sixth force does not depreciate the core teachings of the framework. The intensity of
each force is driven by certain factors, which affect the average potential return on investment for
18
October, 2014
companies in the industry. The configuration of intensity of the different forces can in this context
be called the industry structure. Strategy will seek to position the company differently in the modern
structure, anticipate and exploit change, or shape one of the forces to better suit the company.
In context of this paper, the industry will be analyzed, utilizing the Five Forces Framework, from the
perspective of the traditional incumbent market leaders, seen as a collective entity. The purpose of
the analysis will be to establish the industry structure, thus facilitating further analysis and
discussion into how the traditional market leaders may position themselves, or potentially shape
the competitive forces, for the sake of individual profitability as well as industry sustainability.
The 9-Box Matrix by the consulting firm McKinsey, is a framework used to prioritize investment
between business units (McKinsey, 2008). The significance the framework has its basis in the
challenge of managing a multi-divisional business. In practice, the matrix consists of an X- and Yaxis, representing competitive strength of a specific business unit and attractiveness of the relevant
industry, respectively (see Figure 1).
A business unit placed in the INVEST
category, should be given the resources it
needs to grow, even if it currently is not
able to generate those resources itself. A
unit that is placed in the SELECTIVITY area
is essentially still deemed to have the
potential to increase its competitive
position, although resources should only
be allocated to it, from what is left over
after having sufficiently supplied other
INVEST business units. Lastly DIVEST means
that investment should be avoided. In this
Figure 1: 9-Box Matrix; source: McKinsey, 2008
case, there are two major options. Either

the unit can be sold, if a good price can be obtained from a company, which might have a better
basis for amplifying its competitive strength. Alternatively, the unit can be kept afloat, on an
absolute minimum level of operation, with a short-term perspective of harvesting.
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October, 2014
In relevance to this paper, the 9-Box Matrix will prioritize the investment potential of generic
business units with a conventional and mobile focus, respectively. Firstly, it is important to note that
since the context of this thesis is to consider the traditional market leaders as a collective entity, or
perhaps rather a specific "type" of company in the gaming industry, there are certain restrictions on
concrete conditions to be used in analyzing the investment potential, especially regarding the factor
of business unit competitive strength. Nevertheless, it is possible to generalize to an extent where
it is possible to gain an understanding of the overall potential for investment into certain games,
using a generic outline of a business unit with such a focus.
The Aaker Model by David Aaker, explains the marketing concept of brand equity as being a
combination of brand awareness, -associations, -loyalty and perceived quality. Brand equity is
defined as assets and liabilities, which add or subtract value to products or services that are
marketed with said brand (Aaker, 1995). The model is expanded by the theory that brand
associations are driven by a brand identity, which represents whatever the holder of the brand
wishes to convey, implied as a promise to customers. The brand image, on the other hand, is how
the brand in actuality is perceived. The practical purpose of the Aaker Model is to aid in the creation
of brand strategy and thoroughly understand the underlying elements that make up a brand, in
order to close the gap between brand image and brand identity. In this paper, the Aaker Model is
used to assess the potential for brand equity, to add to the competitive strength of a generic
business unit of a traditional market leader, in light of having an established brand.
Research-Obstructing Elements
Throughout the process of writing this paper, a variety of different obstructions and difficulties were
encountered in regards to the performed research. While this is a fairly inherit characteristic of
written works in general, there are several perceptible elements that we - the authors - would like
to emphasize and share with the reader. Because some were reasonably anticipated, and others the
result of unfortunate circumstances, these have collectively altered and pushed the original
conception and vision of this project in new directions. Therefore, this section is dedicated to
presenting the most prominent obstructing elements of the course of this paper's research.
20
October, 2014
No correspondence with targeted companies. As referred to in the Research Philosophy and

Approach, correspondence with relevant corporations is absent in this paper. In reality, this has
been the biggest and most unexpected obstruction to the research process and the formulated
project scope. The initial goal of this thesis was to explore the ongoing industry consolidation and
paradigm shifts, and how these have affected the internal and external processes of multi-national
developers and publishers, in terms of challenges and opportunities. This research area did however
rely heavily on inside knowledge from incumbent publishers due to the lack of third-party
empiricism on the topic. Therefore, over a period of 3 months, a variety of big publishers (Ubisoft,
IO, EA, etc.) were consistently contacted by telephone and email in the hopes of arranging personal
interviews or electronic correspondences. The aim of these were to help build the necessary
foundation for the discussion and recommendations of the thesis. Yet, no single response was
received from any of the respective companies, making it impossible to proceed with the original
topic. Thus, in order to prevent a complete discard and waste of months of work, the paper was
adjusted, re-scoped, and adapted to the current and slightly broader focus area.
Missing presence of expert knowledge. By expanding the scope of the thesis and applying a more
general industry orientation, the binding reliance on in-depth interviews with the mentioned
publishers was generally avoided. However, a new challenge arose, as the current scope also
required empiric input from external sources, in order to make the research relevant and credible.
Yet, the considerable complexity of the topic and a decision to exclude a consumer oriented focus
narrowed down the possibilities for finding suitable interview candidates. Apart from Thomas
Bense, other international industry experts were - similar to the corporations - rather inaccessible.
On top of that, only a confined group of respondents from the qualitative interview were able to
present complete and constructive feedback on the given subject matter.
Definitions
This section will provide definitions for some of the most pivotal terms, used in this paper. These
definitions will be subjective interpretations of some of the more ambiguous terminology, used in
the context of the games industry. The majority of terms, concepts, entities and industry lingo,
which is deemed to not be common knowledge, will be explained during the course of the paper,
either in context, or through the use of footnotes. The terms which will be presented in this section
21
October, 2014
are however essential, yet at the same time, so equivocal, and arguably used far too loosely by
publications and articles on the industry, that it is necessary to define them as a prerequisite for the
understanding of this thesis.
First and foremost, the gaming companies which are the focus of this thesis will be referred to as
the traditional market leaders, and variations thereof. The term "traditional", in this context, refers
to the fact that said companies, were, and still are, the market leaders in sales of traditional boxed
games, distributed physically. The implication is thus that they held solid market leading position in
the overall industry, prior to the paradigm shift of digitization. As examples of these companies, the
2 most important are Electronic Arts and Activision Blizzard. For the sake of analysis, the traditional
market leaders will be considered as a theoretical collective entity of companies, which share a
number of characteristics:
They have had, and currently have, substantial market share in the physical game-sales market
They claim intent of presence in all segments of the games market
They are multi-divisional and multi-national
They maintain divisional or subsidiary development studios
Beyond publishing their own games, they also publish for 3rd party developers
They are not owned by, or corporately affiliated with, device manufacturers
Although some of the relevant companies are naturally still important players of the overall
industry, they are by no means undisputed market leaders, being rivaled and surpassed in game
sales revenues by new entrants to the industry and device manufacturers. Therefore, the term
"traditional" should help avoid confusion.. The contemporary challenges and strategic
considerations of this defined group of companies, are deemed to be the most relevant in regards
to covering the implications of the ongoing paradigm shifts of the games industry.
Next, it is relevant to categorize the different sub-markets of games. For this papers the main point
of reference will be the Global entertainment and media outlook report by PwC (PwC, 2012). The
categorization in this report, is primarily, but not fully, distinguished by which devices games are
played on. The exception is online games, which in the PwC report refers to any game, or
supplementary content that is purchased, downloaded or "obtained access to", in digital form,
22
October, 2014
online through a PC or console. It does not include physical boxed products, regardless of whether
the game is partially or exclusively playable online. It does however include micro-transaction
revenues from games that are otherwise free to play, such as social games, embedded in social
networks like Facebook, or browser-based casual games, embedded in websites.
The next categories are console games and PC games. Following the previous category, it is
straightforwardly evident that these refer to boxed and physically distributed games. Console and
PC games will also occasionally be referred to as representing traditional or conventional games,
being the historic standard for what the industry was associated with. It is important to note that
following the definition of online games, the designation conventional games, in the context of
revenue statistics refers only to sales of boxed games. In the broader context, this paper may refer
to conventional games as a type of game, which is either exclusively or also - in addition to online available in physical boxed form.
The last category is in the PwC report called wireless games. In the context of this paper, it will
however be renamed to mobile games. The reasoning behind this is to avoid confusion with
handheld consoles. Mobile games will thus refer to the same as the wireless category in the PwC
report, being chiefly games for smartphones and tablets.
Since a major point of this thesis is the expansion of the market due to new game types and new
gaming-enabled devices, it is relevant to have a collective term for these recent opportunities. As
such, mobile, casual and social games will be referred to as modern games. Lastly, it is worth
mentioning the concept of independent games, which is essentially not a distinct game type, instead
signifying that a game was developed without little to no funding from publishers.
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October, 2014
Chapter 1.
The Origins of the Games Industry

The games industry is distinguished by the swift and dynamic change, which is mainly caused by
persistent seismic shifts in both technology and in the user base. Thus, it should not surprise anyone
that the modern games industry is distinctively different compared to that of twenty, ten, or even
five years ago. Throughout the progress of moving from its initial origins as a pastime activity and
into its current form of a fully corporatized mainstream entertainment medium, the games business
has, however, undergone vigorous swings, accomplishments, and distress. Addressing the focal steps
in this evolution will therefore emphasize which historical factors have shaped the games industry
into its contemporary state, and also how and why. This will be the purpose of this chapter, which
through a chronological presentation of the most prevalent events, will illustrate the gradual
creation of the games industrys traditional structure and value chain. As such, the main focus will
surround the US games industry crash of 1983, which factors caused it, and how the industry
eventually got back up on its feet. Though this is the opening chapter of the thesis, it should be
noticed for its relevance to the later discussion and conclusive recommendation.
24
1.1
October, 2014
From Past-time Activity to Corporate Practice
Born out of the early days of memory-based computing and usually developed by one or two
enthusiastic programmers, the concept of games served primarily as tech demos and means of
personal gratification (Cohen, 2011). Even though there are many debates over which game
productions should be considered the pioneers of the industry, it would essentially come down to
individual definitions of what a game is. However, released in 1972 and loosely based on the
principles of table tennis, "Pong" was the first arcade game to have a widespread success in out-ofhome gaming (PongGame.org). This marked a noticeable milestone for the industry, not exclusively
due to Pong's success, but due to the fact, that the game was developed and published, by what
would become the first large-scale gaming corporate Atari. Even with few schedules, no marketing
plans, and a modest attention to long-term strategy, the founders of Atari, Nolan Bushnell and Ted
Dabney, managed to develop a company culture dedicated to convey a continuous stream of
innovation (Williams & Kahn, 2013). Furthermore, this initiated one of the first steps in facilitating
a more modern approach to distributing roles within game production.
Eventually, Atari's culture enabled the focus on bringing the gaming experience to people's homes,
instead of solely relying on publically accessible arcade machines. This was especially triggered by
the 1976 release of the first cartridge-based home game console developed by the company
Fairchild Camera and Instrument. Atari responded to this by initiating development of the Atari
Video Computer System (VCS), later renamed the "Atari 2600", which aimed for popularizing and
inducing adaptation of more competent home consoles (Williams & Kahn, 2013). Although
confident that the console would be another promising hit, Bushnell realized that developing the
machine and bringing it to market would require a substantial financial investment. In the search
for external investors, Warner Communications expressed high interest and acquired Atari in 1976,
making the release of the Atari 2600 possible in the US on September 11, 1977 (AtariAge).
Despite heavy competition, Atari quickly managed to grab the dominant position as industry leader
with an annual revenue increase from $75 million to $2 billion in the beginning of the 80s. This
accomplishment made Atari the fastest-growing company in the history of the US at that time
(Werner, 2011). At its height of success, the Atari flagship console was installed in around nine
25
October, 2014
million US households and aimed to

push business forward (Lambie,
2013). This success was largely
accredited to the conversions and
production of numerous hit game
titles that were exclusive to the
Atari 2600. For example, Atari
produced a console version of the
classic
Japanese
game
Space
Invaders from 1980, which became

so well-liked, that people started
buying the Atari 2600 for the sole
Picture 1: Advertisement for the Atari 2600 console (Nov 22, 1981)
reason of playing the game at
home (AtariAge). Thus, on the surface it seemed that the games industry - and especially Atari had managed to integrate a thriving and efficient business environment, which would secure a
future of prosperity. Nevertheless, was this actually the case?
1.2
Prelude to an Industry Turmoil
Surrounding the launch of the Atari 2600, the second generation of consoles kicked off and
consequently defined a peak era of attractiveness and advance for the medium. In particular, the
five-year period between 1978 and 1983 characterized the game industry by a huge surge in
popularity and profits (Lambie, 2013). This was fueled by the revelation that this newfangled
industry was changing the face of the US business, and as soon as profitability was obvious, a flood
of companies jumped the bandwagon (Werner, 2011). With a staggering total revenue worth of
around $11.8 billion, the US game industry had by far outperformed the combined profits of the US
movie and music industries (Lambie, 2013). At that time, inspired by the success of Atari, the
preliminary advantages were more than evident for new entrants and industry incumbents. Yet, as
the actual business of gaming was still very young, nobody understood how reaching such dizzying
heights could cause a devastating backlash. Soon, the entire game industry, Atari included, started
to bend under the pressure of bad business practices, market saturation and fierce competition.
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October, 2014
The high industry attractiveness and relatively low barriers of entry resulted in an astounding
number of consoles to enter the market around the 1981 through 1983 mark (Oxford, 2011).
Although the Atari 2600 was dominant, it now competed with more than a dozen other home
consoles, most of which, were produced by electronic or toy-making companies, and only sought to
switch markets to gain a share of the games industry profitability (Werner, 2011). Even though the
new entrants, including the ColecoVision and the Mattel Intellivision, provided novelty items unable
to directly compete with the success of the Atari 2600, they contributed to a over-saturating the
market with consoles and hardware clones (Vinciguerra, 2014). This lead to the availability of an
extensive amount of console hardware, giving consumers far too many choices.
The overflow of new consoles was accompanied with an even bigger runoff in regards to games
availability on the market. Once again, seeing the potential feasibility and utility of the games
business, companies, of which many had with no entertainment experience at all, began to
penetrate the market (Werner, 2011). Games were a particularly interesting and innovative medium
for product manufacturers who suddenly realized their veritable advertisement value as interactive
commercials that customers either pay for or acquire for "free" by collecting product coupons
(Oxford, 2011). In addition, the attractiveness of the industry was further raised by two prevalent
factors. First, game development in the late 1970s/early 1980s could be completed on a small scale
and scope that often required marginal inputs, in terms of resources. Depending on the ambition of
a game project, development would normally require 1-2 people and a timeframe of five to six
months (Lien, 2014). The games industry did however start to see changes as many companies
tolerated games to be handled by single programmers who would push the final product to market
in a matter of a few weeks. Second, the majority of the console hardware on the market - the Atari
2600 included - did not have any "software locks", which ultimately allowed externally produced
games to be compatible with almost every system. Thus, everyone could freely make, distribute and
sell games for existing consoles without any of these sales going back to the companies that actually
made the consoles (Werner, 2011).
Progressively, the games industry came under the effect of a widespread loss of publishing control,
which brought forth a series of new issues. Focus on delivering quality game products quickly
became substituted by a desire for generating return through simply pushing vast quantities of poor
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October, 2014
titles. This was practiced to such a degree, that, according to Werner (2011), "Entire companies
sprang up with the intention of making bad games that they could sell cheap" (Werner, 2011).
Nevertheless, as many third party developers were unable to access the same commercial retail
distribution systems that Atari utilized, such as national department stores, these would have to sell
their games through other outlets. As a result, games were offered almost everywhere, especially
at "...local computer stores, toy stores, comic book shops, and via mail order catalogs." (Vinciguerra,
2014), which contributed to the influx of a bewildering array of consumer choice in the form of
cheap games (Lambie, 2013). The market was actually so overrun by game releases that many stores
could simply not keep up, let alone have shelf space for the constant supply. Games that previously
used to cost 30-40 dollars each were now dumped into bargain bins and sold for around 4 dollars
(Caruso, 2011). This ultimately offset the original price of games and ignited a distressing price
competition amongst the industry players.
On top of it all, the oversaturated console market was suddenly struck by a new threat, forcing it
into competition with the brand-new technology presented by the personal computer. This was
primarily triggered by the fact that home computers, like the Commodore 64 and the Apple II, fell
in price during the early 1980s and became affordable for the average family (Oxford, 2011). "Unlike
the specialized consoles, PC's were generalized devices that could be used as both business machines
and gaming platforms, which made them a better overall investment for many households" (Werner,
2001). Moreover, the PC's offered superior technology in terms of graphics, sound, and the usage
of long term memory, which allowed players to save their game progress. Thus, computer
manufacturers seized the opportunity provided by the turmoil on the console market to promote
the multipurpose PC's at competitive prices (Caruso, 2011).
Combined, these forces contributed to an increasingly unstable environment, which suffered from
the lack of regulations, saturation, quality assurance, and acknowledgement of long-term business
sustainability. Having the privilege to gleam back at the state of the games industry of the early
1980s in retrospect, it is viable to assume that the market was ready to burst - and rightfully, the
games industry experienced a devastating crash in 1983. Nevertheless, the last stroke that was
required for this to happen can be attributed to the business decisions undertaken by Atari.
28
1.3
October, 2014
High-Profile Failures: The Atari Shock
Apart from having a dominant presence on the market from around 1978 until the mid-1980s, Atari
played a massive role in the developments prior to the industry crash of 1983. Many industry experts
and analysts believe, and continue believing, that the industry juggernaut was largely responsible
for the unfortunate outcomes of the second console generation. In general, there is one ubiquitous
reason for this. Atari had initially placed high stakes in the pursuit of creating a market for homebased gaming, delivering quality products, and triumphing the exceedingly turbulent environment.
And the company was unquestionably off to an extremely strong start. Unfortunately, it seemed
that the fastest-growing company in the US had grown too quickly for its own aspirations and
capabilities. In many respects, Atari reflected a similar inexperience towards approaching and
handling the novel business of the games industry, as seen throughout the majority of the market
entrants. However, the sheer magnitude of Atari meant that the company could influence the entire
industry through its decisions - and eventually it did just that.
One of the first controversies surrounding Atari was related to the company's approach towards the
internal software development talents. Although Atari was initially structured around providing an
optimal environment for the conversion of creativity and innovation, the involvement of Warner
Communications seemed to have an opposite influence on the corporate culture. The first sign of
an internal struggle was related to Pong inventor and founder of Atari, Nolan Bushnell, and his
decision to leave the company in 1977, soon after the Warner acquisition. In an interview with
Spiegel Online (2007), Bushnell was asked why he left the company in the thriving year of 1977. His
response to the question was the following: "Atari management under Warner was increasingly
stifling... Atari had changed from an engineering-driven company to a marketing-driven company.
Innovation wilted and died - and they failed." (Spiegel Online, 2007).
Unsatisfied with the working conditions, four lead programmers left Atari in 1979 and sought to kick
off their own company for producing games. For that reason 1980 marked a watershed moments
for the industry with the establishment of the first ever third-party software developer, Activision
(AtariAge). This would, however simultaneously become one of the key caused of the nearing crash,
as the formation of Activation and lack of first-party control over software compatibility, was the
grand step towards the industry's loss of publishing control. Prior to Activision, every game was
29
October, 2014
produced by first-parties, meaning that all games for Atari were developed by Atari, all games for
the Intellivision were developed by Mattel, and so on (Werner, 2011). "Activision was the world's
first third-party developer, and as such, if a consumer brought an Activision game for the Atari 2600,
Atari wouldn't see a dime" (Werner, 2011). The presence of third-party developers was therefore
devastating for the first-party business models that were based on selling consoles for cheap and
making profit on game sales. This was only worsened by the fact that Activision initially released
four very well received games, which showed the consumers that the Atari 2600 was capable of
better games than Atari themselves produced (AtariAge). On top of that, dozens of third-parties
were swiftly formed to follow the example of Activision. In an effort to counteract the rising trend
of third-party development and to enforce a restriction on production of external hardware capable
of utilizing first-party games, Atari decided to seek legal help. Unluckily for them, in '82 the US
judicial system publicly allowed the existence of third-party developers, which eventually resulted
in an even greater drive for everyone to jump on to the bandwagon. At that time, the market was
pressured by an oversaturation of consoles and flooded by games, of which, many were of
extremely low quality. This presented an opportunity for Atari to prove their attention to quality
and the ability to deliver superior products, which could potentially uphold consumer loyalty. Yet,
business executives started making boneheaded decisions with the most prevalent examples
adjacent the production of the two games; Pac-Man and E.T., both released in 1982 (Werner, 2011).
Originally released in Japan as an arcade game in 1980 by Namco, Pac-Man instantly became an
absolute blockbuster, before eventually turning into a classic of the medium with immense
popularity even to the present day. Thus, in retrospect it seems quite obvious why the executives
of Atari saw an enormous potential in making a home port of the game for the Atari 2600 console.
On this basis, management predicted that sales would reach at least US$500 million (Kent, 2001) if
the game was released promptly. However, the final port barely resembled the original arcade
version that people had fallen in love with. Despite internal critique - especially from marketing
manager Frank Ballouz - Atari executives decided to print and distribute the promised 12 million
copies regardless. Of these, a total of 7 million copies were eventually sold at a retail price of $37.95
(Time, 1982), making Pac-Man the most selling game in the history of Atari 2600. However, this was
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October, 2014
no reason for celebration as 5 million unsold cartridges were returned to sit at Atari warehouses,
while a huge number of consumers were demanding refunds (Caruso, 2011).
Picture 2: Comparison between the original and the ported version of Pac-Man
An attempt to repeat the "success" of Pac-Man was seen later that year, following the release of
Steven Spielberg's blockbuster movie, E.T., on June 11th, 1982. Upon acquiring the license to
produce a game based on the biggest movie hit of the year for $25 million up front, Steven Ross,
head of Warner Communications, gave Ray Kassar, CEO of Atari, a deadline of having the game in
stores by Christmas (Caruso, 2011). Kassar assigned the experienced programmer, Howard Scott
Warshaw, with the job of developing an E.T. game in six weeks time. Even by the standards of the
time, it was an absurd task with an expected outcome (Werner, 2011).
The game's reception was disastrous. With only six weeks of development time and a strong belief
by Atari executives that the games would sell solely based on the strong E.T. brand, 5 million copies
were manufactured of which barely 1,5 million were sold (Oxford, 2011). And with no means of
shifting the bad investment placed in the excess and leftover cartridges - including Pac-Man and
other games - Atari was forced to dump them in a New Mexico landfill to avoid further inventory
costs and issues (Lambie, 2013).
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October, 2014
However, the fundamental problems of Atari could not just be buried away in the same manner.
Neither of the Pac-Man or E.T. failures were presented in the Warner Communication's earnings
report until December 7, 1982, where "... Atari announced that it expected a 10-15% increase in
sales in its fourth quarter, rather than the 50% increase it had predicted earlier in the year..."
(Trautman, 2014). While a continued growth might seem as a positive forecast, it was actually bad
news for the fastest growing company in the US. In addition, the forecast came as a shock to both
the shareholders and Wall Street, as Warner's share prices fell from $51 to $35 the next day, being
a tumble of over 31 percent (Vinciguerra, 2014). By the end of '83 Atari had lost a staggering $536
million (Caruso, 2011), also caused by the failed launch and cannibalization of sales of the Atari 5200
console. As a result Atari was broken into three units before eventually being sold off by Warner
during '84-'85. In conclusion, the once dominant video-game division's later console incarnations
never came close to regaining the market supremacy of the early eighties (Trautman, 2014).
1.4
The Aftermath of the Industry Crash
The high-profile collapse of Atari had ultimately formed the core of the games industry crash of
1983. And while many competitors - including Coleco, Mattel, etc. - saw a golden opportunity in
attempting to claim Atari's former market share, these companies simply did not offer any appealing
hardware or games to fill the void. In turns, these were also dragged down to accompany the
collapse of Atari (Trautman, 2014). By 1985, the entire home console industry that was formerly
estimated to be worth more than $3 billion on its own, had now plummeted to a mere $100 million.
This means that the industry market value dropped by a staggering 97% in a matter of two years
(Lambie, 2013). Thus, it did not come as a surprise that analysts predicted the crash to have brought
a conclusion of the gaming fad, that consumers had moved on, and that investors and retailers
should focus on different endeavors (Werner, 2011). Theoretically, gaming was deemed dead, while
in reality, the crash did not lead users to swear off electronic games.
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Seeing that the sudden halt in the games industry was centralized around the market for home
consoles - like the Atari 2600, ColecoVision, and Intellivision - these had absorbed the worst of the
disaster (Oxford, 2011) and allowed the games medium to thrive in other areas. Consumers were
beginning to adopt the PC platform embracing its capabilities as a convenient and powerful digital
entertainment tool (Williams & Kahn, 2013). On top of that, computer games never suffered any
recession during the crash, which attracted the attention of companies like Activision towards the
platform (Werner, 2011). Lastly, but most importantly and quite ironically, at the same time as the
console industry in the US fell into disarray, Nintendo launched the Famicon console in Japan
(Lambie, 2013). Both hardware and games produced by Nintendo were so well received in its home
country that Japanese executives started considering something that would have been deemed
impossible by many people at that time. Regardless of the dire state of the US home console market,
Nintendo was driven by the belief that consoles were not just a passing trend, and that consumers
were in fact interested in dedicated and powerful entertainment hardware. Thus, the rationale
behind Nintendo's entrance into the US market was that the medium itself was not to blame for the
industry crash, but rather the terrible business decisions of the former operating companies
(Werner, 2011). The challenge would therefore be to reinstill the confidence of consumers, in that
consoles are able to deliver quality content and genuine entertainment value.
Picture 3: Advertisement for the Nintendo Entertainment System (NES)
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October, 2014
Nintendo approached this challenge through two innovative undertakings. First, the Famicon
console was redesigned and renamed the Nintendo Entertainment System (NES) specifically for its
North American release. This was strictly a marketing decision as Nintendo assumed that American
audiences would be cautious about exploring the home console market after the crash. Thus,
replacing the term "video game" with "Entertainment System" for its console and giving it a more
sophisticated look prevented direct associations (Oxford, 2011). Second, unlike the Atari 2600,
Nintendo locked down their console. The NES would only function with game cartridges that had a
specific chip in them, to which Nintendo had exclusive rights over. This meant, that "...Nintendo
would have full approval over any games coming to its system, and could reject inferior products."
(Werner, 2011). Apart from assuring quality control, Nintendo also welcomed the creativity and
product diversity of third-party developers. This time around, however, external developers had to
agree to pay royalties in order to publish games on the NES.
1.5
Subset
In essence, the games industry crash of 1983 was attributed to the factors of market oversaturation,
loss of publishing control, price competition, and a bunch of boneheaded corporate decisions.
However, the novel and focused strategic approaches of Nintendo played an enormous role in
revitalizing the US home console market. The company managed to single-handedly prove that the
console market had just been misunderstood, and that improving on previous oversights could lead
to entirely different results. Not only did the NES become the best-selling console of its time and an
immense commercial success able to disprove Wall Street's expectations of failure, it also reshaped
the entire industry structure (Werner, 2011). The business model of licensing third-party developers
and authorizing them to produce and distribute games for the NES platform was so revolutionizing,
that it was quickly accepted and adapted as an industry-wide standard - even to this day (SanchezCrespo, 2003). Accordingly, this laid the basis for a game production network to be established with
the purpose of ensuring optimal business conditions and standards for the individual industry
participants. Thus, although the enhanced situation of the market spurred new competition, this
new industry structure prohibited the challenges experienced by the former market to reoccur
(Trautman, 2014). With these alterations, the industry started recovering and embracing
modernization. This is the topic of the next chapter.
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October, 2014
Chapter 2.
The Structure of the Games Industry

A lot has changed within the games industry since the mid-1980s. In the wake of the disrupting
events surrounding the crash in '83, the industry managed to revitalize itself through the adaptation
of more standardized and professional business practices. In particular, the implementation of the
regulatory licensing system provided a groundwork, on which the console market managed to
reform and swiftly make a strong comeback. Consequently, the resurgence of the industry in the late
1980s and the explosion of network culture in the late 1990s demonstrated the capabilities of the
interactive games medium and secured a permanent place on the market. It was also during the
1990s that consumer demand for - and adaptation of - game systems boomed globally, resulting in
the industry experiencing significant growth. Even to this day, the games industry is still expanding
due to factors, such as, continuous technological advancement, increasing demands for game
production, and changing consumer demographics. This has, however simultaneously contributed
to the creation of a complex and dynamic business environment, reaching across numerous genres,
platforms, and markets - not to mention - the entirety of the digital sector. The purpose of this
chapter is therefore to demonstrate the traditional structure of the games industry, as well as
provide an overview of the most prevalent contemporary tendencies that are interfering with the
conventional conceptions. On this basis, a specific emphasis will be placed on defining the modern
configuration of value integration and distribution amid the diverse industry players, and how this
has affected the industry as a whole.
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2.1
October, 2014
The Traditional Structure
Subsequent to the transformation in the mid '80s, the games industry adopted a redefined value
chain, entailing the presence of a production network in which a specific sequence of participants
are involved in delivering and adding value to a product or service. In this context, three things are
important to notice. First, due to the strong comeback and consistent market dominance, this value
chain, considered as traditional for the games industry, places its foundation on the console
platform. Second, the conventional structure is retail driven and thus dependent on the distribution
and sales of physical products. Third, the lack of a specific reference to platforms, such as the PC,
mobile, and handheld devices, does not exclude their presence in the traditional structure of the
industry. While similar, the dynamics of these individual entities will be elaborated later on in this
chapter. As such, the conventional value chain is comprised of six distinct actors, namely; the
console manufacturer, developer, publisher, distributor, retailer, and consumer respectively. The
relationship between these actors is depicted in Figure 2, which covers the entire streamlining
process involved in the creation of conventional games and services.
Console
Manufacturer
Developer
Publisher
Distributor
Retailer
Consumer
Figure 2: The Traditional Value Chain
Based on conventional value chain analysis, value and additional costs are added to the product or
service as it moves in the direction of the arrows, where every actors executes a certain role, and is
rewarded with a share of the generated revenue in the end (Larsen, 2011). The same principle
applies in this particular setup, where the individual roles of the actors are generally predefined as
follows: The console manufacturer/first-party makes the necessary hardware on which games are
played, and is the primary driver of technological innovation. The hardware industry also sets the
standards and capabilities of game production, as this will always be limited to the technical
specifications of the platform. Next, similar to other publishing industries, such as music, film and
books, the developer takes on the role of the artist making the game, while the publisher provides
advanced financial support, handles marketing, and imposes regulations. Development occurs in
studios, which are commonly local companies with staffs ranging from a few persons up to several
hundred spanning across a wide variety of professions (Zackariasson, 2012). Upon completion of
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October, 2014
the game, the publisher and/or first-party is in charge of arranging for a manufacturing company to
produce the physical copies and packaging for the game. The finished products are sold off to
distributors or advanced to retail stores, eventually reaching the end consumer.
2.1.1
The Industry Spiral
Although the traditional value chain of the games industry may seem rather linear and
uncomplicated, it can be manipulated in a number of ways. In fact, the present state of the
conventional structure of the games industry is highly symbiotic and driven by the cyclical
interactions occurring between the various actors operating within the value chain. Thus, rather
than acknowledging the structure as a generic set of sequential steps formed by the value chain, it
becomes more appropriate to address it through a more dynamic perspective. For this purpose,
Figure 3 is designated to depict the interactions and procedures required to deliver the products
and services to the end consumer within the traditional structure of the games industry.
Figure 3: The Traditional Structure of the Games Industry (adapted from Rabin, 2009)
This detailed overview makes it more comprehensive to assess how the different actors and value
chain sequences are integrated in practice. Yet, in order to gain a deeper understanding of the
underlying forces, it is necessary to look into the primary mechanisms and drivers of the
conventional industry. A suitable insight can be presented through an outline of Mikolaj Dymeks
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October, 2014
(2010) proposed Industry Spiral, used for defining the repeating chain of events that drive the
conventional games industry. These are eight distinct steps in this process (Zackariasson, 2012):
1) Game consoles are designed. This initial process requires expensive development of hardware
and software technologies, and is a crucial fragment of every new cycle of the conventional industry
structure. Ultimately, the design solutions implemented by the console manufacturers will influence
the rest of the industry in terms of business/economy, game development process/technology, and
even the game medium itself.
2) Game console manufacturers propagate their visions. Console manufacturers are following a
somewhat different reasoning in regards to the value chain analysis, as they have two distinct
groups of users, being the consumers and developers/publishers. In other words, the console
manufacturers operate simultaneously in a two-sided market, where the consumer market is
subsidized and generates revenue, while the developer market provides all third-party titles. These
two groups are linked to each other through network effects, where the value of a platform for one
user group is closely tied to the number of users in the other (Larsen, 2011). Being the bond between
the two markets, the console economies seek to operate through a complex ecosystem based on a
symbiotic relationship between manufacturers and external developers and publishers. Yet, this
relationship is rarely characterized as purely symmetrical. The reason is that console manufacturers
often exercise a certain level of strong-arming. Empowered by the license-holding, console
manufacturers act as gatekeepers and enforce many technical, artistic and business-related
conditions, which ultimately shape the entire industry.
3) Game console manufacturers establish their business/media/technology. The game console is
manufactured, distributed, marketed, sold and supported by the manufacturer. For every console
generation the market size, revenues and profits as a whole have increased significantly, and similar
tendencies are expected for the newly released eight-generation (see appendix 2). However,
although R&D costs associated with console development are colossal, consoles of a new generation
are initially retailed at a considerable loss to the manufacturer. The reasoning behind this is, once
again, related to the network effects and inter-group externalities of the two-sided market. This
means, that the value for consumers is a function of the number of developers attached with the
particular platform and vice versa. Thus, console hardware is commonly subsidized in order to
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October, 2014
penetrate the market quickly, attract developers, reach a certain critical mass in both user groups,
and thereby establish a foundation for growth (Larsen, 2011).
4) Publishers select target audience and marketing strategies. At this step, third-party publishers
have the opportunity to specify, pursue, and invest in various marketing endeavors and innovation
thereof. It is, however, essential to note that the console manufacturer often dictates the game
medium development to a substantial degree, by formulating requirements, guidelines, platform
marketing, and technological specifications. Theoretically, this can establish certain boundaries for
the relevant marketing sphere and limit the possibilities of publishers to such an extent, that they
become locked within an arena, consisting of a selected audience and predefined sets of tools and
potential. Yet, this is not set in stone, as no one single console manufacturer is purely dominant.
5) Publishers invest in game development. According to Dymek (2010), the games industry is
unquestionably compelled by a path-dependent mentality of if it aint broke, dont try to fix it,
where successful game titles give rise to a stream of sequels and plagiarizing competitors. This trait
is regarded as an outcome of the drastic rise in development budgets within the conventional games
industry, which has led to a solidification of content strategies. Thus, investing in the development
of titles, concepts, and genres with already proven success is often preferred in place of alternative
projects that exploit original intellectual property. The reason is that these alternatives are likely to
increase the risk level of the publishers entire product portfolio. Although this behavior is not
unique for the games industry, few can demonstrate such path-dependent and persistent
behavior in terms of content strategies (Zackariasson, 2012, p. 43).
6) Game product reaches retail. After going through multiple and significant phases of shaping and
formatting, the game product finally reaches retailers. At this point, the title is required to penetrate
the market within a typical timeframe of three to six months. According to Dymek (2010), the
traditional structure of the games industry is built around a mono-window sales model, where
there are no second chances in terms of other revenue sources, as soon as a title is removed from
the distribution channels upon expiration of the given sale period. Furthermore, Dymek (2010)
remarks that this increases publishing risk, as development budgets constantly rise.
7) Market information feedback to industry. Demand is never certain in the conventional games
industry, and the majority of released titles do not make a profit. According to estimations, only 4%
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October, 2014
of games that enter production and 20% of games released to the market will actually return a
significant profit (Leigh, 2008). Still, the games industry has the essential characteristics of hit-driven
industries, as titles that become profitable are immensely profitable. Therefore, sales statistics are
extremely important for the industry, as they provide an information feedback loop, which is crucial
for formulating future development and content strategies.
8) Process is repeated. During the entire product life cycle of a game console, steps 4 through 7 are
repeated for every published title. One such console cycle/generation typically has an average
lifespan of around 5-7 years before reaching maturity, and a new console is introduced to the
market. Within each cycle, the most popular and dominant machines often engage in "console
battles", where each company publicizes the powers of its newest model (Zackariasson, 2011). For
an example of the PLC curve of the seventh console generation (see appendix 3) When a new
console is released, the entire process from step 1 to 7 is repeated.
2.1.2
Alterations on the Conventional Integration
The course of the industry spiral is essential in context of understanding how and why certain
alterations are being implemented by the overarching paradigm shift, which ultimately affect the
core value chain proposition of the conventional games industry. However, in order to fully
comprehend this development, there are several elements require that elaboration and
clarification. A critical aspect to notice, for example, is that developers following the conventional
industry frame do not have direct access to distribution networks or consumer markets. The reason
behind this is primarily that developers tend to lack financial capabilities to personally fund and
promote their games (Zackariasson, 2012). Thus, the traditional industry structure is predominantly
built around, that publishers hire one or multiple developers and external contractors to make a
game (McGregor, 2013). These second- and third-party developers are compensated for the sales
of their games through royalties, which are somewhere between 20-20% of the publisher's net sales
revenue after deductions (Edwards, 2006). This assigns publishers with the crucial role of taking the
financial risk involved in contracting different developers, researching market trends, building
portfolios of games, and executing sizable promotion strategies to create exposure for their
products. Moreover, as previously seen in Figure 3, a publisher may even assume the position of
either allocating the finished goods personally, or contracting an external distributor for the job.
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October, 2014
These are therefore typically seen as the predominant and pivotal component when it comes to
managing game production in the conventional perspective. On this basis, Readman and Grantham
(2006) have suggested that the value chain has changed in the last twenty years to become much
more publisher centric. The plausibility of this claim is fairly visible within the contemporary industry
structure. However, publishers are becoming all the more relevant, as they are simultaneously
pushed away from purely platonic collaborations with external entities, which are instead
substituted with determined value chain integrations. The dominant corporate strategy amongst
publishers has recently formed towards consolidating and integrating vertically up and down the
production cycle (Kerr, 2006). There are two focal motives for this inclination.
First, to a considerable extent, the forceful console manufacturers whose influence can be felt
through the entirety of the games industry (Smith et al., 2008), are continuously distressing the
publishers. The contemporary console industry is acknowledged as an oligopoly, controlled by
Nintendo, Microsoft and Sony (Larsen, 2011), who each control around a third of the console
market, as depicted in Figure 4 (right). What the figure also shows (left) is that the console and
handheld2 platforms combined account for more than half the current global revenue of the games
industry. Thus, the ability of first parties to maintain a position as juggernaut drivers of the games
industry has assigned a specific role to these entities.
Figure 4: Global Revenue and Platform Share (to the left) & Console Sales Market Share by Company (to the right) 3
Handheld platforms are taken into account, as Nintendo and Sony also produce the dominating devices in this area.
"Global Revenue and Platform Share" is based on published Microsoft estimates for 2012 (Armitage, 2013). "Console Sales
Market Share by Company" is based on total yearly sales statistics published by VGChartz (2014) for 24/06/2014.
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October, 2014
As the console manufacturers hold the licensing rights to their platforms, they too want to
propagate their visions and ideas, and take some part in incorporating them into the products
created by third-party developers and publishers. This is decidedly visible in the industry spiral, as
the console manufacturers play a leading role by dictating many of the overarching dynamics
through strict quality standards and guidelines. In turns, this drives up the development costs for
publishers, as more time and resources are spent on obliging to each manufacturers specific
demands and control procedures. Moreover, apart from enforcing this assortment of gatekeeping
procedures, the console manufacturers also impose a license fee on externally developed titles, in
return for compatibility with the particular system (following the principles implemented by
Nintendo in the late '80s). The exact licensing fee varies based on the manufacturer and individual
deals, but it can generally be anywhere between $3 and $10 per unit (Edwards, 2006). It is through
these fees, and not through hardware sales, that the manufacturers generate profits. In addition,
publishers commonly pay licensing of around $3 per unit, for the right to use externally created
intellectual property, such as storylines, characters, or music in a game. Thus, considering that a
console game is priced at $60 in retail, the licensing costs per unit can easily constitute 14-16% of
the total worth. And due to the strong industry foothold of the manufacturers and the importance
of intellectual property rights, the licensing costs are continuously increasing (Kerr, 2006)
The second tendency is a prevalent for the conventional industry structure and specifically related
to the aspect of game development. Following the progressive technological advancement of
gaming platforms and the dynamic environment created by the industry spiral, the demands and
capabilities of game production have increased accordingly. This has imposed an ongoing arms race
between game publishers, ultimately leading to the utilization of larger production teams, soaring
development budgets, and tougher competition (Smith et al., 2008). As a result, the conventional
games industry has gradually become centered around a predominant focus on production of the
so-called AAA games. This is a classification term used to describe game commercial productions of
immense size and scope, which are developed by large studios, and funded by massive budgets with
high intensity of promotion. A common way to explain the meaning of the term, is that one "A" is
nominated for the game being critically acclaimed or considered successful, another "A" for bringing
unique and innovative gameplay, and the final "A" for a financial success. Titles defined as AAA are
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October, 2014
therefore considered to be the "best-of-the-best", with publishers expecting to offset the general
development cost by cashing in multiple-of-cost returns on their investment (Schultz, 2014).
However, it is important to notice that big budgets and long production cycles do not
unconditionally guarantee that the outcome will be consistent with the all three criteria of the AAAquality classification (Cohen, 2008).
This immense intensification of the size and scope of commercial game production is exemplified in
Table 1, which gives three practical examples of how contribution has changed throughout time. As
seen in the first column, and pointed out in chapter 1, game development used to be a small
endeavor, simply requiring confined teams and budgets. Jumping several console generations
further, it is apparent to detect the steep growth of every constituent. However, whereas units sold
are
mainly
affected
by
increased
global
accessibility
and
adaptation
of
capable
hardware/bandwidth, the cosmic evolution of team and budget size sis primarily consistent with
the focus on commercial AAA-titles throughout the conventional games industry.
Table 1: The Evolution of Game Production (based on data from VGChartz, 2014)
These numbers are expected to climb even further, due to the surging industry and consumer
demand for complex products, which in turns necessitates more elaborate input from more and
more specialists (Smith et al., 2008). Paradoxically, however, if adjusted for inflation, the retail price
for new game releases have continuously diminished during since the post-crash era (see appendix
4). Nevertheless, these prices are generally fixed to an average global industry standard of $60, to
which Forbes has published the costs breakdown summarized in Figure 5 (Forbes, 2006).
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October, 2014
As the breakdown indicates, the

publisher is left with approximately
75% of the retail price, once the retail
markup and retail placement fee4 has
been deducted. Although this seems as
a solid proportion, costs need to be
covered for the inputs of each actor in
the traditional value chain. Thus, since
development, licensing, and marketing
Figure 5: Video Game Costs: Cost breakdown of a $60 console game
costs are seizing big shares of the total
income, this usually leaves the publisher with a mere profit of $1 per unit, assuming that the game
generates any profit at all. It is however important to note that this cost breakdown may differ
significantly depending on various elements. Not relying on external franchises, owning distribution
channels, and digitalizing products, will for instance potentially lower licensing, distribution,
manufacturing, and inventory costs. As also present in Figure 5, publishers can benefit from
integrating developers into their value chain in order to diminish inclusion of royalty payments.
Therefore, the vast majority of the incumbent publishing companies are pursuing vertical and even
horizontal integrations to an extended degree.
On the other hand, the inability to pursue such integrations leaves the small developers and
publishers facing high risks and costs in return for minor profit margins. This is especially critical
during the early stages of a console generations lifecycle, where game development costs are
increased due to adaptation processes to the new hardware, and where hundreds of thousand game
copies need to be sold before they turn profitable.
Collectively, these tendencies have induced an industry-wide corporate refinement to the
conventional structure, ultimately bringing it under pressure. With the possibilities brought forth by
the ongoing paradigm shift, the creation of new configurations is utilized to offset the conceivable
confinements and inequalities of the traditional structure. In this paper, these are referred to as the
modern structures of integration, which are explained next.
4
The purpose of this fee is to ensure better marketing from the retailer through in-store advertisement, etc.
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2.2
October, 2014
The Modern Structures of Integration
The state of the conventional industry structure is in a transition period, where, especially the
elements of the widespread and worldwide adaptation of the Internet, social networking, and
mobile devices have had an immense impact. Even the traditional ideas and principles of gaming
are constantly being altered towards implementing a refined and vast network connectivity, where
people have more choices of what games they play, with whom they play, and when and where
they play. Therefore, to a vast degree, current-gen games and hardware are expected to substitute
the single player notion in return for a focus on networking features and online gaming. In reality,
this transition into a modernized approach to gaming has grabbed the attention of the entire games
industry as it has unlocked new opportunities for both control and profiteering (Williams & Kahn,
2013). For example, games that require connectivity to
a centralized server system include DRM5, making them
more resistant to piracy, which has always been a
definite challenge for the industry. What is more
important, however, is that industry corporations are
intensely exploring the new markets, products, and
possibilities for value chain integrations, made
available by the ongoing modernization. An
Figure 6: U.S. Computer and Video Game Sales
Growth (In Billions and Divided Into Delivery
Formats) (EF, 2014)
indicative exemplification is provided in Figure 6,

showing the influence of delivery formats, which are
not inherently built into the traditional industry structure. These pioneering formats are all highly
dependent on online capabilities, as they consist of content that is digital in nature. Most
significantly, however, these are driven by the functionality of digital distribution, which lead to a
considerable alteration of the traditional industry setup.
The introduction of digitalization and digital distribution are the single most prevalent markers of
the ongoing industry paradigm shift. Although these concept has been present since the early days
of the games industry, their implementation and utilization only became prominent with the
Digital Rights Management is a class of technologies used by hardware manufacturers, publishers, etc., to control the
use of digital content and devices after sale.
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October, 2014
network advancements in bandwidth capabilities of the early 2000s. Ever since their actualization,
however, the business of making and selling games has been changing. Through the process of
digital distribution, game content is delivered as purely digital information, which in turns
diminishes the need for manufacture, exchange and sale of physical products. Therefore, this
transformation is steadily sweeping away the traditional brick-and-mortar channels, and instead
delivering products to online-based services and retailers (Okalow, 2012). Due to its huge impact,
the rising digital market was initially believed to pose a threat to the entire industry and its future,
but has since enabled new ideas and technologies to take hold. Ultimately, digital distribution is
now widely accepted as establishing independent revenue streams and opening up the incumbent
market to an upsurge of new creators and consumers (Parker, 2012). In this regard, digital
distribution platforms, independent developers, and the mobile games market play a leading role.
2.2.1
Digital Distribution Platforms
The era of digital distribution initially set off with the PC market going digital more than a decade
ago. In broad strokes, the first majorly influential digital distribution platform Steam surfaced the
market in late 2003 (see appendix 5), delivering an innovative and alternative approach to the
traditional retail structure. The entire idea behind this platform was to turn the PC into a single,
convenient, secure, and personalized online storefront, simply accessible through the download and
installment of a virtual software client. Quickly, this method of selling games managed to gain
momentum, revolutionize and reshape the traditional industry, and keep the PC platform relevant.
With the ability to provide centralized services to purchase and download all kinds of digital content,
many publishers started seeing the potential and profitability of expanding their online capabilities.
Inevitably, many industry incumbents realized three core prospects. First, saving from eliminating
physical retail and the associated costs of goods sold inputs - like manufacturing, shipping,
packaging, wholesaling, returns, bad debt allowances, retail placement and markups fees gets
added to the operating margin. Second, digital distribution enables revenue to be further increased
by monetizing consumers by pushing additional content and incentivizing in-game transactions. Due
to the nonexistent feature of limited shelf space, product life-cycles are also kept indefinite and
extra digital products can be obtainable at virtually no additional cost (Okalow, 2012). Thus, far
surpassing traditional retailers, an excessive amount of content can be offered, making a sell less
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of more strategy viable for digital distribution platforms. This represents the so-called long-tail
concept (see appendix 6), through which one-time customers are potentially turned into repeatpurchase customers, while being kept for as long as possible within the online network (Jelassi,
2008). It should be noted that the long-tail concept also contributes to lessening the relevance of
Dymeks (2010) sixth step of the industry spiral and the mono-sales window of the conventional
structure. Third and last, opposed to the traditional and physically centered industry structure, the
digital component offered users five direct and prominent benefits:
1. No More Physical Media: By purchasing games digitally, the user is not obligated to acquire and stock any
kind of physical media formats. Thus, the user solely relies on a library feature, which stores all games and
content purchased, in one single and convenient platform.
2. Accessibility Anywhere: The availability of purchased games and content is not restricted to any specific
devise or location. Personal library content is available - anytime, anywhere - on the desired setting.
3. Convenient Shopping: The digital characteristics eliminate the necessity for visiting physical or even onlinebased brick-and-mortar stores with known hassles, such as waiting in lines or paying extra shipping costs. In
addition, certain customer outlays in the form of travelling expenses and time expenditures are substituted
with an instant gratification when purchasing new games.
4. Pre-Loading New Games: In order to ensure immediate game access on the official launch date, games are
available for purchase and download days before the actual release. This tackles certain risks connected with
physical and online retailers, such as late deliveries or sold out game copies.
5. Auto Patching: This feature removes the need for consumer maintenance, as it allows new game patches to
download and install automatically.
Increasingly, console manufacturers and many associated publishers are recognizing the digital
potential that the PC industry has explored for years. Microsoft, Sony, and Nintendo have
consistently integrated digital storefronts into the consoles of the current and last generation.
Similar to the digital distribution platforms on PCs, these allow for download of full retail titles,
additional downloadable content, and other entertainment media directly to the home console
and the corporate benefits seem to follow. It is plausible to assume that if this trend continues, then
it could be the leading way to purchase games in the foreseeable future.
Various industry players and observers suggest that the savings a first-party or third-party publisher
can see in transitioning from physical to digital distribution range between 10%-30% of gross margin
(Okalow, 2012). Yet, manufacturers/publishers also face a challenge from the growth of the digital
47
October, 2014
channel, as they are still experiencing a degree of confinement by the traditional industry structure.
According to Okalow (2012) they occupy a delicate middle position where the promise and
benefits of digital distribution are in sight, but their existing dependence on retail obliges them to
focus resources on what appears to be an increasingly outdated model.
Figure 7 depicts the successive operational chain of
digital distribution platforms, and emphasizes how it
is restructured compared to the conventional value
chain. Here (1) the developer collaborates with the
publisher and/or first party to develop an end
product, which is (2) moved into the integrated
digital distribution channel and (3) directly delivered
in a to the consumer. At the same time, publishers
Figure 7: Structure of Digital Distribution
and/or first parties are able to use these platforms

and to promote their products.
2.2.2
Independent Developers
Other than providing benefits to the incumbents of the games industry, the expansion of digital
distribution can be seen as the key conduit for enabling the presence of a new phenomenon, namely
the independent developer. The term independent developer (or indie dev) is commonly used for
characterizing small development teams or even a single person creating non-commercial,
casual, or niche-market games without significant financial support from corporate sources. As it
was made clear in paragraph 2.1.2, developers of the conventional industry structure are universally
unable to stray away from collaborating with publishers. This is mainly due to their lack of financial
support and expertise, required to singlehandedly streamline entire production cycles down the
value chain, and especially with the focus on AAA-titles. With digital distribution, however,
developers are able to bring a final product directly to the consumer, without the interference and
strict gatekeeping from a large number of external intermediates. More importantly, indie devs are
able to significantly cut costs of goods sold, while simultaneously enjoying the benefits of the digital
channels. To give an example of how this dynamic has become integrated into the industry
48
October, 2014
structure, Figure 8 illustrates the modern relationship between independent developers, the
respective digital distribution channels, and the end consumers.
Depending on the financial capabilities of the indie
developer, streamlining a production to the end
consumer commonly occurs through the support of
crowdfunding, or by distributing an already finished
game title through established digital platforms. In
either case, both scenarios are generally definable
as a form of self-publishing, delivered exclusively in
a digital format. In the first scenario, the indie
developer has an
Figure 8: Structure of Independent developers
established concept but lacks
financial resources for producing the game. This

often occurs either when the idea for a game breaks
the path-dependent mentality of the industry giants, or when a developer simply wants creative
freedom, uncompromised by precincts. The solution in this case is therefore to dismiss all
intermediates and seek financial support directly from the consumer. This has become possible
through the establishment of the so-called crowdfunding sites, for which Kickstarter is the most
prominent example (see appendix 7). Here, the game is financed, developed, and distributed
directly to the consumer, leaving the developer with 90% of the revenue, excluding the 10%
administration fee. Utilizing crowdfunding is however entirely restricted to PC and Smartphone
platforms, where accessing consoles or more established digital distribution channels - such as
Steam - implies different principles. As such, the second scenario does not entirely circumvent the
interference of the bigger industry players. In addition to more strict approval processes,
independent developers are facing larger fees and profit cuts when integrating games into the
online channels of consoles or large distribution platforms. Although the pricing structures are
generally secluded under non-disclosure agreements, they are estimated to be around 30%-40% of
the total revenue (Gamedev, 2010). Yet, the clear advantage of the second scenario is the greater
reach and richness provided to the indie developer's titles.
49
2.2.3
October, 2014
The Mobile Games Market
The last mentionable entity driven by the rise of the digital distribution sector and the vast consumer
adaptation of mobile devices is the thriving and innovative mobile games market. In particular, this
focuses on the production and distribution of game applications for Smartphones and tablets, which
are compatible with Android, iOS, or Microsoft operating systems. With a major concentration on
accessibility, simplicity, and availability, these game apps have become an inherent part of the daily
activity of many people. At the same time, seen from both a corporate and independent viewpoint,
the development and distribution of mobile games is an attractive endeavor. On top of the benefit
of being profitable, these games are, currently, much faster, cheaper and less risk-sensitive to
produce. Therefore - as it also will be made clear in the following industry analysis of this paper the contemporary games industry is strongly influenced by the widespread trend and publishing
attention brought forth by the mobile games market.
Dynamically, the mobile games business follows a
fundamental integration, which is similar to that of
digital
distribution
platforms
and
independent
developers. In reality, it can be defined as a

combination of both. As depicted in Figure 9, the value
chain of mobile games production can function either
Figure 9: Structure of the Mobile Market
with or without the integration of a publisher. A

publisher is most often present to leverage a franchised
brand title, while the direct relationship between developer and first-party generally occurs for
independent productions. The first-party, which is commercially represented by the device
manufacturer (e.g. Samsung, Apple) or the operating system holder (e.g. Google, Apple), is always
the attending link between developer and consumer. These distribute content through app stores the mobile equivalent of digital distribution platforms - and retain around 30% of each sale as
transaction fees (Mackenzie, 2012).
50
2.3
October, 2014
Subset
By focusing heavily on revitalizing the console market after the early crash, the industry dynamics
shaped into a determined spiral for consecutive pressure on both innovation and competition. In
turns, this resulted in an industry fragmentation that only offered endurance to the most
commercial, competent, and financially capable incumbents. Consequently, the traditional industry
structure evolved into an ever-growing arms race defined by technology, profitability, and AAAtitles, placing only the most prominent publishers and console manufacturers ahead. Not far behind,
however, the digital component managed to gradually develop and become proficient enough to
insert itself and find a very promising place to enforce a paradigm shift. Therefore, this chapter
emphasized the transformational and modernizing role of digitalization and digital distribution. Not
only has it contributed to a restructuration of the traditional games industry, but it has also allowed
entities to enter and gain momentum through novel configurations. At the end of this chapter, it
should be comprehensible where the games industry originated, how it changed, and in which
general direction it is currently heading. Therefore, it is appropriate to take a step further and look
into a more comprehensive analysis of the games industry.
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October, 2014
Chapter 3.
Industry Analysis
The analysis of the industry is divided into two parts; an overview of consumer spending and an
analysis of the competitive forces based on Porter's Five Forces. The purpose of the overview is to
understand the recent and expected development of the industry, in order to establish the financial
significance of the various segments of the market. The Five Forces analysis, in turn, provides a
formal approach to uncovering the industry structure. This will be done through considering the
predominant factors, pertaining to each competitive force. In accordance with the framework of the
thesis, the traditional market leaders will collectively serve as the incumbent perspective. Ultimately,
the subset will provide a summarization of the significance and intensiveness of the different forces,
and the underlying factors. The established configuration of industry structure will then serve as the
basis for further discussion, regarding sustaining a healthy and profitable industry, as well as
strategic positioning relative to the market segments.
52
3.1
October, 2014
Industry Overview
It has been estimated that by the end of 2013, the total gaming audience surpassed 1,2 billion
people, constituting around 17% of the world population (Spil, 2013). The global market of games
is considered to be comprised of spending on games, including accompanying digital content and
micro transactions, but excluding spending on the hardware. The global worth of the industry has
recently been forecasted to potentially exceed $100 billion by 2017 (Brightman, 2014). A more
conservative estimate, supplied by a 2012 PwC report6, sets the total worth at around $71 billion in
2014, with an likely growth equal to a total worth nearing the $90 billion mark in 2017 (PwC, 2012).
Table 2: Global Games Market by Component; source: PwC, 2012; Forecasted figures are in bold - also please note that
the category 'Wireless' corresponds to the 'Mobile' category referred to in this paper.
Using the PwC report as a primary reference point, it is relevant to consider the games market by
categories7 of games as well as by geographical regions, regarding both recent history and expected
growth or decline. Considering first, the global games market, Table 2 above, taken from before
mentioned PwC report, shows that the industry grew with haste around 2007-2008, with annual
growth rates above 20%. Thereafter, spending has continued to increase, albeit at a significantly
6
7
The more recent PwC reports have been unavailable. See section: Methodology: Data Collection
See section Methodology: Definitions
53
October, 2014
more moderate rate. Growth is however, according to the report, expected to pick up, reaching
annual growth rates near 8% in the coming years.
Looking at individual categories it can be seen that console has been the dominant segment of the
games market. Starting from 2008, spending has however been steadily falling. This is on the other
hand forecasted to change around 2014 when spending should starting increasing again. Since this
category only refers to physical game copies, the primary causes of decreased spending are online
and mobile games (PwC, 2012). Firstly, console games are to an increasing extent being downloaded
through the digital distribution platforms native to the relevant device, for example PlayStation
Network and Xbox Live. Secondly, some consumers may have shifted some of their spending to
games for smartphones or tablets. The forecasted oncoming increase in spending, relates to the
generational shifts of consoles8, with new devices often leading to newfound interest into the
market segment (PwC, 2012). As mentioned before, physical console games are considered to be
the "conventional" format, in unison with physical PC games. Since PC games are predominantly
digitally distributed, the physical segment is, far smaller than its console counterpart, but is also
expected to continue deteriorating. The primary driver is of course again the shift towards online
and mobile games, while the new console generations also have an impact (PwC, 2012). Lastly, it is
worth mentioning piracy also, as a potential cause of decreased spending on PC games (PwC, 2012).
The impact of this is, as will be mentioned further on, debatable, however, all things equal, it will be
more noticeable on PC. This is due to the process of pirating being much more complicated for
console games, both on the end of the person copying the game, as well as the end-user.
Moving on to online games, the table shows a quite substantial increase in spending over the past
years, corresponding to the forecast of further increases towards 2016 and a expected compound
annual growth rate of 13,3 %. Bearing in mind the descriptions given in the methodology chapter,
online games, both in the context of this thesis, as well as the used report, include any game that is
distributed digitally, primarily digital console and PC games, but also browser-based games and
those integrated in social networks, however excluding games on mobile devices, which have a
separate category. The known and expected increases in online game spending are to a high degree
At the time the report was published, the consoles of the most recent generation were not yet released. This
happened in the fall of 2013, thus supporting the forecast.
54
October, 2014
driven by broadband penetration (PwC, 2012). Lastly, of the game types contained within the wider
denomination of online games, casual browser-based and social networking games are expanding
the target market base, drawing in consumers who are new to gaming altogether, yet attracted due
to the wide integration of games into the everyday internet experience (PwC, 2012). It is however
primarily the trend of console and PC games, increasingly being purchased in digital form, which
explains that online games are likely to become the dominant segment of the market soon.
The last segment of the games market is mobile, which is denoted "wireless" in the PwC report 9.
Spending on mobile games has had similar development as online games, though from a lower
starting point, and with a slightly lower annual growth rate. Similarly, looking at the forecast, the
compound annual growth rate is expected to be around 10,1% for the period 2012-2016. This
forecast is again relatively conservative, while a more recent estimate is that the segment could
grow at a compound annual rate of over 20%, accounting for around 60% of total game spending in
2017 (Brightman, 2014), as opposed to the "mere" 18% in 2016 forecasted by the PwC report (PwC,
2012). This information, both underlines the massive significance generally attributed to the mobile
segment of the games market, in the industry contemporarily, as well as the issue of uncertainty
towards how it will in actuality grow. The primary driver of growth is the fact that smartphones and
tablets, are becoming widespread among all layers of social classes and age groups, casual gamers,
who are newly introduced to gaming through said devices (PwC, 2012).
Table 3: Global Games Market by Region; source: PwC, 2012; Please note that this table deviates from the previous
one by including advertising spending.
The description for 'wireless' in the report, corresponds to the definition of 'mobile' in this paper (PwC, 2012)
55
October, 2014
Considering next the overall games market by regions, it can be seen in Table 3 above that the North
American and European markets have seen a similar development in total game revenues, and are
thus expected to further grow at largely the same rate. Overall the European market is slightly
bigger, has had less years of decreases, and is also forecasted to grow at compound annual rate
which is 0,5 percentage points higher than the NA market. The similarities between the two markets
can of course largely be attributed to the fact that they are found in similarly high-developed regions
(HDR, 2013). It should be noted that the EMEA region, seen in the table, actually also includes the
Middle East and Africa, however these latter two markets combined make up less than 1% of the
total EMEA market (PwC, 2012). The arguably most interesting market however is Asia Pacific,
which, as can be seen, is forecasted a 10,3% compound annual growth rate. This region is largely
driven by the countries Japan, China and South Korea (PwC, 2012). This corresponds to the notion
that the latter two countries, in particular, hold advantage over western markets due to not having
a legacy of console dominance, meaning that consumers have been quick to embrace online and
mobile gaming (Williams, 2013). In fact, corresponding to the notion that online and mobile will
drive growth of the industry, similarly Asia is expected to play a key role in this regard (Brightman,
2014). Interestingly even the console game segment has seen decent growth in this region in recent
years, which is expected to continue (PwC, 2012). As such, Asia is the most significant reference of
likely increased efforts at internationalization, for the now multi-national traditional market leaders.
3.2
Competitive Forces Analysis
Even though modern game types are expected to drive the growth of the industry, it is worth noting
that market growth does not automatically equal an attractive industry (Porter, 2008). It may
mitigate direct rivalry due to the fact the "pie" of market share becomes bigger, however the
industry may still be subject to pressure from one or more of the other four competitive forces, as
stipulated in the Five Forces Framework by Porter (2008). Companies should seek to keep economic
value amongst the incumbent companies of the industry, instead of it being bargained away by
customers and suppliers, or constrained by potential new entrants and substitute products. The
industry structure, which is the configuration of the intensiveness of the various forces, is thus
essentially an expression of the health and sustainability of the industry. It is in the interest of the
incumbents to retain the economic value in the industry, thereby securing the potential for long-
56
October, 2014
run profitability. In other words, the overall sustainability of the industry is an equally, if not more,
important strategic concern for decision makers, as the individual profitability of their respective
companies (Porter, 2008).
3.2.1
Threat of New Entrants
The first competitive force is the threat of new entrants. Incumbents will be forced to lower prices
and/or make short-term investments, as a way of defending their market position, if they have
reason to suspect that new entrants may come to the market, with an intention to wrestle market
share from the incumbents (Porter, 2008). The intensiveness of this competitive force is an inverse
relationship of barriers of entry. These are formed by advantages that the incumbents hold, which,
in varying degree, complicate the possibility of new entrants to compete on the market.
It is appropriate to start, by considering barriers of entry relevant regarding marketing one of the
primary responsibilities of a publisher. In terms of marketing communications, games are advertised
in many different ways, both online and offline10. The incumbents have an advantage in having the
necessary capital required for an expansive marketing campaign including advertising of the various
sorts. Global offline advertising is expensive, but can expose the games to those consumers, who do
not frequent websites or digital distribution platforms. Global presence and reach signifies
economies of scale, since the fixed costs, e.g. labor, of the marketing campaign, are spread over a
larger audience, resulting in cost advantage (Porter, 2008). In the online sphere, virtual in-store
advertising is essential. Digital distribution platforms can have thousands of games, (Kohler, 2013),
making it all the more of a challenge to attract and maintain an audience for a game. In this regard,
curation by the distribution platform holders is essential, since they will have an interest in
promoting games that are expected to be successful, rather than something by an unknown new
entrant. One definite and common way to get good virtual in-store advertising is to have a sale. The
trend of frequent and substantial sales is known on distribution platforms of all game categories,
but is best exemplified by the previously mentioned Steam platform, recently releasing the
possibility for developers and publishers to set their own sales, whenever they please (Handrahan,
2014). The purpose of sales are of course to maximize contribution, under the expectation that the
10
Advertising through "traditional" channels; e.g. TV, Radio, Billboards, etc.
57
October, 2014
decrease in price will increase units sold. Since the only variable cost of digital distribution is a
commission percentage to the operator of the platform, there is strong motivation to drastically
lower prices for the sake of increase output. It should be noted that the long-term impact of price
competition is ambiguous, and will thus be discussed later. In the short-term perspective however,
sales signify an incumbency advantage, since it is manageable for an established incumbent, to
forego profit, for the sake of retaining market share. Conversely, for a recent startup, it is essential
to turn a profit. This signifies an example of an expected retaliatory measure (Porter, 2008), that
incumbents can, and have, used to defend market share.
Brand equity is generally strengthened by advertising, and signifies another incumbency advantage.
The particular benefits of brand equity will be considered later11, however in the context of cost
advantage, the relationship between brand equity and advertising is somewhat cyclical, in the sense
that the former decreases the necessity of the latter, effectively making marketing relatively
cheaper. This is of course due to the fact that brand loyalty facilitates the network effect, where the
consumers' inclination towards a particular brand, entices others to choose it as well (Porter, 2008).
It is also worth mentioning the corporate structures of the incumbent traditional market leaders,
which is one of their primary characteristics. These companies grew through acquisitions of popular
minor studios, which led to their current multi-divisional and multi-national structures. Firstly,
having a portfolio of studios, and associated developers, with past successes, perhaps even from
different local markets, facilitates improved, and global, brand equity. Conversely, it is also possible
to inadvertently cause the value of brands to diminish, if the corporation has a noticeably negative
impact on the acquired studio. Another advantage however, is that multiple development studios,
equal more simultaneously game development projects. More games developed, in turn leads to
economies of scale, since the fixed costs of the corporation are spread over more output. A primary
example of a fixed cost of the corporation is of course labor. In light of their capital and history of
incumbency, the traditional market leaders employ experienced executives, managers, marketers
and of course, developers, which in themselves entail an incumbency advantage.
11
See section 4.2.1 Brand Equity
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October, 2014
Moving on, it is of course also relevant to consider barriers of entry, which are more closely
associated with the actual development and distribution. Firstly, in regards to developing games for
console specifically, a substantial capital requirement is in effect, since third party developers have
to pay a licensing fee to the console manufacturer (Cohen, 2010). Licensing consists of several
element; such as the initial investment into development and tests kits, which are essential for the
game creation process, as well as the assembly of physical boxed game copies, to which the console
manufacturers have the exclusive right (Mazel, 2009). Deselecting a specific console or the platform
group altogether, brings about the barrier of customer switching costs. Switching between consoles,
or to/from PC, entails an investment for the consumer. Applying the same consideration to mobile
devices, customer switching costs are perhaps slightly lower, due to the increasing popularity of
gaming-enabled smart-phone and tablets, which it is fair to assume are prevalently purchased for
the sake of needs, other than playing games.
In the case of both console manufacturers, and the operators of mobile game platforms, it is
relevant to take note of the trend of independent development, which both supplier groups have
shown interest in supporting (Martin, 2013). It is in their interest to have their service represent a
diverse offering of games, with the intention of competitive strength in their respective market
segments. This has led to the existence of independent developer programs, providing developers
with software development kits and access to digital distribution channels. The only real barrier of
entry in such cases is that said programs usually have a registration fee. These are however marginal
compared to traditional licenses. It is worth noting that PC distribution platforms have adopted
similar processes, where even without the presence of licenses or SDK's, they require upfront fees
from independent developers, with the sole purpose being to regulate the amount and credibility
of new games on the platform (Cifaldi, 2014). Digital distribution in general, has had a mitigating
effect on entry barriers, seen through its advantages specified in the prior chapter. Though it is also
highly attractive for incumbents, e.g. decreasing holding costs, it has been particularly significant for
new, small or independent, entrants, facilitating the circumvention of the capital requirements, and
economies-of-scale-driven cost benefits, associated with the conventional value chain.
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October, 2014
In relation to the process of development, it is important to consider the software resources used,
e.g. game engines12. Building an engine from scratch can be costly and complex, meaning that
developers will often purchase partial or full engines, to use as a basis (Ward, 2008). The traditional
market leaders have both the capabilities and resources to create their own engines, subsequently
using them for multiple projects, across divisions, thus gaining economies of scale enabled cost
advantage. Development of conventional games, has, as mentioned before, seen a trend of
increasing overall production budgets. The capital advantage of the traditional market leaders,
facilitate this budgets, within which labor is a primary element. Conversely the modern game types,
i.e. casual/social, mobile, and independent games of either game category, have been associated
with low budgets, small teams, and simplicity in both the development process and the end-result.
This however does not necessarily mean that the incumbency advantages of the traditional market
leaders are irrelevant in regards to these game categories, however it might signify the potential of
shaping their further evolution and role in the game industry. While a large production budget of
course does not automatically equal a successful or quality game, it never the less signifies an
incumbency advantage through technically facilitating near-constraint-less projects.
3.2.2
Power of Suppliers
The next competitive force is supplier bargaining power. Suppliers can capture value from the
industry by increasing their prices, cutting their costs by diminishing the quality of what they supply,
or otherwise negotiate a better position (Porter, 2008). Either way, the costs of incumbents in the
games market will increase, if production is sought to be kept unchanged. When considering the
bargaining power of suppliers it is necessary to distinguish between different groups13.
Firstly, it is relevant to mention console manufacturers and mobile distribution platform operators.
These two supplier groups share the characteristic of supplying both software development kits, as
well as the service of distribution channel access. Another similarity is found in market
concentration. In mobile platform operators, there are a handful of alternatives, of which the two
dominant, Google and Apple, combined controlled more than 90% of the market in 2013 (IDC,
12
The software basis of a game. Related to tasks incl., but not limited to: rendering and physics. (Ward, 2008).
Game development and publishing entail several suppliers, which lack transparency or are irrelevant in the context
of this paper. Therefore only the most important, industry-specific, supplier groups are assessed.
13
60
October, 2014
2013). In terms of consoles, Sony, Microsoft and Nintendo account for the full 100% of the market
(VGChartz, 2014). In the case of either supplier group, these market concentrations increase their
power relative to incumbents in game development and publishing (Porter, 2008). A related
consideration is that while it is possibly to refocus both development and publishing towards other
game categories, to circumvent power of a specific supplier group, doing so entails considerable
switching costs, since certain consumer segments are lost. In terms of differentiation, consoles
distinguish themselves, through their network services and exclusive game titles, thus strengthening
their power. Consoles may differ in hardware capabilities, though in recent years this has been
marginal difference. With the newest generation, it has been claimed consoles are less complex,
and more alike, to develop for (NowGamer, 2013). Mobile operating systems, on the other hand,
are more natively similar, exemplified by the possibility of cross-platform app connectivity.
Looking at games played on PC, digital platforms are independent of the hardware used to play
games on, and thus are focused on providing distribution channel access. An important factor
pertaining to PC game distribution is that physical and digital forms are separate considerations, as
opposed to mobile where boxed games are irrelevant, and consoles, where the bargaining power
of the device manufacturers, is essentially unavoidable. This theoretically lessens the bargaining
power of digital platforms on PC, since physical distribution is a potential substitute (Porter, 2008),
though in practice, the switching- and opportunity costs associated with deselecting the digital
sphere are of course immense. Regarding PC game development, the most obvious supplier group
is made up of manufacturers of hardware components that facilitate gaming, such as graphic
processing units. Market concentration is high, in regards to this supplier group (JPR, 2014), but in
respect to game publishers, this supplier group does not have any control or licensing claims, over
games, making their power substantially lower than for example console manufacturers.
Being a creative industry the most important resource in game development is of course labor,
signifying the supplier group of game developers. Firstly, developers are a less concentrated group
than the incumbents of the industry. On the other hand, developers actually do not exclusively rely
on the gaming industry. Depending on the specific specialization of a particular developer, that
individual may have relevant skills for other creative entertainment industries such as film or music,
or even programming within the industry for non-entertainment software. Furthermore, a
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October, 2014
developer who has functioned as a producer, or with similar management responsibility, has
relevant experience for project manager positions. Conversely, there is no real substitute for
experienced game developers. Changing suppliers, in this regard, would be if a developer decides
to resign, or is fired. The consequent switching costs cannot be generalized, however there have
been examples of game development projects, and even studios, falling apart due to the departure
of a single key personality (Sarkar, 2013). Since human resources are what drive the creative
processes, the absence of just one developer, even if replaced by another, will result in a different
product, as opposed to industries where processes are standardized. Each developer has a distinct
package of skills and experience, and it may be difficult to predict how these competencies will
manifest themselves in the end result. However, if that developer's past successes correlate with
the desired profile for a new game development project, the bargaining power of said developer is
stronger. Lastly, it is interesting to mention that forward integration of the supplier group is enabled
by independent development, most significantly that which is funded through crowdfunding.
3.2.3
Power of Buyers
Moving on to the bargaining power of buyers, their significance is that they can put pressure on the
price level of games, or demand higher quality and service in games, with both scenarios increasing
costs and diminishing short-term profitability for the incumbent companies (Porter, 2008).
Firstly, there are intermediate retailers, who in turn can be divided into specialized gaming stores
and non-specialized gaming stores such as big-box retailers. A shared characteristic, which has had
considerable significance for their bargaining power, is that they can affect consumer behavior
downstream, by choosing to refrain from stocking games certain games (Martin, 2006). This has
however been mitigated a great deal, as a result of the emergence of digital distribution, which
effectively circumvents the need for retailers. To compete with digital distribution benefits, such as
speed and availability, it has become troublesome for retailers to effectuate their power against
publishers. Nevertheless, their presence is still needed, seen for example from the persisting
dominant role of boxed console games, as per the industry overview.
In terms of structural bargaining power, the market of retailers is fairly consolidated, and volumes
bought are high. It is, however, fair to assume that big-box retailers purchase the largest volumes,
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October, 2014
giving them an edge in terms of bargaining power (Porter, 2008). Since games are not standardized
products, if a specialized store attempts to effectuate its bargaining power by not stocking a
particular game, and if consumers demand that game, the trust towards the store is diminished.
Conversely, at a big-box retailer, it is more common to not find certain titles, in light of them not
exclusively selling games. In addition to this big-box retailers, can offer substantial discounts on
games, enabled by their high volumes purchased, in order to lure consumers to their other products,
and maximize overall contributions. Price sensitivity is also higher for specialized gaming stores,
since they nearly exclusively sell games and associated devices. For big-box retailers on the other
hand, game purchases are only a minor part of their total cost structure. Specialized gaming stores
have seen a decrease in popularity, and are thus being pressured, as a result of both digital
distribution and big-box retailers disrupting their business (Handrahan, 2012).
The other primary group is of course the end-users, the actual gamers, who can also be segmented
into distinct groups, for example based on disposable income, game preferences and affiliation with
the gaming community (Porter, 2008). The total end-user group is of course international and very
large, especially in the online market, with individuals purchasing in relatively small volumes.
However, factors like industry transparency and access to information, enabled by the internet,
facilitate informed decisions, which increases bargaining power quite substantially (Grant, 2010).
Gaming journalism and communities are important in this regard. Information prior to release relies
on the marketing of the game, while professional and amateur reviews help the decision
subsequently. It has also become common that developers and publishers empower consumers, by
collecting feedback in tests of the unfinished game, and after its release. If used properly, this can
drive enhancement of the quality of the game, and in fact help in gaining and retaining an audience.
The empowering of users in this way, has even been manifested in new funding methods and
business models, such as crowdfunding or early access models, where the amount of
backers/buyers directly determine if the project is undertaken or not, and which features are
implemented (Williams 2, 2013).
Bargaining power based on price sensitivity, is on the other hand, a direct cause for pressure on
prices. An increase in disposable income, naturally leads to a decrease in price sensitivity. Another,
more industry-specific, aspect is the level of involvement in gaming. Consumers, who highly
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anticipate the release of a specific game, may be less inclined to patiently await a discount. At the
same time, however, for the enthusiastic consumer, spending on games will likely constitute a
substantial part of a personal entertainment budget, thus increasing price sensitivity (Porter, 2008).
Aspects of games can also induce or mitigate price sensitivity. For example, regarding multiplayer
gaming, the trend is usually that activity will be very high in the time immediately after the release
of a game, and thereafter fall progressively over time (Cook, 2014). Since activity and number of
participants add value to multiplayer gaming, consumers seeking this type of gaming have reason
to be less price sensitive about retail release prices.
3.2.4
Threat of Substitutes
The next competitive force is the threat of substitutes. Substitutes are defined as performing similar
or identical functions, by different means (Porter, 2008). Their significance is that they can set a loft
on the prices, and thus profitability, of the incumbents' products. If the function is largely the same,
the consumer will choose the product that is cheapest, which is why it can be necessary to
counteract substitutes with price cuts, in turn leading to price competition.
Under the assumption that the core function of games is to be entertained, the primary substitute
to gaming is of course other types of entertainment. This makes it a highly subjective matter to
assess substitutes. The most obvious however, is arguably watching movies, since similarly to
games, it is an activity which can take place in front of a computer, in front of a television, or even
on a mobile device, alone or with friends and family. The significance of this is quite straightforward:
if consumers are more inclined to watch movies in their spare time, instead of playing games,
profitability for game companies suffers. For this to happen however, switching to the substitute
has to leaves the consumer with more relative value (Porter, 2008). This of course entails many
variables, such as the length of the game or movie, or when in the life cycle of the product it was
purchased, yet fundamentally the threat of substitution is present, and a relevant concern.
Furthermore switching from gaming to watching movies entails very little switching costs, if any at
all, since more or less all devices on which it is possible to play games, also have the ability to play
movies. A recent trend is the emergence of streaming services, where movies are made available to
watch freely, for a set low monthly price, often available on all of the above-mentioned devices. As
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a counterpoint, the gaming industry is also expected to be subjected to a similar trend, made
possible by cloud-gaming14 (Brightman, 2013). However, this has not yet been truly popularized.
Another potential substitute, which is noteworthy to mention, is piracy. Arguably piracy signifies a
different "distribution channel" rather than a different product. However the consequence of piracy
is, at least conceptually, a direct loss of value for the entirety of the defined industry, as is the case
with substitute products. The attractiveness of piracy, for consumers, should be evident, since the
games are free. This is however offset by various levels of complexity in downloading and installing
pirated games, as well as any subsequent errors or missing content, caused by the obvious lack of
developer-support of illegal copies. The exact extent and significance of piracy on the profitability
of the gaming industry, has however been debate for several years. Some developers claim that
piracy rates are as high as 95% while other studies show that it is as low as 8-10% (Shahid, 2014).
The fact is that it is extremely hard to measure how much piracy is going on, but more importantly,
it is almost impossible to measure the significance of this piracy on profitability. For example, a
measure of piracy rates does not tell anything about how many of the consumers, who pirated a
game, went ahead and purchased it afterwards. This is a relevant consideration since players can
use piracy as a form of testing, to make an informed decision of buying or not. Furthermore, each
time a potential consumer pirates a game, and subsequently decides not to buy it, it is not
necessarily a lost sale, seeing as that particular player might not even have cared about the game,
if it had not been possible to test it beforehand. Lastly, it is worth mentioning that examples have
shown that overly focusing on combating piracy, through extensive DRM, complicates and hurts the
experience of law-abiding customers (Martin, 2011).
3.2.5
Complements and Strategic Partnerships
This force is based on, strategic partnerships, and related existence of products and services that
are complementary in nature, to those of the industry. Such complements inherently increase the
value of the products and services of the industry (Grant, 2010). However, their presence might also
influence some of the other competitive forces, potentially having either an enhancing or
detrimental effect on long-term profitability (Porter, 2008). The strategic partnerships, in
14
Gaming through streamed services. Performance thus depends on internet strength, instead of hardware.
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themselves, are similarly ambivalent, and their presence alone, is not sufficient in concluding the
intensity of the force. The balance of power between the two parties of a partnership, determines
who gets to reap the added value, associated with complementary products (Grant, 2008).
The primary example of a complementary product to games is of course gaming-enabled devices.
Consequently the most prevalent, example of a related strategic partnership is that between, on
one side, a developer or publisher, and on the other side, the manufacturer of a console. Beyond
the already covered core supplier relationship, strategic partnerships, centered on console games,
primarily relate to the concept of device-exclusivity, where features, distinct content, or an entire
game, may be exclusively available on a particular console. Obviously for consumers who own said
console, the partnership leads to an enhancement of value, however this is does not necessarily
entail a gain for the game's developer or publisher. Focusing on a specific console runs the risk of
losing loyalty among owners of other consoles. The console manufacturer on the other hand
benefits from attracting consumers to its system. In other words, for console manufacturers these
partnerships signify differentiation, while for the developers and publishers it is a narrowing of
scope, thus setting the balance of power in favor of the console manufacturers. The benefit for
developers and publishers however, can be found in the promotion of the game, since it is in the
interest of the console manufacturer to push the product in the virtual market place, making it
potentially easier to attract an audience. In this way, the partnership also entails an increase in
barriers of entry.
While strategic partnerships also exist in regards to PC games, the implications are not the same.
The common example is that a manufacturer of hardware components and a game developer or
publishers, will have a mutual agreement of endorsing the others product, in cases when a given
games is optimized using the given hardware. Therefore, the power balance is more equal, however,
the gained value is also less, seeing as said endorsements, traditionally, are not substantiated by
any features of exclusivity. In regards to mobile games, on the other hand, strategic partnerships
have been prevalent in similar form as on consoles. However, with the market concentration of
mobile operating systems, of recent years, this is no longer the case, with the concept of exclusivity
relying on the developers inclination to obtaining the right to create games for specific devices.
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Lastly, an interesting consideration is that there have been example of mobile games being
functionally complementary to conventional games. Since this implies a multiple-platform focus, it
is specifically relevant regarding the traditional market leaders. The complementary relation exists
when the gameplay of a mobile game is centered on somehow affecting a core conventional game,
beyond just sharing an IP. A simplified example could be that playing a mobile game, could earn you
virtual currency, which can be spent in the core game. The notion of games being complementary
to each other in this way, of course signifies a substantial potential for added value and profitability,
related to a wide presence in the games markets. In this context, strategic partnerships centered on
external development, would also be a relevant in supporting in-house development, since the
bargaining power would remain with the publisher of the core game.
3.2.6
Rivalry among Incumbents
The last competitive force is the rivalry among existing competitors. High rivalry confines
profitability of an industry, because it enables those outside of the industry, to soak up economic
value lost in the competition. Rivalry depends on the basis on which incumbents compete, as well
as the intensity with which they compete (Porter, 2008).
Looking at intensity first, the initial relevant consideration is that the traditional market leaders,
inherent to their definition, are more or less of similar size, scope and market capitalization,
intensifying their internal rivalry (Porter, 2008). Furthermore, in expanding the perspective to the
entirety of the industry, the before mentioned low entry barriers in regards to modern game types,
have already resulted in a vast amount of players, who partake in the competition for market share.
This is only exacerbated by the global nature of the industry, with digital distribution in particular
breaking down borders. Commitment of incumbents to their business, and the industry as a whole,
can also intensify rivalry (Porter, 2008). However actual intent is immeasurable and companies such
as the traditional market leaders will likely never admit to anything else than an aspiration to sustain
the core values that drive creative passion for gaming. It should be fair to assume that this also
applies to smaller companies, and especially independent developers, where games are passionprojects more than anything else. The intensity of rivalry is however also in a couple of ways
mitigated in the games industry (Porter, 2008). Firstly, the avertable entry barriers of the industry
conversely signify low exit barriers. Secondly, assets relevant to game development and publishing
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are not specialized to an extent, which would make them unusable in other contexts, e.g. the before
mentioned versatility of developers. The last important factor is of course that, as seen in the
spending overview, the games industry is growing relatively fast and steadily, which expands the
market, thus supporting market share and profitability for more competitors (Porter, 2008).
Next the basis for rivalry should be considered, to which it is relevant to start with the dimension of
price competition, due to its significance for profitability (Porter, 2008). The first factor, which
determines the liability of price competition, is the relation between fixed costs and marginal costs,
(Porter, 2008). Considering a given game project separately, all development costs are essentially
fixed, since they are irrespective of the amount of copies sold. This creates an inherent incentive for
incumbents to cut prices, even below average costs, to maximize contribution to fixed costs or,
additionally, to defend market share in retaliation towards new entrants. In the latter case,
incumbents may even choose to forego profits, and cut prices under marginal cost. In the case of
digital distribution, not even traditional distributive variable costs are incurred15. Instead, the
platform holder receives a sales percentage. This means that marginal cost will rely on the price, in
turn making marginal profit constantly positive. Due to the long tail concept, with inventories being
virtually endless in digital distribution, once a game's sales dwindle, incumbents have reason to try
luring in customers for incremental revenue, contributing to fixed costs, at effectively any price.
Another factor is the degree of standardization in games. As mentioned before games are not
standardized. They can however have a lack of distinction, which can be a contributing factor to
price competition. In conventional games, this is most often seen with competing AAA titles within
a given genre, which in seeking mass-appeal, end up with similarly narrow value propositions.
Within the independent development scene, on the other hand, there have been occurrences,
where the formulas of successful games have been copied to create several games that are nearly
identical. This is a consequence of the low entry barriers and subsequent oversaturation of the
market, and has been most pronounced in mobile games.
Lastly, a factor regarding price competition is whether the product is perishable, or not (Porter,
2008). Games that are primarily single-player, are perishable in the sense that they can become
15
Disregarding marketing costs.
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outdated in terms of gameplay features or graphics, or simply loose attention when a competing
publisher releases a similar game. On the other hand, if a game is truly good some might consider it
timeless, not to mention the trend of "retro gaming" which signifies a deliberate demand for classic
games. Games which to a large extent, or fully, rely on multi-player gaming, are arguably more
obviously perishable since consumers gain value from the amount of people playing. With the
exception of few games, which manage to hold a large but stable player base, most games will peak
in participation soon after launch, thereafter decreasing.
The reason for price competition being highly detrimental to profitability is that there is a direct
transfer of cash from the industry to the consumers. Since price cuts are easily noticeable by
competitors, a spiraling effect can potentially happen (Porter, 2008). Furthermore, the trend of price
competition can have the drawback of training the customer base to be more disregarding of
product features, services, and brands, which are some of the other dimensions on which
competition can exist. These do not have the same direct negative impact on profitability as price
competition. Seeking to enhance value propositions through these dimensions, can lower the threat
of substitutes, and furthermore, incentivizes long-term investment, such as R&D, which raises
barriers of entry (Porter, 2008). In terms of industry profitability it is also essential to consider
differentiation and customer segmentation as a source of mitigating detrimental rivalry.
Competition on a narrow basis signifies zero-sum competition where the success of one game, leads
to the failure of another. Conversely, it can be said that the paradigm shifts of the industry, have led
to an expansion of the market. Thus, the diversity found in the overall games industry, can be said
to be a driver of positive sum competition, and in turn sustainability of average industry profitability.
3.3
Subset
Having touched upon the competitive forces, it is now pertinent to sum up on the relative intensity
of each, and consider which of, and how, the different elements configuring the industry structure,
should impact future strategy of the incumbent traditional market leaders.
Looking at the threat of new entrants first, it is in particular relevant to consider those whose
potential entry is facilitated by the paradigm shifts of the industry, i.e. developers of modern game
types, and independent developers in general. The threat of entry from these types of entrants has
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become highly intensive, due to factors such as digital distribution and independent developer
programs. The most obvious mitigation comes from marketing, which should seek to discourage
new entrants, by shaping the process of gaining a game audience, to be capital intensive. In general,
however it should show, that the lack of incumbency advantages based on asset intensity,
associated with initiating game projects, is telling of the fact that game development, at its core,
requires relatively little. Of course capital requirements increase with the scope of the project,
however this is mostly relevant in regards to AAA games, to which it should be evident that the
existing incumbency advantages apply to a higher degree. A related problem with capital
requirements is that technically possible for a large company, from another industry, to diversify,
and enter game development and/or publishing, on a grand scale and scope, by leveraging its
resources. Combined these consideration signify that the overall threat of new entrants is quite
intensive. Beyond driving down profitability from deterring new entrants, low entry barriers of
course also ultimately lead to more competitors and rivalry. It follows that it is paramount for the
traditional market leaders to seek mitigation of this force, which can be done by focusing on
incumbency advantages that are hard to copy, and/or unrecoverable expenses, such as marketing,
R&D, brand equity and a multi-divisional corporate structure.
Moving on to the summarizing the considerations pertaining to the power of suppliers, it is firstly
relevant to mention the digital distribution operators. As the analysis has shown, their bargaining
power is quite high, with the lack of alternatives, within either game category, being the primary
factor. Refocusing to other game categories, will only result in being faced with another supplier, of
similar power, or switching- and opportunity costs that outweigh the benefits. Ultimately, digital
distribution is an example of a supplied service, which, originating in the industry paradigm shifts
has thoroughly, embedded itself into the supply chain. In other words, there is not much to be done
in terms of shaping this particular competitive force, from the perspective of the traditional market
leaders. A similar conclusion can be reached in regards to the suppliers of hardware, both console
manufactures and those relevant to PC components. Their bargaining power is high, albeit driven
by lack of alternatives and their fundamental integration in the supply chain. In terms of the last
considered supplier group, that of developers, their bargaining power was also found to be high.
While specifications used in hiring labor could be standardized, this would be highly
counterproductive to the nature of the industry as being creativity-driven, and differentiation in the
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games market, which, as should be evident by now, are key points in regards to the value
propositions of games.
Next, the power of buyers was firstly analyzed in respect to intermediate retailers, whose bargaining
leverage is relatively moderate, having been diminished substantially by the emergence of digital
distribution. The conventional supply chain is however still significant, especially regarding console
games, yet the bargaining power of the retailers is, as the analysis indicated, overshadowed by the
internal rivalry between specialized and big-box retailers. The latter are in terms of competitive
position and structural bargaining power, the strongest, yet at the same time the least price
sensitive, and thus the least likely to effectuate said power against publishers, which is an ideal
situation for the traditional market leaders. The other buyer group consists of the end-users, where
available information point to a high bargaining power. However, in terms of price sensitivity, and
inclination towards effectuating power, individuals are quite varied, e.g. based on social
stratification. It is worth noting that end-user bargaining power is not inherently bad, since the
notion of having impact, incentivizes an active role in giving feedback on games, which can aid
developers and publishers in enhancing their value propositions. Thinking of the theoretical
consequences of bargaining power - forcing down prices and demanding better quality - as it will be
discussed further on, price competition in the industry trains consumers to focus on the former,
while it could be argued that the latter is not even detrimental. Though it might hurt profitability in
the short run, being pressured on quality, it can have a positive effect in the long run, for example
through impacting brand equity.
Regarding the threat of substitutes, while the intensity of this force is relatively high, it should
nevertheless be evident from the examples used, that its significance in the broad picture is fairly
low. In terms of piracy, the varying accounts of its impact, leaves reason to question its significance.
Since trying to counter it through DRM can, as mentioned, have negative consequences, the most
pertinent consideration is instead to try and improve on the value proposition associated with a
legally obtained game, for example through features, which incentivize customer-to-customer
interaction through a publisher-held network. In terms of movies, and other entertainment media
even more so, the low significance is substantiated by the consideration that the differing
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characteristics of the products make it questionable whether or not they are in fact substitutes.
Under the notion that they are, however, seeking to enhance consumer value is the best approach.
The intensity of the force of complements and strategic partnerships is as mentioned a complex
matter. However, the considerations pertaining to the analysis, point to strategic partnerships with
device manufacturers having relatively slight value for developers and publishers. Instead, it is
mentioned that a complementary relation can in fact be reached within the confines of the games
market, between games, facilitated by synergies across divisions, and potentially strategic
partnerships with other developers.
Lastly summing up on rivalry among incumbents, structural intensity is quite high, however this is
mitigated somewhat by the growth of the industry. The competition that does exist, is however of
great significance. This primarily relates to the fact that the analysis showed a considerable
structural basis for price competition in the industry. Due to its theoretical significance for long-term
profitability, price competition is one of the major points of the coming discussion, where its
concrete impact on the industry's sustainability will be considered. Lastly the analysis, states that
the paradigm shifts of the industry, have facilitated a diverse market of games, which induces
positive sum competition. In terms of competitive forces, it is however also essential to consider
the potential of change. In this regard, there is an ongoing debate on how, especially mobile games,
will develop, both in terms of attributes and significance. This begs the question of whether or not,
the lines between game categories could become blurred to an extent, which would induce a higher
degree of competition on similar dimensions, leading to zero-sum competition, and a long-term
deterioration of industry profitability.
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Chapter 4.
Investment Prioritization
Having completed the analysis on the competitive forces, it is next relevant to assess the investment
potential of conventional and mobile games separately. Building on the foundation, obtained from
uncovering the industry structure, it is possible to prioritize the two segments of the games market,
which in turn will aid in the formulation of a concrete recommendation, further on. The findings of
this analysis should give a good idea of how it is most pertinent to allocate resources, regarding the
different focuses, in order to maintain and enhance a wide presence in the market for games.
This analysis will focus on the potential for investment into mobile gaming, as an alternative to
conventional games. This is done due to two key reasons. Firstly, there is the massive significance
currently being attributed to mobile, as a driver for the future growth of the industry, for example
seen by the before mentioned expectation of certain experts, that mobile game revenues could
account for up to 50% of the total value of gaming within a few years. Secondly, the findings of the
assessment of investment potential of mobile, will also to a large extent be similarly relevant, when
discussing the challenges posed by increased popularity of both independent games in general, as
well as casual/social games. This is due to the fact that currently there is little distinction in scope,
complexity and budgets between browser-based casual/social game- and mobile gamedevelopment projects.
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Industry Attractiveness
An essential factor in determining the future prospects of a business unit is the attractiveness of the
industry in which it competes, in other words; the potential for long-run profitability of the average
incumbent (McKinsey, 2008). The structural foundation for profitability has been established
through the competitive forces analysis. It is however relevant to reiterate a few points of the
industry overview, in supporting an overall outlook on industry attractive. First and foremost, in
reference to section 3.1, it was found that the overall market it expected to continue growing a
steady rate, which, creates a foundation for positive sum competition and good average
profitability. The most important observations however come from the outlook of spending by game
categories. In reference to Table 2, the following is especially significant:
Spending on boxed console games is expected to grow more than PC games are expected to
decrease, leading to a forecasted slim net growth of physically distributed conventional games.
It is important to bear in mind that the online games segment includes the digital versions of
console and PC games, meaning that conventional games overall is expected to remain the
dominant game type, signifying its importance.
Mobile game spending is expected to grow at a high rate, which is assumed to be supported by
an expansion/broadening of the target market base.
The future significance of mobile games, is however uncertain; e.g. the notion that the segment may
soon rise to become dominant, is inconsistent with the more conservative forecast of PwC (see
section 3.1). The fact of the matter is that it is very challenging to forecast developments in the
dynamic games industry, primarily due to technology driving demand to a high degree. Though it is
for example a fair assumption that mobile games have come to stay, and that spending on them will
increase, it would be naive at best to overestimate their importance as a future primary source of
gaming, especially with new technologies on the horizon, as will be touched upon in the last chapter
on perspectives. For now, in terms of industry attractiveness the key thing to gather is that spending,
makes multiple game segment viable, and can support a sustainably profitable industry with several
competitors.
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4.2
October, 2014
Competitive Strength
The other main factor, which will be considered as a premise for assessing investment potential, is
competitive strength of the relevant business unit (McKinsey, 2008). The 9 Box Matrix is
conventionally used on a specific existing business unit of a company. In the context of this thesis
however, seeing as the focus is on a group of incumbents; no specific company example will be used.
Instead the assessment will focus on resources and capabilities, closely relatable to incumbency
advantages16, which hold the potential for competitive edge, and which are assumed to be shared
characteristics of the before mentioned companies.
First of all the traditional market leaders, as a defining characteristic, have a foundationally good
mix of tangible, intangible and human resources. In tangible resources, they have both substantial
financial resources to support their scale and scope, as well as physical assets, which are especially
significant by facilitating their multi-divisional and multi-national presence. In terms of intangible
resources, some primary examples include software assets, especially game engines, and
intellectual properties (IPs). Furthermore, they have established reputations as incumbents, which
in developed form, also signifies brand equity. Lastly, in human resources, they of course have a
wide range of developers and project managers, with skills and expertise, particular to individual
divisions, as well as upper-level managers who facilitate inter-divisional, corporate cohesion.
The actual competitive advantage is of course devised from capabilities, which are supported by
held resources. Considering that certain capabilities are, hierarchically, more fundamental than
others, namely those of broad or cross-functional nature, these evidently apply to the traditional
market leaders having a wide presence in the games market (Grant, 2010). Examples of relevant
capabilities, of the traditional market leaders, include:
Multi-divisional coordination and innovative R&D, enabling diverse, yet parallel, game projects
Customer network servicing and marketing, facilitating management of a corporate brand
Similar among these four examples of capabilities, and their supporting resources, is, firstly, that
they enable entry into new game market segments, and the maintenance of a wide market
16
The prior exemplification of incumbency advantages, is analogous to resources and capabilities.
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presence. Especially, in light of their defining multi-national structures, these capabilities are
inherently applicable in a crossborder context. Secondly, they can be said to sustain competitive
advantage, due to being durable, yet hard to transfer or replicate, in light of being highly firmspecific to the complex organizational structures of the traditional market leaders. Last, but not
least, they signify competitive advantage, by coinciding with key success factors of the industry,
when matched with the findings of the competitive forces analysis (Grant, 2010).
Capabilities can however also be more detailed and relevant to specific activities or tasks, within the
broader functions (Grant, 2010). In the context of games, this could for example be capabilities
specific to phases of the development process. Therefore, it is necessary to distinguish between the
game categories, since, as mentioned before, they entail different processes, and thus also different
capabilities. In general, mobile game development is more constrained, in part due to hardware
limitations, and in part due to their standard purpose, focused on simplistic gameplay for short playsessions. It follows that while the capabilities of traditional market leaders, on the detailed
hierarchal level, still give them a basis for competitive advantage, in regards to conventional games,
not all of said capabilities can be fully carried over into mobile game development. All things equal,
such simplifications, makes capabilities specific to mobile games, easier to imitate.
4.2.1
Brand Equity
Following the notion that competitive strength is based in resources and capabilities, brand equity,
and brand management, are generally considered to facilitate a wide market presence. This also
applies to the games industry. Nevertheless, there are a few considerations, regarding prospective
brand equity of the traditional market leaders, as derived by the configuration of the industry
structure, which may pertain to substantiating the difference between their potential for
competitive advantage in conventional and mobile games respectively.
In broad terms, the significance of Brand Equity, as a source of competitive strength, is that it can
aid in motivating consumers into choosing products and/or services, which are contained under the
given brand, over that of competitors. In regards to this, thinking of the specific asset categories;
Brand Awareness signifies that recognizing the brand upon seeing it, or recalling the brand in certain
situations, will make it more likely to be chosen, driven by the simple aspect of familiarity (Aaker,
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1995). Brand Association in turn builds on the foundation of awareness, and signifies that
consumers will connect the brand with a certain perception or image, which if positive, or otherwise
relevant to the context of the purchase, will help drive the choice. Chief among the associations is
of course Perceived Quality of games and related services offered under the brand. This is generally
considered an asset in itself since it has been found to be the main driver of return on investment
(Aaker, 1995). Lastly, the target market can be segmented into varying degrees of inclinations
towards the brand, also known as Brand Loyalty. Enhancing this asset is key in regards to customer
retention, which can lead to predictability in cash flows and lowered marketing costs (Aaker, 1995).
Next, it is of course relevant to consider which foundation the traditional market leaders have for
brand equity as a source of competitive strength. Brand awareness is the prerequisite for the overall
equity, and is, as such, driven by the size of a company's target market, and the reach of marketing
communications (Aaker, 1995). In other words, the potential for brand equity is again highly
correlated with the incumbency advantages, which form barriers of entry. Capital, economies of
scale, and of course marketing expertise, are key in regards to maintaining a broad sales base. This
also carries over to their ability to market beyond regular media channels for example with
promotions, sponsorships or conversely, acquisition of intellectual property or licenses. It is a
common sense assumption that the traditional market leaders have established brand awareness
in the market for conventional games, in light of their history. Similarly it can be assumed that this
to some extent carriers over into mobile games due to the overlap of core gamers who also
occasionally use their mobile devices for playing. Conversely, the large casual, mobile-gaming,
segment of the consumer base, have less preconditions for being familiar with these companies.
Therefore, while the foundation for enhancing brand awareness on a wider basis exists, in regards
to mobile games, the starting point is well behind that, which has already been established among
consumers of conventional games. It can also be argued that the mobile games market has less of a
legacy of attributing significance to brands, in part due to the way they are distributed, where the
operators of the smartphone platform curate the virtual marketplace.
Brand association as an asset can have several dimensions, according to Aaker (1995). Considering
first the attributes of products, and their related benefits, the value proposition of a generic game
is that it provides entertainment, however vague that may be. The entertainment value of a game
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if of course subjective to the individual consumer, and for conventional games, it can in theory be
made up of numerous functional benefits; a few examples being: game stability, gameplay
mechanics or graphics rendering. While individual brands may focus on specific functional benefits,
the traditional market leaders share a foundation of experience and knowledge of their target
market, which supported by their divisional structures, enables them to cater to a wide spectrum of
consumer inclinations. In regards to mobile games however, due to their simplicity in both
development and end product, the variation of functional benefits are less. The implication of this
is of course, that it deprives the traditional market leaders of competitive edge, due to brands
lessening in significance, as games become easier to copy and attempts at differentiation become
more contrived (Aaker, 1995). This is further substantiated by the lack of emotional and selfexpressive product-related benefits in mobile games, as a result of their limitations (Aaker, 1995).
In general, the aspect of emotional benefits is however, a potential strength of the traditional
market leaders, with their core capabilities lying in conventional games, of which many genres can
be considered story-driven, atmospheric and able to invoke an emotional response from gamers.
Lastly, in terms of self-expressional benefits, conventional games under the brands of the traditional
market leaders may be preferred by those who consciously identify as gamers, due to their history.
Brand associations can of course also be tied to attributes an organization, in which case product
classes are transcended, thus making in irrelevant to distinguish between the significance of the
various segments of the games market. In general it can however be said that organization
attributes generally figure stronger competitively, since, regardless of market capitalization, it is
obviously more complex to duplicate an organization or corporate structure, than a game, and it is
certainly not something which can be done overnight (Aaker, 1995). Conversely, this however also
makes this kind of brand associations hard to shake when they are less favorable. Attributes such
as for example pledged values or an aim for innovation, are hard to communicate, and in turn hard
to measure and evaluate, resulting in a potential lack of credibility (Aaker, 1995).
As mentioned before, perceived quality is an association, both relatable to products as well as
organizations, which is worth considering on its own, due to its importance as a key asset leading to
sustainable competitive advantage, and as a primary driver of financial performance, according to
several studies (Aaker, 1995). Perceived quality can be said to be an overall measure of "goodness"
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of brand associations, according to Aaker (1995). In other words, the foundation for it is to be found
in the same incumbency advantages of the traditional market leaders that drive product and
organizational attributes. It is however worth noting that it is technically the perception, not the
actual quality, which is the most important. While it is of course not sustainable to try and create a
perception of quality, without anything substantial to support it with, it is nevertheless still the
primary concern, to be able to communicate what the brand defines as quality (Aaker, 1995).
Lastly, there is brand loyalty, which is chiefly enhanced through customer relationship management,
often manifested in loyalty programs, which in turn also enable database marketing (Aaker, 1995).
The traditional market leaders have competitive edge in regards to improving and maintaining
brand loyalty, again in light of their before mentioned incumbency advantages, which facilitate CRM
on both a grander and more efficient scale, than smaller and/or newer companies. Furthermore,
their varied portfolio makes loyalty programs and customer networks more enticing for the users.
The traditional market leaders also have an edge in regards to a specific segment of consumers,
namely those whose behavior is habitual rather than driven by reason. In such cases, the envisioned
brand identity comes second to being able to cater to as many needs as possible (Aaker, 1995)
something, which most new competitors cannot. It should lastly be noted however, that similarly to
awareness, the customer segments in the market for mobile games specifically, might be more
challenging to approach, primarily due to the perception of mobile games, as a trivialized pastime
rather than a hobby, which one invests in.
4.3
Subset
The presented considerations are meant to aid in placing the hypothetical business units, one with
a conventional game focus, and one with a mobile focus, within the 9 Box Matrix. Looking at industry
attractiveness first, the 9 Box framework requires a distinction between three degrees of
attractiveness (McKinsey, 2008). Assuming "high" attractiveness denotes an industry in which all, or
nearly all, competitors are profitable, while "low" attractiveness alludes to a state in which only few
companies are profitable, and competition is zero-sum, it should be evident from the above
considerations that the games industry can be labeled to be of "medium" attractiveness in its
current shape.
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Considering next the potential for competitive strength, a "high" level of strength equates to a state
in which a substantial basis, for maintaining or gaining a market leading position, exists (McKinsey,
2008). Evidently, this label is appropriate for the traditional market leaders, in regards to
conventional games. Conversely, the "low" level would mean that the business unit is completely at
the whims of the actions of other industry players (McKinsey, 2008). This would be too harsh, in
reference to their potential in mobile games however, thus meaning that it is more pertinent to
label them as having a "medium" potential of strength. Many of their core capabilities, and
incumbency advantages, also carry over into presence on the market for mobile games, and it
should be evident that there is potential for shaping the configuration of the industry.
In Figure 10, C represents the investment potential of
the conventional games market segment, from the
perspective of the traditional market leaders.
In
reference to Figure 1 it can be seen that this

placement corresponds with the INVEST section of the
matrix. The M represents the investment potential of
mobile, and the placement corresponds to the
SELECTIVITY diagonal.
Figure 10: 9-Box Matrix (McKinsey, 2008)
A common pitfall among companies, when commanding strong resources and capabilities,
especially a strong band, is to reduce investment in the core business, for the sake of either
improving short-term profitability, or to fund diversification into a new business (Aaker, 1995). This
is of course highly relevant to the games industry, in light of the, before mentioned, significance
attributed to mobile games, among certain experts and analysts. The results of this analysis should
however show that for the traditional market leaders, it is important to maintain priority
commitment to the core business of conventional games, while still investigating the mobile
segment, as a potential for a secondary, or perhaps even complementary, business. Put another
way, using the example of brands, mobile games have the potential to enhance brand equity of the
traditional market leaders, though it is currently, not likely be substantial in supporting a full refocus,
solely towards mobile.
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Chapter 5.
Discussion
At this point, the descriptive and analytical parts of the thesis should have provided sufficient insight
into the overarching dynamics of the games industry. This makes it suitable to commence a
discussion on the presented findings, whose purpose is to facilitate an answer to both the general
topic and definite problem formulation of this paper. Before initiating the discussion, however, two
focal features need to be elaborated upon, in order to establish a complete comprehension of this
chapter's design and approach. First, the discussion will be centered around and divided into three
sections of focus. Each section draws attention to a specific issue, which ultimately represents one
of the three destructive tendencies leading to the 1980'ies industry crash. These tendencies are
respectively; market oversaturation, price competition, and loss of publishing control, which, based
on the presented research, can all be observed - in some way or the other - as dynamics of the
contemporary games environment. Second, the qualitative empiricism generated for this thesis will
be implemented in the discussion, and introduce the viewpoints of industry expert, Thomas Bense,
as well as those of the seven interviewed members of the gaming community. This primary research
data is of high relevance to the first feature of the discussion, as all interviewed respondents deem
the above-mentioned tendencies to be correct observations. In addition, a number of secondary
industry sources, such as journalists and specialists, will also be utilized as contributors to insight on
some contemporary subjects. This pool of primary and secondary data will be added consequently
to supplement and strengthen the discussion where found suitable. In conjunction, the entirety of
the discussion is acting as a stepping-stone to the following and final chapter, in which
recommendations are formulated for the traditional market leaders.
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5.1
October, 2014
Market Oversaturation
Based on this paper's descriptive and analytical groundwork, it is evident that the games industry is
defined by its inherent ability to continuously drive and expand the market for games and gamingcapable devices. In this regard, the establishment and employment of the traditional structure and
the industry spiral can be seen as the key mechanism that helped spur on a consistent stream of
progression. The associated reasoning is that the consequent enforcement of rules and standards
practiced by the industry leaders following the 80ies crash, not only regulated the market, but also
counteracted one of the most damaging former tendencies; oversaturation of games and consoles.
By applying system locks, licensing measures, and control of product quality, the industry
incumbents managed to raise the barriers of entry and create a structured environment that did not
encourage short-term profitability exploitation. This meant that although the traditional structure
was designed to enforce a not easily accessible and highly competitive environment which to a
certain degree still is it ultimately prohibited the entry of unsolicited players, while safeguarding
the profitability and long-term survivability of the industry. Yet, however regulated as it may be, the
traditional structure has not been able to shield the industry from some of the disruptive potentials
brought forth by the modern advancements especially in terms of market oversaturation.
As it was made clear throughout the thesis, the games industry is currently experiencing a structural
alteration, which is energized by the extensive digital adoption across the board. While the
application of modern value chain configurations can be characterized as driving change and
innovation, according to industry expert Thomas Bense, the most important trend happening in the
games industry right now, is That it spreads to all platforms, including telephones and tablets. At
the same time, however, the ongoing structural modifications and market expansions have
indisputably reformed the conventional industry setup. For example, Thomas Bense adds that; The
independent developers are in a strong position, as they have the possibility to develop games fairly
easy. And if you have a good idea, it can also turn into a good business. Thus, with a little help from
backers, small and independent developers have much more freedom to create and publish games
without the strict interference of intermediates. In addition, the accessibility to concentrated value
chains has made the process of conveying services and products to the market much quicker,
simpler, and at reduced operating costs. The main contribution in this respect is off course - once
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again - directed by the advancement of digitalization, to which Thomas Bense signifies the central
benefit of being able to download games regardless of whether its a big AAA-title or a small indie
title. And following this empowered exploration of game production, attention to the creation of
gaming-capable devices, and spreading them onto the market, has increased accordingly. According
to one of the interviewed members of the gaming community, this has led to a trend where "...only
15-20 years ago the average western household would have only one gaming-able device, every
person now has several.". This has ultimately opened up for an expansion of the technological
market, in which incumbents and new entrants are constantly trying to propagate their visions and
ideas of innovation. Thus, despite resulting in long tail, terminating the restrictions set in the sixth
step of the industry spiral, and increasing reach and richness of the games market, the introduction
of novel digital initiatives has also made the industry much more accessible to potential entrants of
all size and scope. Yet, while these features can be deemed as constructive and amassing to industry
growth, it can also be argued that they subsidize a number of serious threats to the traditional setup.
Regardless of the continuous dominance of the console platform and the industry spirals role as
the primary orchestrator of the games market, the contemporary environmental dynamics push
forth a series of new prospects that lure in competition. The current tendencies are that companies
are rushing to secure a place in the innovative, lucrative, and relatively uncharted markets and submarkets enabled by the modern games industry configurations. In addition, incumbent publishers
are progressively leveraging and extending their operations and brand portfolio across every
platform available, in order to achieve a greater market reach. These tendencies particularly
concern the mobile games sector and the establishing market for the so-called microconsoles,
which both represent relatively new outgrowths of the games industry. Yet, these sub-markets
incorporate a variety of features, which imply a possibility for causing oversaturation similar to the
one observed prior to the 1980ies industry crash.
The initial focus is on the mobile games sector. Driven by the explosive emergence, popularity, and
consumer adaptation of smartphones and tablets, the mobile games sector has quickly gained the
attention of the games industry as a suitable platform. As Thomas Bense mentioned, integrating
these platforms is currently one of the leading trends within the games industry, especially as based on the conducted industry analysis - this sub-market is considered to hold substantial
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prospective. With the revolutionary introduction of app stores and their wide-open market for
third-party titles, the mobile platform has come to incentivize game development by offering ease
of access, lessened restrictions, low financial risk, and an assertive estimation of market growth and
profitability. In combination, this has solicited an overwhelming stream of new games to constantly
float the market. To give an example, as of June 2014, both the Google Play and the Apple App Store
offer over 1,2 million active apps and count between 50-75 billion downloads, of which around 40%
are categorized as games and entertainment (VB, 2013; Perez, 2014). One noticeable part is,
however, that these games are not exclusive creations of industry-native developers and publishers.
Instead, mobile game publishing welcomes a variety of organizations and companies from external
industries. According to a report on the evolution of mobile games published by ESA, these have
demonstrated an eagerness to embrace a wider audience and explore the potential that the
industry offers and even major companies such as Disney, Viacom, USA Network, and Marvel
have launched mobile games in an effort to engage their respective target audiences. (ESA, 2012).
An example of an external opinion to further support the increased importance of the modern game
sub-markets, specifically mobile, is that of Teut Weidemann, a free-to-play game specialist, who
states that not only are mobile games reshaping the industry, but will in fact make the market as it
is known today, irrelevant (Sinclair, 2013). The argumentation of Weidemann seems to be roughly
comprised of two main points. Firstly, he mentions digital distribution and how self-publishing has
become easier, going on to say that mobile gaming has significantly increased the impact of the
former. Secondly, he points to the lucrative nature of mobile games, citing company mobile game
developer Supercell as an example, having a market cap exceeding and rivaling large traditional
market leading game publishers, based on just three released games. Despite Weidemann's stance
on today's market becoming irrelevant, it is also stated that he expects both console and PC gaming
will continue growing, but that the overall market will shift to mobile. Coupled with his statement
that smartphones have enabled reach into "... territories where we'd never done business before...",
his argumentation, whether intended or not, seems to support the notion that the market has been
expanded due to people who did not play games before, now playing games on their smartphones
and tablets as well as casual games in Internet browsers.
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Weidemann does however also state some challenges, regarding mobiles games, with potential
influence on the growth of the market. He points to app discovery as one challenge, thus rephrasing
the issue of gaining a game audience revealed in the industry analysis. As another central challenge,
Weidemann reiterates the lack of entry barriers. He states that this has lead to an overflow of low
quality games, and goes on to relate this concern to the cause of the 1980's crash, thereby
supporting the ambiguous effect of the current barriers of entry, as presented in the competitive
forces analysis. Combined with the incessant existence of the "if it ain't broke, don't try to fix it"
path-dependent mentality outlined in the industry spiral, these challenges have led to the mobile
gaming landscape spilling out a vast amount of game content to chase the tails of ideas that have
worked previously (Edge, 2014). This has formed the offensive trend of proliferation of cheap
imitations of innovative mobile games, disregardless of whether the originals are created by
independent developers or incumbent publishers. According to Tech Times journalist, Malerie
Gokey, clone apps "...lead to confusion among users and even trick some into thinking that they have
downloaded... [a game]... when they have in fact downloaded a pale imitation." (Gokey, 2014).
Directing the attention from the games sector to the console sub-markets, it is equally plausible to
assume that indicators of an impending oversaturation can potentially be observable. This coincides
with the increasing corporate push of microconsoles, a term most commonly used for describing
lower-cost devices that connect to televisions and provide gaming and other digital media services.
Before venturing into how these are affecting the games industry however, there are three vital
factors to note. First, the role of smartphones, tablets, and other mobile devices will not be the focal
point of this discussion. These do represent the most fundamental pool of game-enabling devices,
and are the reason for the creation of sub-markets such as that of microconsoles. However, while
their significance cannot be neglected in context to the games industry, these devices are not
inherently designed as dedicated gaming platforms. Therefore, mobile devices have an influence on
this area, but an encompassing discussion on whether the market for these is oversaturated will not
be present. Second, the focus is once again on a sub-market of the games industry, the reason being,
that the traditional console market is nowhere close to an oversaturation due to its current
oligopolistic formation. In fact, Thomas Bense points out that Nintendo is suffering at the moment
by explaining that their new console Wii U doesnt live up to their former success [with the Wii
console] and doesnt sell anywhere near that, consequently resulting in more developers
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deprioritize [the Wii U] in favor of other machines.. With Nintendo lacking behind, this makes
Microsoft and Sony exclusive competitors on the contemporary market. Third, according to games
writer and researcher Rob Fahey, the presence of microconsoles on the market is embodied in two
consecutive waves. In an article for Gamesindustry.biz, Fahey commented, Despite enthusiasm,
Kickstarter dollars and lofty predictions, the first wave of microconsole devices tanked and their ilk
just turned out to be something few people actually wanted or needed. (Fahey, 2014).
The second wave is however, somewhat different. Unsurprisingly, a growing number of tech giant
corporations, such as the well-established and reputable market incumbents; Google, Apple, and
Amazon, are now seeing their potential for leveraging their brands and portfolio in the games
industry by integrating microconsoles into their core offerings. In this regard, Fahey argues that
the second wave microconsoles will enjoy all the advantages their predecessors did not. They'll be
backed by significant money, marketing and development effort, and will have a major presence at
retail. (Fahey, 2014). Moreover, he points out that in many ways these will take on the aspect of
Trojan horse devices providing the convergence of being tiny boxes that stream media off the
network, with a sufficient gaming capability built-in to satisfy the mainstream consumers. Looking
at the bigger picture, Fahey assesses that the universal corporate vision is to establish a synergy
between the microconsole under the TV and the smartphone in the pocket. He goes on to saying
thats gaming all sewn up, they reckon. a microconsole and a smartphone will be more than
enough gaming for almost everyone, leaving dedicated consoles and gaming PCs to a commercially
irrelevant hardcore fringe. (Fahey, 2014). With this attitude and with a splice of widespread
external corporate attraction to the games industry and successful implementation of the next
wave(s) of microconsole it can be a matter of time before the market is also flooded.
Objectively, it is apparent that the modernized and refined industry structure has spurred on new
dynamics, which to a vast degree resemble the state of the games environment prior to the 80ies,
when it comes to market oversaturation. What the contemporary games industry is experiencing,
is the rise of pioneering markets, widespread formation of competitors, and a flood of games and
devices to follow. As Thomas Bense points out; It is correct that the market is flooded with products,
and some of the new machines will disappear just as fast. Give these tendencies a bit more time,
money, and freedom, and they may potentially result in the perfect storm. Because, if the 1980ies
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crash has taught the games industry an important lessons, it is not to dive headfirst into seemingly
lucrative and uncharted markets. At the same time, however, there are certain contrasting
argumentations to consider before devising definite associations and doomsday scenarios on the
matter. To start with, Rob Fahey points out that the strong growth of a new casual gaming market
does not have to come at the cost of growth in the core market, and may even support it by providing
a new stream of interested consumers.. In his opinion, "This is not a zero-sum game, and will not
be a zero-sum game until we reach a point where there are no more non-gaming consumers out
there to introduce to our medium." (Fahey, 2014). Thus, the existence and prospects for market
growth of microconsoles does not have to come at the expense of PlayStation, Xbox or even digital
distribution platforms, such as Steam. The only genuine disadvantage of microconsoles that Fahey
notices at the moment, is the limited attention to designing proper controllers, which could
potentially restrain people utilizing these machines.
In further context, drawing a perspective to this thesis' empirical findings involving the gaming
community, there is a divided attitude towards the manifestation of the mobile games and
microconsole markets. When asked for an opinion regarding the attempts to bring mobile-gaming
to the living room, whether there is a demand for this, and whether microconsoles can threaten the
"traditional" consoles, only one community member was not familiar with the concept of
microconsoles. The remaining six are split into two equally sized groups; one supporting, and the
other dismissing the market's relevance. Those supporting the concept of microconsoles express
that "...it's great it keeps evolving", it makes the user "...independent of the [traditional] console",
and that "The increasing interval between console releases, might increase demand for such
machines...". These gamers also find, that while microconsoles are not "...a direct threat to the
traditional console, at least not for a while.", they could "... threaten the traditional ones if the
quality is the same in the games.". On the opposite site, the questioned gamers simply do not find
that there is enough demand for microconsoles, while adding that; "People who like those games
will most likely prefer to play them on their mobile devices.", "[The microconsole] Ouya failed and
[the upcoming] Steam machines will too.", and "I just don't really see the point.". Although this
contributes to a fairly limited outline on the subject matter, it is indicative that the perceived role
and the impact that microconsoles have on the traditional industry is still quite vague.
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To sum up, the strong push of modern games and gaming-capable devices is continuously
introducing new consumers to the games sphere, expanding the user base, and demonstrating
profitability. Consequently, this has drawn the attention of many incumbent publishers, striving
intensively to integrate their offerings into the rising sub-markets. What is crucial to realize,
however, is that behind the apparent lucrative setting these sub-markets are still representing
unknown waters, which delicately deflect focus from the conventional format of gaming. Moreover,
as the conjunction between the sub-markets and the modern digital applications has welcomed a
vast number of external competitors, profitability is theoretically in danger of being sucked out of
the industry. In particular, this relates to the bigger entrants, such as the tech giant corporations,
whose core business operations are not inherently tied to the games industry. With these
corporations engaging in peripheral positioning by integrating games and gaming-capable devices
as auxiliary offerings, excess revenue is not exclusively tied to and re-invested in the industry. Lastly,
the challenges surrounding app discoverability and imitation embody some of the biggest
drawbacks to the mobile games market. These tendencies draw a direct perspective to the 1980'ies
crash, and while hardware clones are currently uncommon due to the regulations set down by the
industry first parties, these may find a prospect in the open sub-markets.
Returning to the impending question of whether an oversaturation is currently undergoing and
possibly damaging for the games industry, an answer is not intrinsically obvious. The objective
judgment relies completely on the impact of the ongoing industry tendencies, as oversaturation in
itself is not inevitably detrimental for the market. And while it may seem ironical that the entire
focus regarding the subject of oversaturation is set on two emerging sub-markets of the industry,
their significance is best not left unattended. At the same time however, it is completely apparent
that the segments of mobile games and microconsoles, enabled by the newly refined and
modernized industry structure, have influenced the conventional configuration.
5.2
Price Competition
The observable effects of price competition is, according to industry expert Thomas Bense, one of
the most important current trends of the industry: "...prices are changing, making it possible to get
games that are free, or at a very low price." The most prevalent contemporary example of price
competition, is the trend of discount sales on PC and console digital distribution platforms. It has
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become standard to run several annual weeklong discount sales, in addition to regular weekend and
daily special offerings. A recent example of this sales trend is Steam enabling the possibility of
developers and publishers to set their own discounts at any time (Handrahan, 2014). This latter subtrend, is a clear manifestation of price competition, with publishers having control over when, and
how much, to discount their games, to compete with similar sales by other publishers. Furthermore,
it should be noted, that these are not slight discounts, or sales promotions, but rather substantial
price cuts, up to 90% off, thus substantiating the severity of the trend. Moreover, while the trend
of discount sales has arguably, been primarily associated with PC games distribution, it is by no
means solely related to this platform. In recent years, especially, the trend has become so
pronounced on consoles as well, that it is clearly evident, that the trend of price competition is
paramount in the games industry.
The structural underpinnings of price competition were laid out in the industry analysis, being driven
by factors such as contribution maximization, lack of differentiation and perishability of certain
games. Price competition is however most effective in an environment of price sensitive consumers.
It was mentioned in the industry analysis, that, under standard circumstances, the price sensitivity
consideration signifies the need for customer segmentation. It can however be argued that price
competition induces price sensitivity, on a relatively broad scale among end-users. In terms of
disposable income, using the spending habits of the average American, as an example, average
annual expenditures on entertainment were $2.482 in 2013 (BLS, 2014). Thus a newly released,
standard priced, $60 game, constitutes close to 1/3 of the monthly spending on entertainment of
the average American. Considering next that some end-users have a high level of commitment to
gaming as a hobby, these consumers may spend close to 100% of their entertainment budget on
games. It could be argued that, from a theoretical basis, their added appreciation of the value of
games, decreases their overall price sensitivity, and makes them likely to remain inclined to buy
games, even with standard premium release price. The way price competition plays into this,
however, is that the latter segment of consumers, will of course, almost certainly, be aware of the
trend of discount sales, meaning that they can plan their purchasing habits accordingly. As such, it
becomes a question of prioritization, where games with perishable features, chiefly multiplayer
capable games, will be bought early, for full price, while it is a matter of waiting for the inevitable
price drop, of lower prioritized games. In other words, this creates a cyclical relation between
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publisher's motivation for price competition, and price sensitivity. Publishers initiate sales, under
the assumption that it drives consumer spending. In turn, consumers adopt a price sensitive
purchasing behavior, which only helps to support the initial assumption of publishers.
The above consideration naturally leads to a more detailed critical look at what the long-term
consequences of price competition could be. In the competitive forces analysis, it was made clear
that, theoretically, price competition can be highly detrimental on average profitability of the
industry. This of course mainly has to do with the notion that the loss of developers and publishers
is a direct gain of consumers, in other words meaning that the profits leave the industry (Porter,
2008). There are however other interesting drawbacks of price competition, worth considering.
One argument, as alluded to above, is that consumers are being incentivized to not buy games at
release, but instead wait for sales, that are bound to happen eventually. Game developer Jason
Rohrer points to the problem by stating that: "They want to get your game as soon as it comes out,
at full price. But they are foolish to do that, because a sale is right around the corner..." (Sinclair,
2014). According to Rohrer, this results in the player base for a given game, being spread over time,
which is especially a problem with games where the value is gained from the network, such as in
multiplayer games. According to a community member, games can indeed influence purchasing
behavior in this way: "No way in hell Im going to pay 60 euro for a game when steam will sell it to
me for their season sales at 25 euro. So yes. I might even buy games at sales that I will never ever
play just because its so frikin cheap." The latter consideration, especially, signifies an interesting
concern regarding the above-mentioned problem of game networks, with sales potentially being an
inconsistent measure of the network value. In general the entire statement also substantiates the
before mentioned notion that price competition has become a vicious cycle, which trains consumers
to be price sensitive, in turn further motivating a wider range of developers and publishers to
partake in price cuts, to remain competitive. On one hand, at their core, discounts can, to some
extent, be effective in short-term market share gains, and as a way of collecting contribution to fixed
cost. There will always be a segment of potential customers, who are inherently price sensitive, and
would be decisively unwilling to pay the premium full price for the game. One interviewed
community member for example had the following insight in this regard: "Yes, I certainly buy more,
but many games I buy now, I would never consider buying at a full price, but the amount of money
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spent on games are probably the same." The main problem, however, primarily concerns
consumers, who based on their commitment to games, especially in the case of a fan base of a
particular developer or game series, would be much less price sensitive, had it not been for the
trend of price competition. In a market where it is inevitable that games will go on sale, sometimes
even soon after release, the fact that some of these loyal fans are trained to wait for discount sales,
signifies a direct revenue loss for developers and publishers.
A very prevalent argument related to this, is that discount sales have a devaluing effect on games in
the long run (Handrahan 2, 2014). What is meant by this is that with game discounts being as high
as 75-90%, even for games that are no more than one year old, consumers are arguably trained to
be less concerned about their investment into games, both in terms of time and money. If the
conception, that the price of games is a marginalized factor, persists, it will likely become near
impossible to sell games at the standard full price, which the conventional supply chain is reliant on.
Furthermore, the quality of games will be increasingly trivialized. Taking the above example of the
average American, for whom a standard full priced game constitutes almost 1/3 of his/hers monthly
entertainment budget, such a consumer will be motivated to care about whether the game was a
good investment or not, underlining the importance of the value proposition. If, on the other hand,
a game were to only constitute around 5% of the same consumers average monthly entertainment
budget, it will arguably be, all other things equal, less important for him/her to justify the purchase,
meaning that motivation to invest time into the game, will also be less. Ultimately, this means that
the trend gives leeway to developers, to increasingly neglect quality. A related notion is that
discount sales can hurt brands and cheapen intellectual property, if consumers become used to
price competition. A primary proponent of this argument used to be industry giant Electronic Arts,
who with its own digital distribution platform Origin, swore not engage in sales with major discounts
(Yin-Poole, 2012). It seems they have reconsidered this stance however, seeing as major discounts
have since become, arguably, just as frequent and substantial, as on competing distribution
platforms. This of course highly indicates that EA has felt forced to partake in the price competition
trend, which only helps to support the notion that this has become a problem, deeply rooted in the
price sensitivity adopted by gamers. Game developer Cliff Harris encapsulated this problem as: "We
are no longer selling products, we are selling discounts. The endorphin rush is now from getting a
bargain, not the fun of actually 'playing' the game." (Handrahan 2, 2014).
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In what arguably seems like a measure to deal with the widespread price sensitivity of gamers,
games to an increasing degree, are offered under alternative business models. The arguably most
prevalent model, and that which deviates the most from the traditional, is free-to-play, where
revenues are based on micro-transactions. The intent behind this model is obviously directed at
attracting price sensitive gamers and then incentivizing them to purchase optional virtual goods.
The obvious advantage is that it is relatively easy to attract a game audience, despite the tendency
of price sensitivity. The drawback, on the other hand, is that cash flows are far more unreliable than
with a standard premium-price game business model. A study shows that only 2,2 % of consumers
playing free-to-play games, actually spend any money (Sinclair 2, 2014). While there are of course
examples of games, for which the (few) paying users, are substantial in keeping them profitable, it
does signify a considerable monetization concern, and is unlikely to be able to support the diversity
of productions scales, seen in the industry contemporarily. Essentially speaking, despite it being a
relevant approach in attracting price-sensitive consumers, it can be seen as a symptom of the
industry trend, rather than a solution to the problem of a general devaluation of games. The latter
consideration extends, fundamentally, to other variations of alternative business models, e.g.
advertising revenues etc. These fail to address the core problem that consumers are, as a result of
the possibilities facilitated by the digitization-based paradigm shifts of the industry, less inclined to
invest the full premium-price of games. This ultimately incentivizes developers and publishers to
focus on other aspects than quality, such as for example features that enabled monetization, or
simply a more narrow value proposition.
Instead, it is necessary to look to the structural underpinnings of the industry, to find which aspects
are important to consider, in formulating a potential solution to the issue. It was established in the
industry analysis, that bargaining power of buyers, despite their relative concentration to
publishers, is quite substantial, driven by the access and availability of information, and digital
products, which in turn is a direct result of global internet usage. The above-mentioned alternative
business models are an example of actually empowering buyers in a negative way, since it leaves
them completely free to effectuate their power by simply playing games without paying. Instead,
the proper way of dealing with consumers should be based on the previously stated theoretical
consequences of buyers bargaining power, namely pressure on price and quality. Firstly, attention
should be shifted towards enabling customers to pressure on quality, as much as possible. As
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mentioned in the analysis, while this may entail short-term costs, a pressure on quality is inherently
not bad. In other words, the trend of transparency in the development process should have
continued support, as it enables consumers to offer valuable feedback, in forming the end-product.
Ending up with a better product, which will strengthen the brand, should, by far, be preferable, to
having consumers put pressure on the price of a sub-par product. A community member from the
qualitative interview also, mentions That developers take interest in their fanbase's opinion." as a
driving aspect of enhancing the quality of a game. Secondly, however, since it has been established
that price sensitivity is widespread, it would be unreasonable to assume that the effectuation of
bargaining power, would not, to some extent, still be focused on pressuring prices down. To mitigate
this issue, focus should be shifted from individual games, to networks and brands. When a publisher
discounts a game, as a result of pressure from buyers, the loss is immediate and final. If on the other
hand, the discount is offered in the context of a network, for example as a direct result of a previous
purchase, the publisher is essentially "letting" the consumer effectuate its bargaining power, in a
way which signifies customer retention. A directly relatable consideration is that according to Porter
(2008), price competition, though risky, does not necessarily have to be detrimental to profitability,
assuming it is supported by clever customer segmentation. As an example, the console
manufacturers have partaken in simplified segmentation for some time now with their subscription
models, as a requirement for online interaction, on their network services. The relevance of price
competition, in this regard, is that they offer discounts, and even giveaways, to members. Although
the traditional market leaders cannot circumvent the console networks, they can still have their own
integrated networks within games, which can also function as customer loyalty programs, outside
of games. Of course, brands are key in this regard, as the costumer must feel motivated by an
expectation of a certain level of product quality, and benefits of dealing with the brand holder.
Lastly, it is relevant to consider the significance of mobile games, in the context of price competition.
In general, it is estimated that between 80 and 90% of all mobile applications are deleted after the
first time they are used (Pramis, 2013). This corresponds with the before mentioned notion that the
perceived quality of a mobile game, relies on a relatively narrow spectrum of functional benefits,
which are almost immediately noticeable upon playing a game the first time. In light of this, and
their generally small scope of complexity, mobile games are associated with the prior mentioned
modern takes on game business models, where the initial price is either low, or non-existent, and
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where subsequent cash-flows rely on advertising revenue or micro-transactions. Evidently, this

makes sense in the context of mobile games, and can arguably be considered an inherent
characteristic of them, as opposed to using similar business models for conventional games, which
constitutes a substantial deviation from traditional practice. In the broader perspective, however,
the impact of mobile games is that the relation between price and value in games, in the overall
market context, has become a more inconsistent concept, with at the lack of transparency in
modern business models. This of course only substantiates the above-considered problem of how
the current machinations of publishers, in trying to adapt to the paradigm shifts of the industry,
induces price sensitivity in consumers.
5.3
Loss of Publishing Control
The last contemporary industry trend, which is to be discussed, is the loss of control and bargaining
power of publishers such as the traditional market leaders. The notion that their position has been
compromised is, of course, a direct consequence of the paradigm shifts of the games industry, and
is related to the prior discussed trends. Intensive price competition, and increased buyer price
sensitivity, has compromised publisher bargaining power. However even more so, their loss of
control is directly relatable to the trend of market oversaturation, which to a large degree is a
consequence of self-publishing through digital distribution platforms.
As mentioned earlier, the market for conventional games has in recent years been centered on
inflated budgets and AAA high-end games. A symptom of this, according to former VP of publishing
at Microsoft, Ed Fries, has been a push and pull between creativity and profitability. He summarizes
the focus of the AAA publishing business as a "...need to do less and less thing and we need to do
bigger and better... And I think that's somewhat of a disease that's infected the whole console
industry where every year there are fewer and fewer titles and they are less and less innovative."
(Brightman 2, 2013). He goes on to say that big publishers in this way created a void in the market.
This notion is supported by industry expert Thomas Bense, who says that: "It also seems as though
there isn't space for products positioned in the middle, it's either the big AAA-titles like FIFA,
Assassin's Creed, Call of Duty etc., or the small simple games that sell."
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As should be evident by now, a defining characteristic of the industry is its dynamic and everchanging nature. This is exemplified by the increasing availability of resources and tools, which
facilitate independent development and self-publishing. As mentioned before, big publishers, like
the traditional market leaders, have the resources and capabilities to carry out nearly any kind of
creative innovation. However, they suffer the risk of overly focusing on profitability over creativity.
Independent developers on the other hand are constrained by their resources. But with this barrier
mitigated, they can suddenly compete on a variety of new dimensions, which the big publishers held
dominance over before. The implication is that independents have started, and are expected to
continue, to fill the void left by big publishers.
Self-publishing is now supported by the three major console manufacturers, providing development
kits, and distribution access to independents (Fahey, 2013). They have an interest in encouraging
competition in the production of the complementary products, namely games. At the same time,
they want to appeal to as broad an audience as possible. This way they increase their bargaining
power, reach a stronger market position, and reduce the value that traditional publishers bring to
the industry. Therefore, their support of self-publishing can be seen as being indicative of a loss of
publisher dominance. On PC, the primary changing aspect has been funding methods, with the
before mentioned concept of crowdfunding, being a primary source of independent games, with
relatively substantial budgets.
In the case of the modern game types, the major constraints have been, and are, of a different
nature. With casual and social games, being embedded within websites and social networks signifies
limited possibilities. With mobile games, on the other hand, it is of course hardware limitations.
However, the latter factor, is of course again subjected to time and technology, driving the
possibilities forward. This notion is of course also the basis for having conducted the investment
prioritization analysis of mobile games, as an alternative to conventional games, since the former
game type has been attributed extensive future significance. Mobile games are essentially an
embodiment of the changes brought about by the technological paradigm shifts of the games
industry, signified by new gaming-enabled devices, dominance of independent development, and
the elimination of traditional physical distribution. Their potential importance is backed up, firstly,
by before mentioned forecasts, of them constituting an increasingly larger fraction of overall game
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spending. Furthermore, as also mentioned before, certain experts consider the market segment
strong enough in making conventional gaming irrelevant. Continuing in the same vein, the Juniper
Research analyst firm, has reportedly predicted the mobile platform to become the "...primary
screen for gamers." within just a few years (Peterson, 2013). Therefore, it is relevant to discuss the
credibility of mobile games being a threat to the traditional value chain. If mobile games were to
overtake conventional games, the lessened relevance of publishers would be noticeably impaired.
A primary concern in regards to mobile devices potentially becoming the primary source of gaming
is the experience and entertainment value of mobile games, which might not live up to that of
conventional games in the perception of the traditional core customer group of gamers. Rene
Ritchie, editor-in-chief on iMore.com, sees the challenge of winning over said segment to mobile as:
"...they're not looking for a few moments of interstitial fun, or a few levels of distraction.", but rather
an experience that is "...full on, immersive, cinematic, heart-pounding, blood-racing..." (Ritchie &
Michaluk, 2013). Ritchie acknowledges that currently, and in the near future, mobile devices cannot
rival the power of a PC or console, nor the precision of a keyboard/mouse or gamepad control
option, limiting the potential for mobile games to win over a large segment of traditional gamers. A
community member from the qualitative interviews agrees that mobile games are limited by
controls and power. The common consensus among the community seems to be that mobile games
are mainly useful in situations where conventional games are out of reach or unavailable. Ritchie
also goes on to state that the current primary strength of mobile games lies in the mobility of the
smartphones and tablets. However, in the longer-term future, if said devices can increase in power,
mobile gaming may also become competitive in the living room as a gaming experience on par with
PC and console. This statement of course directly relates to the potential market penetration of the
before-mentioned microconsoles. The opinions of Ritchie are supported by Kevin Michaluk, editorin-chief of CrackBerry.com, who more or less reiterates all of the Ritchie's concerns regarding
winning over the traditional core gamers, going as far as calling display size "...the single biggest
factor in why mobile can never deliver the same emotional attachment console games can." (Ritchie
& Michaluk, 2013). Michaluk does however also add an interesting point, namely that monetization
and business models of mobile games, as of yet, are not as reliable as those for PC and console
games, as have been mentioned in the discussion on price competition. The risk of investing into a
large budget for a mobile game, limits the potential for evolution of mobile game development. On
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a final note Michaluk acknowledges that mobile gaming currently can be considered "...just a fun
time killer.", and that the rise in popularity of mobile gaming does not necessarily bring about the
downfall of other types of gaming (Ritchie & Michaluk, 2013). Similarly, a community member says:
"...there is a huge market for mobile games... but goes on to state that it is also a distinct market
segment, signifying the relevance of the prior investment prioritization analysis.
Essentially speaking, there is likely no immediate threat of modern game types, mobile especially,
swaying away the larger part of the core gaming audience. The next relevant question to consider,
however, is how big publishers can reestablish and/or maintain dominance on the wide games
market. According to games industry consultant, Jonathan Newth, holding a portfolio of IPs used to,
almost solely, be a key aspect for valuation of a publisher. And while this is of course still highly
important, in the contemporary digital world, building and maintaining a community or audience of
players has also become a primary concern (Newth, 2012). Industry veteran developer, Tim Schafer,
agrees, stating that with low entry barriers, and an oversaturated market, success has become:
"...less about creating an awesome game and more about discoverability. Guess who is really good
at discoverability? The publishers." (Hiscott, 2014). For a game to be discovered, marketing is
naturally necessary, and with their expertise in this area, publishers like the traditional market
leaders have a significant capability, which signifies the potential for strategic partnerships. Industry
consultant, Jesse Divnich, explains the problem as being an erroneous misconception among
independent developers, that self-publishing negates the need for marketing. In his optic: "...the
absence of publishers in the digital environment is significantly impeding developer's success."
(Brightman 2, 2012). This sentiment is shared by industry veteran Don Daglow, who sees the issue
of getting noticed in the digital marketplace as a primary challenge, which signifies the intertwining
of marketing and the role of publisher. Regarding the value of marketing, he says "Brilliant
marketers know how to go out and help people find games they want to play...That isn't a skill that
just everybody can have and sometimes those in the game design community liver under the illusion
that we're also marketers... It's a different specialty and the people who are good at it are incredibly
good and they enhance the game experience. That knowledge, I think, is going to stay heavily
concentrated in publishers." (Brightman, 2012).
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The above statement of Daglow, underpins that marketing should support the value proposition of
a game, while the prior input of Tim Schafer, about the "awesome" factor of games becoming less
important, signifies a worrying tendency. One of the community members from the qualitative
interviews, points to publishers power, as being manifested when they "Use most of the funding on
marketing and less on [the] game.". The same individual mentions the recent game Destiny as an
example, which upon further research, is indeed rumored to have had a total development cost of
around $140 million, while upwards of $360 million have been allocated to marketing17 (Gantt,
2014). Despite the game being marketed as an innovative AAA game, it has been received with
relatively lukewarm reviews (Pereira, 2014). This kind of inconsistency may not have an immediate
effect on the sales of this particular game, but over time, consumers may find the relevant brand to
be associated with unfulfilled promises of quality, hurting long-term profitability. This brings the
discussion back to the essence of game quality, which must be a primary focus. Remembering the
industry analysis, it was mentioned that the multi-divisional corporate structure of the traditional
market leaders is a result of an acquisition-based growth strategy, where smaller successful
companies were embedded into larger divisions, focused around either locality or game
types/genres. While this cultivated a wide presence, with resources and capabilities relevant to a
diverse spectrum of games, the common consensus among experts and community alike, seems to
be that within the individual divisions, games have become fewer, but with an attempted wider
appeal. Assumedly this has been deemed as being more cost-effective, but has conversely resulted
in restrictions on the creative processes, and in turn quality. One community member says: "...some
publishers care more for profit, and as such might compromise the game quality, in order to appeal
to a larger audience. The further consequence, of mass appeal, is that the functional benefits
become less distinctive, which according to the competitive forces framework induces price
competition and impedes the potential of competition on diverse dimensions. The latter is instead
facilitated by the independents, who can cater to niche segments. It should be no surprise that now,
with new possibilities, independents prefer self-publishing, to the alternative of potentially having
their creative autonomy compromised. This leads to the significance of marketing, as a possible way
of incentivizing and attracting independents, to enter strategic partnerships with big publishers. This
way the independents can create the products they want, while benefitting from marketing,
17
The total budget of $500 million is an official statement by publisher Activision. The exact allocation is rumored.
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facilitating discoverability and customer retention. From the perspective of the publishers, this
enables them to have a wide relevance in niche mid-range offerings, and mass-appeal low-range
offerings, while being able to focus inwards on distinguishing quality of AAA conventional games,
targeted at the core segment of gamers. And the optimal value would of course be gathered from
creating synergy between these diverse offerings through publisher-specific networks, such as
mentioned in the discussion on price competition.
The industry veterans agree that conventional games will remain significant, and thereby
substantiate the maintained role of publishers like the traditional market leaders, in the industry.
Tim Schafer for example states that he would not himself be prone to try and independently
produce a high budget game like Titanfall18, going on to say that: "...those kinds of games are not
going away. The indie games community is just offering something more. It's like how Sundance
didn't get rid of blockbuster films - it just added more variety and made the whole ecosystem
healthier." (Hiscott, 2014). Daglow affirms this by saying that blockbuster game will in particular
come from: "...long term dedicated in-house teams of publishers...", and that he believes console
gaming will "...adapt and prosper alongside all those things we're seeing now. in reference to the
emergence of modern game types (Brightman, 2012).
An interesting opinion is that of Kristian Segarstrale, a veteran specific to the casual, social and
mobile game markets. He downplays the current relevance of publishers in regards to mobile
games, though he acknowledges the importance of monetization and customer acquisition. In his
view, however, the role of a publisher in regards to those concerns can be replicated by down to
only two persons (Sinclair 2, 2013). Though it contradicts the general notice of publisher relevance,
this sentiment is arguably true to some extent, albeit uniquely specific to mobile games, indicating
the transitional phase that this part of the games market is undergoing. Segerstrale does mention
that one way, he believes publishers will increase in significance, is through offering services for
developers in regards to dealing with player bases in foreign countries, especially the emergent
economy foreign markets. He does however allude to being of the opinion that this will require new
global mobile corporations, failing to mention the traditional market leaders as potentially having a
significance. This is likely due to the presupposition that these are associated with the before18
AAA first-person shooter game from 2014, developed by Respawn Ent., published by Electronic Arts.
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mentioned push and pull between creativity and profitability, which independents seek to avoid. It
remains, however, that he traditional market leaders are inherently multi-national, and have had to
deal with cross-border operations and management for long, as opposed to a hypothetical small
development team, which although catering to the global market, has no experience in international
management, and perhaps not even localization19. According to industry expert Thomas Bense, the
fact of where the developer comes from, has a decreasing significance within the digital and global
game market, however, this does not carry over into the post-production processes. This is
obviously an interesting observation regarding the potential significance of internationalization of
developers. For the traditional market leaders to attract the interest of developers however,
considering the above assumption of independents averseness to dealing with corporations, an
approach focused on strategic partnerships rather than acquisitions seems a natural next step.
The Asian market is particularly relevant in this regard, not just because it is given considerable
significance in driving the future growth of the industry, but also since it can be argued that
monetization of mobile games is better understood there. In for example China and South Korea,
consoles never really had a breakthrough. In the China's case, foreign made consoles were in fact
banned up until recently (Fahey 2, 2014). According to venture capitalist Raymond Chang, this
means that the Asian market has no so-called "legacy business" and has thus been faster at taking
on online and mobile gaming, being ahead of the game in terms of business models and
monetization of modern gaming (Williams, 2013). Yang goes on to state, that Chinese developers,
through experience, have gained an understanding of to which extent to let gamers play for free
before money is required, and that they have "pushed that to the limit." Furthermore, he also states
"When I'm in China I feel that game publishers and gamers are so hungry for Western-made games."
(Williams, 2013). These statements have a few significant implications. Firstly these Asian markets,
China included, where mobile and online are far more dominant than in Western regions, and where
a demand for Western games exists, are of course attractive to small and independent developers.
Since publishers, like the traditional market leaders, can help them deal with the challenges
associated with for example localization considerations and game discoverability, strategic
partnerships are relevant. In regions that are more acclimated to the business models and value
19
Process of translating the game to the language of local markets.
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propositions of mobile, publishers have less reason to push creative control over games, which
should be make developers more inclined to partake in these partnerships, in addition to the
obvious marketing related benefits. This signifies internationalization for both developer and
publisher, as even companies such as the traditional market leaders, will gain new foothold in
markets where they have had less prior presence. Arguably even more interesting, however, this
can also carry over into their core business of conventional games, using clever branding, networks
and shared IPs. According to the PwC report, used in the industry overview, even the physical
console game spending segment is forecasted to have a compound annual growth rate of 2,5% in
Asia, as opposed to only 1,9% in both Europe and North America (Pwc, 2012). While it will be a
challenge, it is companies like the traditional market leaders, who have the resources and
capabilities to navigate the relatively unchartered foreign markets, and with cross-platform
incentives, it may just be possible to attract the Asian mobile loving gamers to dabble in
conventional Western games.
Following the sentiment that conventional games will persist, while these are of course increasingly
distributed digitally, and thus a part of the online games segment, to some extent, traditional
physical distribution will remain necessary. While the digital trend in general signifies a relative loss
of publisher control, relations between publishers and intermediate retailers conversely solidify the
remaining significance of the traditional market leaders in the minds of many core gamers. Said in
another way, despite their dwindling capitalization in the broad sense of the market of games, the
brands of the traditional market leaders will still be associated with, as their definition suggests,
"market leadership". Their presence, and even dominance, in physical retail stores, definitely plays
a part in this. A related fact is that while the online spending is increasing, according to studies,
many consumers still technically prefer physical boxed games. According to a recent report, 74% of
US core gamers would take the physical copy over a digital one, if the price was equal (Sinclair 3,
2014). This implies that price competition essentially is a contributing factor to the growth of digital
sales, giving a distorted impression of actual consumer demand. Meanwhile publishers in fact seem
anxious to phase out the physical part of their business, which is again, arguably, an indication of a
narrow look at the cost benefits of digital distribution. While this is of course relevant, it could be
argued that the rate at which the complete distribution paradigm shift should happen, has been
overstated. COO of Electronic Arts, Peter Moore, for example, takes it for a given that digital growth
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is an expression of consumer taste and habit, which is somewhat a moot point, given the likelihood
that it is to a large extent a result of pressure created by the structural underpinnings of the industry
(Brightman 2, 2014). Secondly, he points out the digital transition being embodied by a new business
environment, where games have become dynamic live operations, which require global online
networks for servicing gamers. This if of course true, and extremely important in general, however
a bit irrelevant regarding the initial sale of the product, since even physically boxed games, can of
course be online-enabled, and even fully integrated in the online network. In other words, physical
game products, do not, essentially, impede or complicate the digital paradigm shift associated with
networking, and in extension, communication intended to brace brand equity and retain customers.
The viewpoint of industry expert Thomas Bense is that digital will eventually completely overtake
physical games at some point. However at the same time he states that it is not an immediate
concern, since physical retailing, for publishers is: "...a good platform to be marketed through...",
and "...of course creates additional sales...". This relates to the idea that since there is evidently
remaining inclination among some consumers to prefer physical goods, it is fair to assume that some
fraction of this segment could in fact be labeled as being gamers who are directly averse to digital
products. And so long as these consumers exist, distributing physical games will constitute
economies of scale, and a remaining solidification of publisher leverage.
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Chapter 6.
Recommendations
The analysis, discussion and all relevant empirical findings have now been presented, considered,
and can facilitate the basis for this final chapter. In short, the new opportunities presented by the
introduction of a modernized industry structure, have resulted in an overwhelming interest towards
the general gaming landscape. Accordingly, many new competitors have entered the attractive
digital markets and are now striving to gain a foothold within the industry. With low entry barriers,
however, product are overflowing the market, while, at the same time, corporations that are not
inherently associated with gaming are free to enter and pull money out of the industry. Thus, as price
cuts are inherently less detrimental to short-term profit when done on digital distribution, these have
been used as an ill-advised attempt at a retaliatory measure against new entrants. In turns, this has
however "trained" consumers to be more price sensitive, which has facilitated even further price
competition. Combined with publishers inflating production budgets to extreme proportions, likely
as an additional retaliatory measure against the reality of decreasing barriers of entry, this has
created a gap in the market, signifying a lack of mid-range offerings. Steadily, independent
developers on all platforms, but perhaps mobile games especially, have filled this void. The
traditional market leaders have thus lost their dominant grasp on the industry, while the overflow
and lack of organization/curation among independents has resulted in occurrences of imitation,
inconsistency in prices and monetization, and other troublesome tendencies. As a countermeasure,
many of these publishers are thus engaging in unstructured reformation and leveraging resources
across modern markets, in the hopes of re-securing a solid competitive stance. However, we do not
find this to be a lasting solution. Instead, we propose that these leaders follow a so-called Focused
Adaptive Synergy (FAS) as a strategy for shaping and driving the industry into long-term
sustainability, while positioning themselves in regards to the different market segments.
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Implementing the Focused Adaptive Synergy
It is evident, that the games industry is currently experiencing a dynamic evolution, devised by the
challenges and opportunities brought forth by the paradigm shifts and the complementary modern
tendencies. For most newcomers the objective has been clear, and these have steered directly
towards entering the newly established markets, which at the cost of certain risks embrace both
development and change. In fact, many of these new entrants have been and still are driven by
the strategy of jumping headfirst, landing on both feet, and exploiting every inch of their potential
within the alluring games sphere. Because with industry attractiveness being at an, relatively
speaking, all-time high, such strategies can be difficult to argue against. Apparently, however,
traditional gaming is not defined exclusively by these modern implications, and for certain parts, the
type of innovation that currently flows across the games industry can be deemed as intuitively
disruptive. One of the most substantial parts in question, are off course the traditional market
leading-publishers, which, in order to stay competitive in terms of the modern reconfiguration, have
comprised with strategic, structural, and operational modifications. In turns, these incumbents are
investing an extensive amount of resources and core capabilities in the mission of gaining relevance
across the various modern markets and segments. This, basically, reiterates the fundamental
question, which, given the problem formulation seen below, this thesis is set out to research.
"In light of current paradigm shifts and tendencies, how should the traditional market-leading
publishers seek to shape the industry, and position themselves in regards to the different segments
of the games market?"
We believe that the answer to this question can be found in the argumentation to why the
theoretical concept of FAS should lead, or at least influence, the strategic configurations and
approaches that outline the contemporary practices of the traditional market-leading publishers.
Driven by the ongoing and tendencies, these are shaped around a new and complex network
paradigm of interrelated, synchronized, and international formations, which in collaboration reach
across different markets and consumer segments. To make it more comprehensible, we have
chosen to refer to this paradigm as the hybrid integration, representing a complete expansion of
the supply chain in vertical, horizontal, and diagonal directions. As an example of these dimensions,
we have created Figure 11, which in entirety exemplifies the hybrid integration and the strategically
planned interaction between the elements of the traditional market-leading publisher.
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Figure 21: The Hybrid Integration
This model places the traditional market-leading publishers in a central position, as to administer,
coordinate, and lead all activities across the hybrid infrastructure, while effectively separating these
in different segments depending on the type of production and targeted market. The fundament
of this process is, however represented by the publisher integration up and down the supply chain.
From here, each segment is formed by separating developers into specific divisions, which, based
on talent and assigned budget, are each orientated towards a particular platform. Most commonly,
divisions integrated with mobile platforms are discrete and operate as individual units due to the
fact, that development for PC and console platforms is entirely different in terms of size, scope, and
focus. At the same time, however, all divisions are orchestrated and regulated by the horizontal
relationships, which are usually based on mutual cooperation rather than definite integrations. For
example, this happens when console manufacturers and app store holders enforce terms and
conditions for licensing and distribution, or when consolidated units, such as formerly independent
publishers, propagate their ideas and expertise. Nonetheless, as reflected in the discussion, the
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mere utilization of this mode of configuration has not been able to aid the traditional market-leading
publishers against a number of prevalent complications tied to the modern industry dynamics.
As indicated by the skewed emanation of Segment C in Figure 11, most big publishers develop their
original titles for console and PC, and thereafter manifest the IP onto the mobile platform. While
the console and PC versions of a game, may be (nearly) identical in terms of content apart from
certain platform-specific exclusivity that applies now and then the mobile platform is often
presented a simplified version, or essentially, a game where merely the base IP is shared. In some
cases, and relatively seldom, the mobile game might have a feature that can have a minor influence
on a core PC or console game. However, there is no direct, real-time interaction, but rather an
indirect and standalone supplement to the core game. Therefore, gamers are not given any
incentives or benefits from buying and playing a title across different platforms, especially since
games for mobile devices most often do not deliver anything other than a subpar IP-exploiting time
sink. Thus, in our opinion, and especially with this increased dedication to the mobile games market,
dispersed strategic approaches as these, reflect the waste of resources and incorrect attention to
value creation that most traditional market-leading publishers engage in currently.
We find that the incumbent publishers are incorrectly driven by a strategy that seeks to shape the
industry outward by focusing in different directions and reaching across every market and segment
possible. However, this strategy is pursued without safeguarding cohesive and adaptable synergy
amongst the integrated units, and most importantly, amongst the fuit of their labor the games.
Currently, the common strageic course of the traditional publishers is therefore mainly driven by
the idea, that targeting the segments constituting the largest, and assumingly most lucrative,
consumer base, is the key to succeeding within the industry. Typically, this refers to the casual
gamers. At the same time, however, publishers want to marginally hold on to their core consumer
segment, being the dedicated or hardcore gamers. This does raise the questions of whether the
incumbents adopting a dispersed strategic direction are, in reality, not grasping too broadly for their
own aspirations and capabilities. For example, it is understandable that traditional market-leading
publishers can utilize the hybrid integration to break free of some boundaries placed by the firstparties in the industry spirals fourth step, and instead use alternative methods to select target
audiences and marketing strategies. Changing from engineering-driven to marketing-driven
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strategies is however not the boldest decision, especially due to two underlying reasons. One, as
discussed earlier, the sudden dedication to the (uncertain) modern markets and segments can result
in a negation of core capabilities. Two, this embraces the path-dependent mentality of the games
industry, as incumbent publishers pursue new directions, while still facing controversies regarding
the quality and future prospects of the overall game production. This might be a generalization and
a personal statement, but the fact is, that we have observed an outcry from the core gaming
community towards the incumbent publishers shifting focus towards exploiting new segments and
chasing fiscal returns, at the cost of production quality. Thus, we see a need for strategic changes.
While the use of hybrid integration is highly relevant and applicable for the traditional marketleading publishers, the dispersed strategic positioning that defines its currently implementation is
not functionally optimal. Therefore, in our opinion, it is essential for incumbent publishers to
converge their strategic focus into creating titles that are integrated, and complement each other
across the different platforms, while simultaneously catering to the various consumer segments. In
light of this, we find that a suitable strategic complementation to the hybrid integration includes:
Focusing on creating symbiosis between games, under the same brand.
Increasing value through product differentiation and discoverability.
Encouraging and enhancing cross-platform use.
Enforcing flexible adaptability to industry trends, consumer demand, and future investments.
Accordingly, we have embodied our theoretical cognition into the concept of Focused Adaptive
Synergy, which is aimed at manifesting itself as a leading strategic orchestrator of the hybrid
integration paradigm. A visual example of this concept is given in Figure 12, which depicts a
hypothetical presentation of what the strategic concept of FAS encompasses. Opposite the outward
approach taken by the publishers in context to the hybrid integration, this method adapts an
inward-centered strategy, which concentrates on joining and redirecting all corporate
competences into one determined and comprehensive mode, through which the market segments
can be penetrated collectively. Once again, the publisher is placed in a dominant position, but is
strategically transformed from a preparatory point of dispersed segment penetration, into an outer
layer that purposely safeguards and conveys efforts towards an attentive implementation of
interconnectivity. Passing on to the first circle, the publisher will have the responsibility of
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October, 2014
collaborating with market-specific first-parities and consolidations, in order to promote strategic

adaptation of synergetic approaches, which can then be integrated into the last circle, housing
developers, distribution channels, etc. This last circle then serves the purpose of shaping the
production and supply chain towards adapting towards a universally targeted segment, which is
reached through collaborative measures rather than fragmented attention. Upon implementation
of the FAS, market information and feedback will be collected by the publisher, which has the
objective of setting sustainable strategic courses, according to future investment prospects, the
opinion of the gaming community, and the ongoing industry trends. The process then repeats itself.
Figure 12: The Concept of Focused Adaptive Synergy
We understand that placing every segment under one focused strategy is not necessarily
constructive, and that it in fact can become highly complex. Each consumer segment is unique and
is characterized by different demand and vision of the games industry. Yet, this does not justify that
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October, 2014
offerings should be completely disseminated, or that publishers should favor one segment over the
other, based on potential immediate benefits and opportunities. This can be destructive for the
industry, and in essence, this is what the Focused Adaptive Synergy is intended to counter. The
concept seeks to deliver a strategic ground on which to build a consistent corporate foundation that
unites all capabilities and resources into an intelligible network. This way the traditional marketleading publishers will be able to keep strategic focus and utilize their inherent core capabilities to
adapt a strong market positioning, while raising industry barriers and simultaneously facilitating
flexibility and long-term survivability. Instead of dedicating intense focus spread across the
individual segments and markets, the universal synergy makes it possible for the publisher to adapt
to industry-wide changed in one collective stroke, rather than having to adapt its various operations
individually. In continuation of this, we have created an exemplification of how the Focused
Owning the same title for

different platforms is not
common, as repurchasing
(basically) identical copies
of a game does not make
that much sense.
Therefore, publishers
should encourage crossplatform purchases by
providing substantial
discounts and incentives.
For example, having
bought a game for PC that
you would like to play on
Xbox occasionally, a
second purchase would be
more justifiable if the title
was sold at a marginal
price or with additional
content included. In order
for this to have any appeal
however, all personal
game progression should
be accessible across
platforms.
Instead of just
leveraging a brand into
mobile titles, these
could be developed to
synergize with the
console and PC game
worlds. These should
be able to function as
individual entities,
integrated into and
influencing the game
environment of other
platforms. To give an
actual example, the
upcoming mobile
installation to Ubisofts
The Division is giving
players the opportunity
of real-time interaction
with the console
platform.
Adaptive Synergy can be implemented in practice, onto the offerings of traditional publishers:
Have parts of the
games containing
exclusive content that
varies gameplay
depending on the
platform played on.
There will most likeliy
be difficulties related to
a such implementation,
for example, however,
this could be done
through multiplayerspecific and other
marginal content, that
will not influence the
core game mechanics
massively.
The perfect scenario would be if gamers could also interact with each other cross-platform, but with
the ongoing arms race between console manufacturers, this seems unlikely to happen anytime
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October, 2014
soon. However, by incorporating a similar three-step method for increasing cross-functionality

between the entirety of the units within the paradigm of hybrid integration, the traditional publisher
can increase value through factors such as; product uniqueness, connectivity, and discoverability.
The strategic incorporation of an intensified focus towards market information and feedback, will
potentially also help strengthening the publisher brand by enforcing security and control of quality
standards. Conclusively, the concept of Focused Adaptive Synergy would furthermore be fit to
deliver solutions to the three overarching industry tendencies presented in the discussion.
Market oversaturation
Restraining from engaging in cohesive strategic devotion and substantial resource
investment in new and unexplored markets. While it seems rational to expand a
portfolio into apparently prosperous markets, a too comprehensive and sudden
dedication can lead to loss of focus on core competences, strategies, and longterm sustainability - especially as flexibility is key in the turbulent environment.
Focusing on modern productions, endeavors, and strategic alliances that help
retaining money within the games industry ecosystem, rather than overspending
on integration with the various devices offered by e.g. the tech giants.
Price competition
Letting consumers effectuate their bargaining power through a transparent
development processes and corporate responsiveness to constructive feedback.
This leads to increased quality and differentiation, while shifting competitions to
other dimensions than price.
Letting consumers effectuate their price sensitivity via clever customer
segmentation-based discounts, within the context of publisher or brand-specific
networks/loyalty programs.
Loss of publishing control
Maintaining the core business of conventional games and growing it through
differentiation, quality, innovation etc. In addition, hightened attention should be
placed on cultivating elements, which signify barriers of entry and publisher
control. For example, publishers can still cater to digital-averse consumers
through intermediate retailers, despite the lure of full-blown digitization.
Engaging in strategic partnerships with independent developers, as the indie
scene has been too optimistic in compressing "publishing" into simply "having
your game featured on a distribution platform". There are other important
factors to publishing, which are key in game discovery and gaining an audience,
primarily: marketing, customer support, loyalty programs/networks, etc. These
are of course in particular important in regards to global presence, and in
facilitating independent developers to reach foreign markets.
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6.2
October, 2014
Feedback and Criticism from the Games Community
Following abductive reasoning, in a last effort to test the formulated recommendations, a final
interview was conducted with two members of the prior questioned gaming community group (see
appendix 9). The first individual has a positive outlook on collaborative gameplay across platforms,
citing this as the strongest feature. Regarding functionality, as a result of the proposed strategy, he
see the potential in it adding a fun dynamic to games His concern however is that crossplatform features are subjected to predatory monetization methods, making them a purchasable
necessity for enjoying the core game, rather than a complementary addition. For the same reasons
he thinks it unlikely that casual gamers can be incorporated in the core target market. He sees
penalizing monetization as a general problem with the modern game types, and fears it will leak
into conventional games. Lastly, regarding the competitive balance of the industry, he does however
consider outsourcing mobile development (strategic partnerships), as a relevant future approach.
The overall impression of the other individuals opinion is that he is conceptually positive the
strategy, though he considers it as being too ambitious, and questions the likelihood of a sufficient
quality standard of related game features. For one, he alludes to the challenge of appropriating the
cohesive experience across platforms that are fundamentally different. Similarly, he points out that
value of the same game across platforms should be equal, though this is miles from the truth
He acknowledges a positive feature in cross-platform networks and services though seems to doubt
the motives of publishers. For example, he mentions that with current pricing of modern games,
publishers are less inclined to care about the associated value propositions. He understands the
rationale of the potential of modern game types, though stresses the importance of not
compromising the core conventional focus. In addition, he recognizes the partnership incentive
inherent in the strategy, as an alternative to traditional acquisitions. As opposed to the first
respondent, he thinks that secondary platforms could attract casual gamers to conventional
games, alluding to core gamers being more critical of narrow value propositions. He points out that
moving back to game-play relevant stuff on either platform. is a primary concern, meaning that
even a complementary experience should be rewarding in itself, not just an extension of the core
game. Overall, the responses point to the fact that, for the proposed strategy to succeed in practice,
it is essential that quality and value must support the implementation of concrete initiatives.
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October, 2014
Conclusion
Through the course of this paper, the shifts and tendencies of the global games industry have been
researched, and analyzed, culminating in a discussion. This discussion has in turn facilitated the
formulation of strategic recommendations, which essentially provide a direct answer and solution to
the core problem formulation of this thesis. These conclusive thoughts will reflect on the progression
of the thesis, wherein there will be allusions to how the initial research questions have driven the
formulation of this paper, essentially answering them in direct reference to their significance for the
core problem formulation. This will ultimately facilitate a conclusion on the relevance of the abovementioned recommendations, as a successful outcome, relative to the original purpose of the thesis,
and the formulated problem.
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October, 2014
The core problem formulation can, upon closer inspection, be divided into three elements. The first
is signified by the sentence In light of current paradigm shifts and tendencies... The implication of
this phrasing is that the validity of potential formulated solution depends on a thorough
understanding of the industry and the changes it is undergoing. The research questions
accommodate this by raising the necessity of both descriptive accounts of the prior history and
contemporary conditions, as well as more reflective and analytical perspectives on the changes in
the configuration of the industry. The paper sets out be recounting a prior partial crash of the
industry, establishing a set of tendencies, as the primary causes. Subsequently, the paper describes
and analyses integration and configuration of the industry structure, thereby identifying
contemporarily relevant mechanics and competitive forces. Notably, it is revealed that the formerly
destructive tendencies, to some extent, are contemporarily observable in the industry. Installed by
appropriate research questions, and in a manner of abductive reasoning, these tendencies are
elaborately discussed, in regards to their actual significance. Thus, a sufficient foundation is
established for proposing recommendations relevant to the core problem. To reiterate the main
points, it has been found that the observable tendencies; market oversaturation, price competition
and loss of publisher control, are substantiated by recent and ongoing changes pertaining to
distribution and development processes, which in turn have led to low entry barriers, intensified
rivalry, and unfocused integration. Upon discussion of the lack of a focused effort from traditional
market leading publishers, to adapt to the interconnected, expanded market, it can concluded that
said tendencies, though inherently detrimental throughout, constitute a considerable directly loss
of industry value, in a uninhibited environment.
The second and third elements of the core problem formulation refer directly to the implication that
the traditional market leading publishers can, for one, shape the industry, and in turn need to,
position themselves in regards to the different segments of the games market These are, as
should be evident by the discussion and recommendations, highly correlated. This underlines the
fundamental notion of this thesis that the traditional market leading publishers are the most
pertinent focal perspective, since their challenge of adapting to the paradigm shifts of the industry,
is intertwined with the potential for a long-term profitable and sustainable creative industry.
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October, 2014
Returning to the flow of reasoning of the paper, in direct response to a research question, the
potential for investment, and most pertinent prioritization between conventional and mobile
games, is analyzed. It is found that the traditional market leaders have the highest compatibility
with the market for conventional games, though their potential also carries over into mobile games
as a secondary focus. This interim conclusion is reached based on the relevant resources and
capabilities that are shared characteristics amongst this type of incumbents. This facilitates the
concurrent identification of aspects that drive strategic positioning, which in turn are found to
coincide and combine with factors that can shape the configuration of competitive intensity in the
industry. This is thoroughly considered in the discussion, leading to an understanding of the defining
factors of improvement, pertaining to concrete initiatives that the traditional market leaders can
employ, in their struggle to adapt to the new paradigm of the industry. It can be concluded that the
traditional market leaders must focus on primary resources and capabilities, in a devoted effort to
maintain and build on a leading position in the core of the game market. This entails a dedication to
diverse value propositions, quality and differentiation, to which constructive empowerment of users
as an integrated function of development, is a key concern. Furthermore, the creation of crossplatform networks, both as a platform for service, as well as interconnectivity and cooperative
functional features, facilitates brand equity as a driver of competitive strength and market position.
In responding to the expanded games market, it is reasoned that the resources and capabilities of
the traditional market leaders are applicable for investment into modern game type, though the
optimal value is gained from these being dedicated to functional complementary interconnectivity,
as well as a representation of core brand characteristics. With investments allocated beyond the
extent of the core business, cultivating strategic partnerships is the optimal approach, thus
benefiting from niche capabilities of developers, in exchange for competency in marketing and
customer retention, enabled by brands and networks. In an extended consideration, differing legacy
market compositions, across the globe, has led to differences in understanding of factors such as
monetization of modern game types. Facilitated by increasing homogenization of the international
game consumer, strategic partnerships are thus particularly relevant in regards to penetration of
foreign markets, signifying internationalization for both developer and publisher.
In light of the factors defining change in the industry, it is found that the wide presence on the games
market, even with a prioritized focus on the core conventional segment, requires a combination of
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October, 2014
horizontal, vertical and diagonal integration. This presents the reality of a new identifiable paradigm
of Hybrid Integration, which is thus the contemporary foundation for shaping the configuration of
the industry towards a more sustainably profitable state. The key factors of change in this regard
are establishing barriers of entry, channeling buyer power, and mitigating and diversifying
competition. To accommodate said paradigm, the various concrete considerations and initiatives,
can be combined and reformulated into a strategic framework, designated the Focused Adaptive
Synergy Strategy. As explained, this concept revolves around maintaining a focused allocation of
commitment to various segment of the market, though being adaptive in recognizing and
appropriate initiatives to their distinct key success factors, and finally yet importantly, seeking to
establish synergy between primary and secondary focuses.
In conclusion, the prior presented recommendations, centered on a formulated strategy, do indeed
offer a direct and complete answer to the core problem formulation. It is comprehensively based
on the current paradigm shifts and tendencies and provides a framework for positioning in
regards to the different segments of the games market which in turn facilitates the potential to
shape the industry, towards a more sustainably long-term profitable global games industry.
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October, 2014
Epilogue
Having presented the concluding recommendations, and reiterated the various factors underpinning
the reasoning with which they were reached, the research questions have been answered, the core
problem accommodated by a proposed solution, and thus the thesis is concluded. On a final note, it
is however worth considering future research, which could be built from the basis of this thesis.
Firstly, it would be relevant to observe the coming years of the industrys development, taking note
of incumbents pursuing initiatives that correspond to those stipulated as manifestations of the
proposed theoretical strategy, and ultimately evaluating the outcomes for both the given
incumbent(s) and the industry as a whole. Taking a different route, it could be interesting to conduct
a case research, following a smaller developer in partnership with a big publishers, and uncovering
the division of value gained from such cooperation.
Another consideration is that the industry could be subjected to new technology driven change,
which could disrupt the validity of the formulated strategy. In this regard, virtual- and augmentedreality are interesting concepts, which are predicted to gain significance in the near future. Enabled
by distinct peripheral hardware, VR and AR, can expand the value propositions of games, and
potentially even change the fundamental conception of what is possible in interactive
entertainment. A key concern however is whether or not they will be integrated as extension of the
core game experiences, or rather separated by a whole new platform and new concepts of digital
storefronts. As of now, the future in this regard, can only be guessed. It can however be argued that
the proposed strategy, to a large extent, inherently accommodates the notion of integrating new
paradigms of gaming into established cross-platform networks, so long as they can be aligned with
core resources and capabilities. As such, the creation of synergy between primary and secondary
focuses is an ongoing process, which does not upset the industry configuration, by applying old
approaches to new challenges.
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October, 2014
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124
Appendices
The following is a collection of the appendices, referred to over the course of the paper. They are
presented in order of appearance.
Included as appendices are also the questions and answers from the conducted qualitative onlineinterviews with both industry expert Thomas Bense and the gaming community.
Appendix 1: Comparison of Research Philosophies (Saunders, 2012); Table 4.2, p.140
Appendix 2: Projected Console Generational Growth (Armitage, 2013)
Appendix 3: The Life Cycle of Game Consoles (in terms of units and sales global revenue)
Global Software Sales by Platform

$200.000.000
$180.000.000
$160.000.000
$140.000.000
$120.000.000
Wii
$100.000.000
PS3
$80.000.000
X360
$60.000.000
PC
$40.000.000
$20.000.000
$0
2007
2008
2009
2010
2011
2012
2013
Appendix 4: The evolution of game cost, including adjustment for inflation (based on EGM, 2011)
System
(year)
Game cost in USD at system

launch year
Adjusted for inflation as of June

2014 (usinflationcalculator.com)
NES (1986)
29.99 - 49.99
64.87 - 108.13
SNES (1991)
49.99 - 59.99
87.01 - 104.42
N64 (1996)
49.99
75.53
PS2 (2000)
49.99
68.82
Xbox 360 (2005)
59.99
72.82
Xbox One/PS4 (2014)
59.99
60.48
Appendix 5: Insight 1: The Valve Corporation

Valve Corporation and the digital distribution platform, "Steam"
Developed by the veteran game-development company, Valve Corporation*, "Steam" currently
hold the title as the world's largest online digital distribution, DRM, multiplayer, communications
and gaming platform. Initially released on September 12th, 2003, Steam has progressively expanded
its features, user-base, and available content. Today the platform offers various community
features, automated game updates, in-game VoIP**, Steam-exclusive game discounts, cross
PC/Mac/Linux compatibility, cloud data storage, profile security services, and mobile cross-contact
chat functionality (Steam,2014). As of June 2014, there were 3312 games available for purchase on
Steam, including games from both major publishers and smaller independent developers
(SteamGames, 2014). Moreover, the 'Steamworks' system was released in 2010 with a focus on
creating a span across different game platforms. Although it still not implemented into the X-box
console, the system provides features of cross-platform matchmaking, achievements, anti-cheat
technology, in-game economy with microtransactions etc. (Steamworks, 2014).
Although Valve never releases sales figures, an estimate made in 2009 by Stardock*** indicated
that Steam enjoyed the position as market leader with a market share with approximately 70
percent of all digital distribution (Gamasutra, 2009). These sales estimates were still considered
plausible in 2011 (Forbes, 2011). Today the Steam client is available in 25 languages and has over
40 million active users, while operating on a year-over-year unit sales increase of more than 100%
for the seventh straight year (Gamingbolt, 2012).
*Valve has a portfolio of a series of award winning titles, such as Half-life, which was release in 1998 and has won over
50 'Game of the Year" and a few "Best Game Ever" awards (Valve, 2012).
** Voice over IP represents communication protocols used for delivery of voice communications.
*** Stardock is a software developer and one of the first to distribute software products via a free digital distribution
program.
Appendix 6: The long tail of digital distribution channels
Appendix 7: Insight 2: Kickstarter

Kickstarter is the world's largest funding platform for creative project, encompassing categories of art, design,
music, publishing, video games and more. The general ideology behind the platform is driven by the belief
that a well-communicated and competent idea can spread fast and wide to a large group of people that are
able to provide both a source of money and encouragement. Thus, all creative projects are encouraged to
utilize the Kickstarter platform and are not restricted by factors of size, seriousness, or experimental
conditions. As an example, the video games category includes projects aiming for everything between
monetary goals of $1,000 to more than $900,000. However, Kickstarter has some clear guidelines on specific
requirements a project must fulfill in order to qualify for funding:
- Projects must have clear and outlined goals that can define a state of completion and the final outcomes.
Thus, the project cannot be open-ended.
- Projects must relate directly to one of the categories supported by the platform.
- Projects are prohibited from being used for raising money for charity, cause funding etc.
The figure below (inspired by Hemer, 2011) illustrates the operational chart of Kickstarter, which acts as an
intermediary in relation to receiving, providing and sharing information between the network of the capital
seeking ventures, crowdfunders, and financial institutions/services. The way this mechanism works is
basically explained through several steps. First the capital seeking venture (CSV) submits an authorized
project to Kickstarter, which is then communicated further to the network of crowdfunders using the
platform.
Those, to whom the project is appealing, can then become backers by pledging a monetary amount of
minimum $1 within a specified timeframe of e.g. 50 days. The CSV will typically create incentives for pledging
bigger amounts through a tiered rewards system, which will be delivered if the project becomes fully funded
(to give an example: pledging $20 rewards the backer with a copy of the final game - pledging $10,000 invites
the backer to a special private party with all developers). The financial transactions are paid through the
micropayment providers, which communicate information to banks and back to Kickstarter.
If a project is not funded before its time expires, the 'All-or-nothing' platform mechanism ensures that no
money are withdrawn from the deposited pledges. Contrary, if a project becomes fully funded, the system
allows a continuation of pledge inflow until the time expires. Upon successful closure, Kickstarter collects a
5% fee along with 3-5% for third-party transaction costs. In addition, Kickstarter does not take any percentage
of ownership of intellectual property. The platform does however, neither investigate a project's claims, nor
does it hold any responsibility for validating and enforcing completion and delivery of promised products
(http://www.kickstarter.com/).
Operational chart of Kickstarter (inspired by Hemer, 2011)
Appendix 8: E-mail correspondence (interview) with industry expert Thomas Bense (TB)
First round of questions:
Q: First and foremost, thank you for agreeing to participate in this interview. We have contacted you because of your
work with Pixel.tv, a Danish gaming news media website. What has your role been there, and what is your general
experience with the gaming industry on a personal and professional level?
TB: Jeg startede Pixel.tv efter at have arbejdet med spil-tv hos dk4, tv3, m.m.
Min erfaring med spilbranchen er at den i hele min tid bare er vokset og har bredt sig til et strre publikum.
Q: What do you find to be the most unique features of video games, compared to other entertainment media, such
as movies?
TB: Det der drager mig mest er at man er involveret i historien, sammenlignet med film/ bog hvor man er passiv
deltager og s kan jeg godt lide konkurrenceelementet, der er i mange spil.
Q: Can you mention 3 things that you think have helped drive the popularity of gaming?
TB: At man gennem rene har gjort det mere brugervenligt, man har udviklet spil der er nemme at komme i gang med,
vanedannende, konstant fortller bedre historier og lavet spil til stort set alle mlgrupper lige fra fitness til rolespil.
Q: And 3 things that you would consider common misconceptions about gaming?
TB: At man ikke er social, at det er fordummende og man bliver voldelig.
Q: According to you, what are the most important trends happening in the gaming industry right now?
TB: At det breder sig til alle platforme inklusiv telefoner, tablets og at priserne ndre sig, s man nu kan f spil, der
enten er gratis eller til en meget lav pris.
Q: Digital distribution and new devices, such as tablets and smartphones, have enabled independent developers to
reach a larger audience without help from a big publisher. How would you assess the future for independent
developers, and should they be considered direct competitors to bigger development studios, or are they in separate
markets?
TB: Indieudviklerne star strkt, da man har mulighed for at udbrede sit spil forholdsvis nemt. Og har man den gode id
kan det ogs blive en god forretning (se angry birds, Wordfued, Minecraft, m.m.)
Q: Digital distribution has increased steadily in popularity over the past years. How do you think this trend will
develop, and can digital downloads potentially completely take over from traditional physical games?
TB: Det tror jeg det gr p et tidspunkt. Man kan jo allerede nu downloade spil uanset om det er en stor aaa titel eller
en lille indie titel. Lige nu holder butikkerne fast i salget, da det ogs for udgiverne er en god platform at blive
markedsfrt igennem og det selvflgelig skaber noget mersalg, men i fremtiden skal forhandlerne vre mere kreative
for at holde fast i salget af de fysiske eksemplare.
Q: Have the gaming companies (especially the market leading publishers) done anything in recent years to either
embrace or counter the trend of digitalization, and/or is there something you think they could and/or should do in
the near future?
TB: Som skrevet, holder de fast i forhandlerne endnu da det giver god mening i forhold til markedsfring og ekstra salg,
men tror det er et sprgsml om tid.
Q: We have seen tendency of industry consolidation where big publishers, such as EA, Activision Blizzard, and
Ubisoft, acquire - and merge with - game development studios, thus becoming multinational gaming corporations.
How important is the localization of a game development studio?
TB: Jeg tror ikke det er s vigtigt hvor spillene bliver udviklet, men mere af hvem det bliver lavet.
Det er mest vigtigt for at holde gang i de lokale miljer for udvikling af spil og inspirerer nye og kommende
spiludviklere. Tror dog det er vigtigt at lave lokalt indhold p nogle spil, overstte dem til lokalt sprog, m.m. specielt til
brnepublikum
Supplementeray questions:
Q: Har du evt. nogle tanker vedrrende dette? Ser du grund til bekymring over eksempelvis disse tendenser:
- at der er kommet flere konsoller, som f.ek.s Steam Machines, Ouya eller Amazon Fire TV p markedet?
- at udsalg og priskonkurrence er blevet s udprget, isr p Steam, men ogs Xbox Live og PS Network?
- at det er blevet s nemt at vre independent developer, at der mske er for mange spil p markedet?
TB: Det er rigtigt at markedet bliver oversvmmet med produkter og nogle af de nyes maskiner vil forsvinde lige s
hurtigt som de kom. Af de store er det lige nu mest Nintendo, der lider. Deres nye konsol Wii U lever ikke op til deres
tidligere succes og slger ikke i nrheden af det samme, de lider ogs p det hndholdte marked hvor mange familier
nu njes med en tablet/ smartphone i stedet for en Nintendo DS. Flere udvikler nedprioriterer Wii U frem for de
andre maskiner, s de blder lidt lige nu. Det virker ogs til at der ikke er plads til den blde mellemvare, enten er det
de store AAA titler som FIFA, Assassins Creed, CoD m.m. ellers er det de sm simple spil, der slger.
Appendix 9: Online interview with gaming community members (GC)

Initial round of questions:
Q: Could you mention some factors that you consider to be particularly destructive for the quality of a game?
GC: Any combination that can be destructive can also be good. Some games do not need 4K quality to be good.
GC: DRM, fanboys
GC: downtime (if there is too much waiting in the game)
GC: Obviously bugs. Especially online based games, problems with connectivity. Non-responsiveness from support team
on forums and webpage.
GC: Not having splitscreen or co-op campaign. And off course the graphics and how realistic the
movements/gravity/shootings/deaths are.
GC: Considering the amount of games you have the option to play, getting into a game with too long playtime can be
an obstacle. Though once you trancend that barrier, fx. in my case with empirebuilder games, it's all good.Another
thing could be reppetetiveness. I play MOBA's and thats just addictive. I hate playing it, but its snacksize enough that I
don't think about it.Linearity. I hate if I play an RPG that I feel I get railroaded. Removes the adventure of it.
Q: Could you mention some factors that you consider to be particularly enhancing for the quality of a game?
GC: Their lifespan and the ability to be creative when playing.

GC: multiplayer, storyline, graphics, gameplay
GC: The time devoted to making each elements in the game. I am now thinking of missions in rpg's. One can quickly
notice of the design team has made some effort in making each quest unique; instead of just gather X amount of Y in Z
amount of time...
Q: In which ways do you know / assume / guess that a publisher can influence game development?
GC: To show dedication for an idea and make sure to share it
GC: They have the money and as such can influence every aspect, especially when scum like Bobby Kotick of Activision
fame sits on the board.
GC: I believe that some publishers are more devoted to the individual games, whereas some publishers care more for
profit, and as such might compromise the game quality, in order to appeal to a larger audience
GC: I assume they can influence spendings/deadlines/quality vs. costs
Q: Do you think publisher relevance will decrease in the future?
GC: No, not really
GC: Yes and no. Games have gotten more expensive to develope, the average Joe expects state of the art graphics,
sound etc. and the marketting budget has exploded in the last decade. With this in mind then yes, they will atleast stay
relevant in the foreseeble future. But in the in last few years we have seen quite a few successful alternatives to the
publisher sponsored games, those beeing crowdsource games(Kickstarter, Indiegogo) and independant game
developers.
GC: Nope, quite the contrary. As the PC market is declining and the console market is growing.. and the hardcore
gamers stick to PC's, I believe that publishers will be lured by the highly profitable console markets, and cater to the
broader public. However, this leaves the PC market as a niche market, and I hope that this will lure publishers that are
more devoted to the smaller genres and will adjust to the quite specific needs of this market
GC: Yes, the industry gets bigger and the amount of competent developers is increasing, so there will be enough
professional expertise to create high quality game with all publishers. The only factor will be money
Q: What is your opinion of game franchises/series, especially those that are annual, such as FIFA or Call of Duty?
GC: Franchises are usually bad, it seldomly leads to innovation, which we have seen, Battlefield, Call of Duty, FIFA,
Assassin's Creed, all come out on a yearly or biyearly basis. Most of the games have stagnated, much re-use of assets,
boring stories, and one wonders if it would be better if it would turn out better if they released fewer of them.
GC: I believe that those franchises tend to water themselves out. I can see the huge financial benefit in them, and there
is obviously a market for them (however why someone would pay 80$ to upgrade from FIFA 2013 to 2014 is beyond
me). My opinion is, that one should only release a new game in a franchise, if it adds something significant to the
game, or has some significant changes. Releasing a new game (with more or less the exact same features) just because
it now says 2014 instead of 2013 is ridiculous in my opinion. "The Sims" is a good example of this.
GC: FIFA is a brilliant franchise and the fact that they have annual releases makes sense, because of movements in the
real-world Soccer-market. CoD is my favourite game, but I do not like any versions since Black Ops (did not like Black
ops 2 either). CoD doesn't need to have annual releases, but maybe only expansion packs and then a new game every
two-three years
GC: I never really play fifa, but I liked the COD games for the single player storyline. Now it seems like a bad
mordernized Unreal Tournament. They don't sell to me, though I do play battlefield (though not much, since it is almost
unplayable). They do not appeal to me.
Q: Do you deem the above mentioned tendencies [tendencies presented in the paper] to be correct observations?
GC: Some of the observation are correct, but if these tendencies lead to a new collapse I do not know. Most likely we
will see something of a small revolution in game development, but where it leads to is hard to see, the market changes
fast, if asked a year or two ago, the indie developers had golden days, but that market seems a bit saturated now. The
same is true with the more traditional developer models, many games experiment with new financial models, selling
DLC, splicing games up, where a bit of it is free.
GC: yes
GC: yes
GC: Perhaps. However the "industry" is a collection of a lot of smaller segments. I agree with the text, regarding certain
segments. However, certain publishers, like Blizzard Entertainment, have established themselves in a high-quality, low
quantity niche, in which games are only released on a bi-annual basis, and where the fan-base eagerly awaits every
release. I believe that for some publishers, the above text is correct, because that are trying to continue to act on the
general market as if the old rules still apply. Where only 15-20 years ago the average western household would have
only one gaming-able device, every person how has several. This has shifted the "average user" from a gaming
aficionado who spends hours every day on games, to pretty much anyone, who spends 20 minutes on the train playing
games. The industry players need to realize this and position themselves accordingly.
GC: Yes, I can see this trend emerging and being present
GC: Well yes, but just because the market is flooded with crappy games doesn't mean I'm going to buy them. The
difference between ps4 and xbox one is miniscule. They play the same games, they offer the same services. Eventually
I'm going to get a PS4 though and that is only because of the Metal Gear franchise. Likewise I also own a wii u to play
through the more and more childish zelda games (maybe I'm just getting old), mariokart and smash bros. I do think
that some things will happen. The Oyua was not a succes, and I doubt the steam machines will be maybe because I
don't really understand the point of them. If I understand correctly its pc's determined for gaming with upgradeble
parts when neccessary? I already have that. Gaming on the go is snacksize, easy and entertaining, but I would rather
be mesmerized by an epic with sourroundsound speakers than shoot bubblegum or whatever you do on a smartphone
game.
Q: Do you have anything related to add, that you personally consider a negative tendency in the industry?
GC: For any gamer that has more experience with gaming than on his phone or facebook, then there is a tendency for
game developers to focus on financial returns. The big budget games might be affected by this, when people only want
more money and not to produce something that might be playable for the next 10-20 years
GC: Too much DLC, torture like F2P models, and extending the game by adding ridiculous achievements.
GC: Cut the crappy games and give me quality. Don't release a game that looks nothing like what you showcased (like
Watch dogs got downgraded for the pc to make it look similar to consoles(though you can mod it through game files to
make it look like the e3 demo)). Don't copy franchises. The market will flood in MOBA's soon: EA is releasing a moba,
blizzard is, smite is coming and there already are DOTA and LOL. There are money there, yes, but ugh. The market is
already occupied. Also DL fucking C. I dont mind an expansion but I hate to have to buy dlc's. Stop me from buying the
game.
Q: Considering, for example, the Steam Machines and Ouya: what is your opinion on the attempts to bring PC- and
mobile-gaming to the living-room setting? Is there a demand for this, and can it threaten the "traditional" consoles?
GC: Doubt that there is enough demand. People who like those games will most likely prefer to play them on their PC's
GC: The increasing interval between console releases, might increase demand for such machines as the Steam
Machine, but I doubt if it's a direct threat to the traditional console, atleast not for a while.
GC: there probably is a demand for this, i just don't really see the point
GC: That could be good, because you are independent of your console, and off course, it could threaten the traditional
ones if the quality is the same in the games
GC: IMO there is no demand for this. Ouya failed and Steam machines will too. I have a pc and I know how to plug a
controller into it, though they could make it easier.
Q: Regarding mobile games in particular: do you see these as substitutes for PC- and/or console-gaming?
GC: No, not yet at least.
GC: They can, but most of them are extremely bare bones and most of them are so called cow clickers.
GC: no, because most moblie games are just time-killers, while you are waiting for a bus/train etc. or sitting on the
table.
GC: No. I believe that those who grew up playing quality PC games are not going to substitute these for mobile games.
However, I believe that there is a huge market for mobile games - bigger than that for PC - but I believe that these are
two different market segments.
GC: Mobile games are limited to controls/touch-screens and power. The experience with PC/console is far superior to
mobile. However, the ease of starting a game on the phone vs. consol/PC makes it a much used platform in my daily
life. (on the bus/toilet/in school/when I'm bored or have 5 min off)
GC: I don't really do mobile games. I own a 3ds, but I play it at home when my gf watches tv or something.
Q: Do you feel game discounts and sales have an effect on how you value games, and do you think they influence
your purchasing behavior?
GC: Not really
GC: no
GC: Yes, I certainly buy more, but many games I buy now, I would never consider buying at a full price, but the amount
of money spent on games are probably the same.
GC: Perhaps. But not to a degree where I would chose not to buy a game because of the discount
GC: They do influence my purchasing behaviour. No way in hell Im going to pay 60 euro for a game when steam will
sell it to me for their season sales at 25 euro. So yes. I might even buy games at sales that I will never ever play just
because its so frikin cheap.
Feedback on the formulated recommendations:
Q: What are your thoughts regarding big publishers being attracted to casual and mobile games? (Primarily mobile
games)
GC: This is a very broad question. As a gamer, I enjoy well-made titles. While many casual, mobile games are wellmade, they are often designed primarily for revenue-generation through minitransactions. The best way to do this is to
create addictive features and penalize the player for not spending money. This is, for me, not enjoyable. My biggest
fear is that this business model will leak back into the "real" games industry, and that more and more free-to-play titles
will incentivize purchases not by rewarding paying customers with, fx., extra content and sidegrades, but by
implementing addictive features into the gameplay and then penalizing non-paying customers.
GC: It make sense for them to do so, given the sheer size of the potential market. What is not OK, is that this attraction
be at the expense of their, either current or future, games released on either the PC only or console only platform. It
does, however, fuck me off to no end when big publishers ride the game-porting wagon and for example port a console
game to PC, not even bothering to re-write, oh I don't know, the fucking code for the controls! So, I can imagine that,
having difficulties jumping over the fence where it is only slightly lower, getting big publishers to jump over the fence
where it is at it's absolute fucking highest, would be a struggle - and this is what's needed if games are to be truly
multi-platform - because surely, 'multi-platform' only says that the game is able to run on different platforms, but
subconsciously it also reads that the game will be equally good on all platforms - something, which is just fucking miles
away from the truth today.
Q: Which impact do you think, following our recommendation, could have on the balance of competition in the
industry? (would it for example incentivize partnerships between companies, or would it make the big publishers
more powerful?)
GC: It seems that large companies are making mobile games in-house, though it would be interesting to see them
activate smaller developers by outsourcing mobile development.
GC: Well, if your recommendations were followed, it would probably incentivise partnerships, because it would be
cheaper to liaise with/buy up an already established other-platform publisher, in order to round up enough porting
force for it to be worth it. The problem with it is, that bigger publishers still won't want to fork out the cash to almost
fully re-develop the actual code for the porting to be successful, given the number of sales to amount spent on the title
ratio will almost certainly go too high for them to be comfortable with. It pays better for the larger publishers to simply
put out a slightly shittier version, and keep it cheap, because people just are less critical when they pay less for it - the
"ah well, it was only 4 bucks, onward to the next title" syndrome. The fact is, for successfuly porting to work, we, the
consumers, have to be more critical when it's not done accurate, and that is something we simply aren't being when
we ourselves feel we are only weakly buying into whatever title is in question.
Q: Which relevance could this kind of integration/strategy, have for the future of the gaming world? (could it
become a primary feature of gaming, or is it unlikely to catch on?)
GC: It could add a fun dynamic to games, but I'm afraid that it would evolve to somewhat mimic the current state of
penalizing non-action. I can imagine that a AAA title with a mobile add-on would penalize players who do not complete
certain tasks on a mobile add-on title, instead of rewarding them for doing so. Of course, rewards/penalties is a tricky
line. Withholding a reward can also be a form of penalization.
GC: Unlikely to catch on. I feel that, even if it were to catch on, it would take so long to get it anywhere near a standard
that I, personally, would find acceptable, that I'd have to spend my life making sure that I eat right in order to get to an
age of 136 to see it succeed - and I'm afraid I'd just rather eat this pizza.
Q: Can you briefly mention, what you consider to be the strongest feature(s) of the idea?
GC: Interesting collaborative gameplay between platforms, and perhaps even between different players on their own
respective platforms.
GC: I'd imagine, for the individual, the ability to play any game, from your last save, on any system, anywhere. For the
publisher, the strongest feature is probably the fact that they get to screw over a larger amount of people per platform
per unit time spent :P (or the fact that they could centralise larger parts of their cloud-based services, if they were
essentially linked to the same gaming service, albeit on different platforms - that would probably also be good)
Q: And what do you consider to be the weakest feature(s)?
GC: If all the proposed features worked, then I can't see a real 'weak' feature in there. They're just too ambitious from a
profitability stand point, especially for the large publishers. Essentially, they would need to provide you with
content/gaming experiences in each game relevant to each platform - so you would need to, for each developed game,
propose content and 'game time' relevant to each platform. That is tricky to accomplish without making stuff on one
platform seem like a complete content grind compared to a more suited platform for the game - so perhaps CS:GO on
an android phone would be centered more around content, by default, rather than something which would require
creative thinking to dream up - like 2D mini-games relevant to learning map-tactics for example.
Q: How would you deem the prospect of cross-platform features of various kinds? (could it introduce casual and
mobile gamers to core gaming, or would it strictly be relevant for core gamers?)
GC: I don't believe that casual gamers can be "introduced" to hardcore gaming. What we deem hardcore gaming is
already accessible enough to be entered by anyone interested in doing so. If mobile add-ons take on a penalizing form,
only the most masochistic hardcore gamers would participate, as it would be "required" for optimal performance in
their AAA title of choice.
GC: I reckon it would almost exclusively expose casual and mobile gamers to core gaming, rather than vice versa. Core
gamers don't like to admit to being n00bs with regards to being 'new' to whatever secondary platforms stands in
relation to their primary preferred platform. This would then again become an incentive game - there would have to be
an offering in the secondary platform relevant to the game play in the primary platform - "look, I played X title on my
phone for 6 hours yesterday and now I have new gloves unlocked on my PC" - just won't cut it.
Q: Lastly, can you think of any additional propositions that might be useful to in regards to the idea of Hybrid
Integration?
GC: Some sort of augmented reality tie-in? There are already interesting augmented reality features on some mobile
games, but cross-platform collaborated between AAA titles on PCs or consoles and mobile games could open up for
augmented reality in "real" games.
GC: This concept of moving away from the content-based grind and back to game-play relevant stuff on either
platform. That is pretty much the most important thing with regards to hybrid integration as far as I'm concerned.
Playing the game should be the reward, or conversely, being shit at a game should be the incentive to get better
provided you like the title. Not because you can 'content' your way through it, without any real story, plot, good gameplay etc etc.

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Abstract

Once again, thank you!

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

From Past-time Activity to Corporate Practice .................................................................................... 25

Prelude to an Industry Turmoil.......................................................................................................... 26

High-Profile Failures: The Atari Shock ............................................................................................... 29

The Aftermath of the Industry Crash ................................................................................................... 32

Chapter 2. The Structure of the Games Industry .................................................................................................. 35

The Traditional Structure ................................................................................................................... 36

The Industry Spiral ............................................................................................................................ 37

Alterations on the Conventional Integration ....................................................................................... 40

The Modern Structures of Integration ................................................................................................. 45

Digital Distribution Platforms ............................................................................................................ 46

2.2.2 Independent Developers .................................................................................................................... 48

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

Chapter 3. Industry Analysis ............................................................................................................................... 52

Industry Overview ............................................................................................................................. 53

Competitive Forces Analysis ............................................................................................................... 56

Threat of New Entrants....................................................................................................................... 57

3.2.2 Power of Suppliers ............................................................................................................................ 60

Chapter 4. Investment Prioritization .................................................................................................................. 73

Industry Attractiveness ....................................................................................................................... 74

Brand Equity ..................................................................................................................................... 76

Chapter 5. Discussion ......................................................................................................................................... 81

Market Oversaturation ....................................................................................................................... 82

Price Competition .............................................................................................................................. 88

Loss of Publishing Control .................................................................................................................. 94

Chapter 6. Recommendations .......................................................................................................................... 103

Implementing the Focused Adaptive Synergy.................................................................................... 104

Feedback and Criticism from the Games Community......................................................................... 111

Conclusion ....................................................................................................................................................... 112

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

Porter 5 Forces Framework

Industry reports & articles

Descriptive PRESENTATION and in-depth industry ANALYSIS

DISCUSSION leading to RECOMMENDATIONS on strategic decisions

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

Research Philosophy and Approach

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

research as a continuous process (Easterby-Smith, 2008). Secondly, collection of secondary data,

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg

IMM Masters Thesis, CBS

C. Haulrich & M. Soelberg