Marketing Environment of the Video Game Industry Marketing 304 Dr.

Houston June 1, 2011

Erick Traschikoff - traschikoff.erick@gmail.com Jesse Morfin - jamzter4life101@yahoo.com Jose Zapata - albertozapata1988@live.com Kevin Mounts - mounts.kevin@yahoo.com Nando Mireles - nando_mireles@yahoo.com Waqqas Nazir - nazir916w@yahoo.com

TABLE OF CONTENTS

Executive Summary. History Competitive Environment Economic Environment Technological Environment. Legal & Political Environment Social and Cultural Environment Bibliography.. Appendix ..

3 4 6 8 11 14 19 22 25

Marketing Environment of the Video Game Industry

Executive Summary Back in the 1970s the video game industry was born with the first commercially successful game Pong from Atari. It was a simple game by todays standards, but was revolutionary for its time. Games were generally played in arcades until the late 1970s when Atari 2600 was introduced for home use with huge success. The introduction of the unit was only a hint of more to come in the decades that followed. Fast-forward 30 or 40 years and today the video game industry is an oligopoly controlled by three main companies: Sony with PlayStation, Microsoft with X-Box, and Nintendo with Wii. The progress made by the industry is astonishing. From large bulky and costly games and cartridges with lots of wires, that confined you to play with just the person sitting next to you, we come to sleek consoles that play video games or DVDs, wireless technology that gives you more freedom, and access to the internet to play with people across the street or around the world. Many people assume that video games are for children, but you may be surprised to learn that the median age of gamers is thirty four. This shows that not only teenagers playing games, but more and more people in their twenties, thirties, forties, and yes even in their fifties and beyond are now gamers. This shift in demographics has helped the video game industry maintain growth in recent years, even through a world-wide economic downturn. Video games have proven to be a low cost way to escape reality for a bit. Todays games offer a wide variety of leisure activities from educational to the controversial. The industry has faced numerous lawsuits from individuals, cities, and yes, even states. At issue is the First Amendments right to freedom of expression. Many of the cases have gone to trial under the premise that violent video games spawn violent children. In most cases, government is requesting stricter controls on video game sales to minors. Many parents feel that this is an infringement on their rights. After all, video games are not played in secrecy in a dark corner, but are generally played in the open. Many parents are aware of the violence contained in the games and buy the games anyway. There are many studies that prove that there is no correlation between violent video games and higher incidences of youth violence. Another issue facing the industry is piracy. Many companies are economically hurt by the sale of pirated games. Piracy forces the gaming companies to not only compete with each other, but also with themselves. This has had an impact on revenues, and there are many efforts under way by the industry to circumvent piracy and protect their companys intellectual property. The gaming industry has had ups and downs like our own economy. It has weathered storms and still managed to reinvent itself over and over again. New innovations keep changing the face of the industry. The demographics are changing and including wider ranges of people with even wider genres of games. It is apparent that the video game industry is here to stay and that the only constant we can count on is change!

Marketing Environment of the Video Game Industry

History The video game industry has been around for decades beginning all the way back in the early 1970s when the first video game console appeared on the market. When they first appeared on the market, they were dismissed as a short lived craze, or were expected to remain the domain or adolescents. Time has proven that this was a completely false statement because it is now one of the most powerful industries boasting billions in profits and which continues to grow rapidly even during economic downturns. One of the very first video games that was created by Atari was Pong in 1971. After the first 2 generations of video games the industry experienced a downturn in 1977. It was a bleak time for manufacturers and most companies sold their video game systems at a loss just to clear out their inventories. A few years later in 1980, Atari came out with the game Space Invaders and Namco came out with the now world recognized game PacMan which helped lift the market back on its feet. While the industry was trying to recover from downturn of the late 70s, it fell upon hard times again a few years later in 1983, this was the second crash in the market in only a short time. This was simply due to a large number of consoles flooding the market. A large number of consoles as well as video games were being manufactured many smaller companies which led to lower quality. The next few generations saw improvements to technology and quality. These improvements spawned new gaming ideas, improved consoles and better graphics. Game consoles such as Sega, Super Nintendo, Playstation, and Nintendo 64 were among the consoles to have this improved technology and therefore enjoyed profitablitity and success. Once these newer models started to appear in its fifth generation, Playstation actually had one hundred million consoles sold, which was the first in its industry to reach that benchmark. While the sixth and seventh generations were making their way to production, they became more gear towards PC video gaming. These games had more realistic visual effects to give you the gamer the feeling of being in the video game itself. With the roll out of PlayStation 3 and Xbox 360 users were now able to connect HDMI cables to get better resolution on their televisions, play online all around the world with other users, play Blu-Ray DVDs, and have a great deal of memory in the hard drive of the game console itself. Because of all the new technological advances to consoles sales sky rocketed; consumers bought up the new consoles because of all the new features available. In 2006, Nintendo announced the much anticipated rollout of its Wii console. It was the first video game making use of infrared technology to detect gamer movement. This interactive technology was the first of its kind, which allowed the gamer to become part of the game in ways never seen before. These new advances throughout the last 40 years in time of history you can see how much it has advanced from poor graphics to one of the best graphics of time which will continue to improve.

Marketing Environment of the Video Game Industry

Competitive Environment The video game industry has a very complex competitive structure overview; it is composed of constant booming innovations being introduced to this market. The market for gaming consoles is an oligopoly with three global giants, Microsoft, Sony and Nintendo as the dominant forces. (Datamonitor, 2010). Michael E. Porter a professor at Harvard University for Business School in 1979 developed a strategy that lays out an overview of any industry or market. This strategy is known as Porters five forces, in this strategy Michael Porter analyzes the market as a whole and takes a tactical approach for any industry (http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=bio&facEmId=mporter). Porters Five Forces main emphasis are derived from his five main ideas, which include: likelihood of a new entry, power of the buyers, power of the suppliers, the degree of rivalry, and the substitute threat (Datamonitor, 2010). These strategic approaches can be exercised upon any market or firm to excel in business sales. This analysis is an essential form of research of the competitive intensity and attractiveness of a market. These are vital factors that must be taken into consideration when a market is trying to grow and strive. When we talk about attractiveness of the video game industry we refer to its ability to make a profit. For example, Entertainment software is one of the fastest growing industries in the U.S. economy. In fact, according to Pricewaterhouse Coopers, the sector will remain one of the above-average growth segments of the global entertainment industries through 2011 (http://drfd.hbs.edu/fit/public/facultyInfo.do?facInfo=bio&facEmId=mporter). From 2005 to 2009, the industrys real annual growth rate was more than seven times the real annual growth rate for the entire economy. In addition, computer and video game companies posted strong overall sales in 2009 with revenues of twenty billion dollars as entertainment software companies continue to provide jobs to state and local economies across the nation. (http://www.theesa.com/gamesindailylife/economy.asp). On the other hand we also have industries that have been fairly unattractive. This means that this industry has failed in their attempts to make a profit and neglected the five rules. A very unattractive industry would be one approaching pure competition. (Porter, 1985) In any type of industry the market must avoid head on competition. Every market is in the business to make a profit, by engaging in head on competition a company can be severely damaged and can cause it to be non- profitable. Furthermore, the video game industry has done an intermediate well job with preventing any type of unattractiveness. Michael Porters Five Forces The Threat of New Entry of New Competitors. In the video game industry the likelihood of a new entry of another competitor is relatively low. The market is essentially an oligopoly composed of Microsoft, Nintendo, and Sony, who each have highly developed brand strength and products with strongly established market positions. It would therefore be exceptionally difficult for a competitor product to enter the market. (Datamonitor, 2010 p16). The main factor for this is the industrys absolute cost to manufacture products. Advantages like having proprietary learning curves helps the video gaming industry understand and target

Marketing Environment of the Video Game Industry

potential consumers. Having access to inputs such as government affairs is vital because a new firm cannot easily enter the market without having these prerequisites (Datamonitor, 2010). The Threat of Substitute Products/Services. It is critical to maintain your brand identity because consumer loyalty is essential in this business, any new product introduced must be able to properly relate to consumer needs and create some sort of unique brand identity that separates them from the competition. This is why new firms that enter this business have a hard time competing against other known successful markets such as Nintendo, Sony and Microsoft. Developers of video games relatively make saleable products for the licenses of publishers which are produced and distributed by the publishers. For example 3DO, Acclaim, Electronic Arts, Informs, THQ Sega, Sony, Nintendo, Microsoft have been very successful with their brand identity and executing and excelling in the overall market structure (Datamonitor, 2010). The Bargaining Power of Customers (Buyers). The power of the buyers in the video game industry is characterized by a distinct lack of choice which restricts buyer power. Brand loyalty is moderate, as a relatively long product lifespan for consoles means that a large proportion of overall sales volume are from the three players have highly distinctive and differentiated brands, which helped many consumers to develop strong preferences. (Datamonitor, 2010 p 14). In a sense consumer power is fairly high there is much bargaining leverage. There are numerous amounts retailers that sell video games and are allocated almost anywhere in any city. There is also a significant abundance in buyer volume and buyer information is almost everywhere. The price sensitivity is reasonable for the video game for the first-time purchasers. There also appears to be threats of backward integration product differentiation substitutes that are always available. The video game industry has a set of targeted buyers incentives. The typical target market for the video game industry is young males 18-35 years of age (http://www.theesa.com/gamesindailylife/advertising.asp). The primary objective of this industry is to focus on the family as a whole and appeal to every single member to participate and promote gaming. The video game industry wants to advocate gaming as a lifestyle and wants to promote their product because by targeting every single type of consumer they relatively wont have to worry about any sort of unattractiveness. The Bargaining Power of Suppliers. The power of the suppliers in the gaming industry appears to be moderate. According to Datamonitor (2010 p15), Electronic components are the key raw materials for the manufacture of games consoles. A low level of differentiation within the component market and low switching costs reduces supplier power as far as commodity parts in consoles are concerned. The balance in power is offset somewhat when it comes to the most important components, especially the central processor. This may be custom designed for a particular product, and require advanced manufacturing techniques. Supplier concentration is an importance of volume to the supplier. The differentiation of inputs

Marketing Environment of the Video Game Industry

impacts the cost of the industry because there is a constant switching of cost for the firm in the industry (Datamonitor, 2010). There is always a presence of substitute inputs and threats of forward integration in the video game industry. Some existing companies like IBM have the materials to make video game products and have the technology to make it happen. For example, IBM designed the Broadway processor specifically for Nintendo Wii console and this chip is manufactured using a 90 nm process that not all manufactures are able to deliver. (Datamonitor, 2010 p15). The Intensity of Competitive Rivalry. The degree of rivalry in the gaming industry is very high the video game industry is an oligopoly that is composed of the three global companies: Microsoft, Nintendo, and Sony. Their products occupy a significant proportion of the video game market. On the one hand, the lack of competitors within the market combined with high product differentiation mitigates rivalry(Datamonitor,2010 p18). This means that exit barriers in the video game industry appear to exist it is theoretically relevant to manufacture and sell a video game product. With the selling of video games or gaming products the overall revenue earned should cover the costs of fabricating it and promoting it. Whatever revenue left relatively should cover the variable costs left if any beyond covering variable costs. This is just an involvement that the market must make to minimize and eliminate any type of unattractiveness such as loss on the assets the company has earned and most importantly securing the profit. The current existence of the industry concentration is in product differences and advocating product identity. For example, console manufacturers such as Sony, Nintendo, and Microsoft have done a phenomenal job with their brand identity. Their mainstream consoles are known worldwide which include Microsofts XBOX 360, Sonys PLAY STATION 3 and Nintendos Wii. The substitute threat. The substitute threat is one of the essential strategic points in a market because there is very high buyer inclination towards substitute products. Switching costs like buying Pc- games, mobile phone games, arcade games, traditional games like board games and cell phone Games. These are the major threats of the gaming industry or any type of sport that restrains society from purchasing video games. According to Datamonitor (2010 p 17), The PC gaming market represents a threat of substitution to the games console market. However, PCs suitable for computer gaming have typically aboveaverage specifications and are often substantially more expensive than current gaming consoles. Furthermore, the strong branding of games consoles makes them significantly more synonymous with the video gaming compared to the PC market which is more business and educated oriented. As PC games software is incompatible with any of the consoles, end-user switching costs within the console market can be particularly high. Today, cell phones are constantly being integrated with faster processers and graphic design to play games on the phone itself. With these new innovations being introduced to the market the video game industry is still at risk. This is why the gaming industry has worked hard to maintain their loyalty to the public and build a relationship with individual consumers it targets. According to IBIS World (2011 p5), In 2011 the video game industries which includes development, production and

Marketing Environment of the Video Game Industry

retailing, will generate 40.7 billion in revenue, up 5.5 percent over 2010. The teenagers who took gaming 25 years ago have neglected to grow out of the fad while todays youth adopt next generation consoles with even greater servor then their parents did. Even though the video game industry is still growing it faces may challenges like pricing pressure and innovation costs. The video game market has acknowledged these obstacles and it has grown into a dominant and very prominent behemoth that has been an ideal market to be taken as an example for any market in the business. Economic Environment Throughout time the video gaming industry, has evolved around society rapidly in various ways. One key aspect on why the gaming industry is a multi-billion dollar organization is because of the various types of gaming systems, video games, technology advancing in the consoles, and competition markets. Once considered to be an entertaining but minor industry, interactive gaming has grown to be big business. (Thormahlen, 2010 p5) This clearly states that when games first came out it was a small market but slowly it has became one of the biggest businesses around the world that has impacted all generations since the early 1980s. Video games now days have advanced everyday because of new technologies which allows users to play online against others all around the world, PC gaming, interactive family games, physical sporting games which allows the user to become an actual player in the video game itself and the list continues. As I move further along I will be discussing the keys facts about the economic environment how it has been growing/shrinking, business life cycles, consumer disposable income, and consumer demand/spending patterns. Global Economic Situation The economic situation globally has increased and decreased in the market of video games throughout many years. The market for game consoles in the United States has experienced rapid growth in recent years, although it fell into a slight decline in 2009 (Datamonitor, 2010). During this time of the market 2009 the game market total revenue was $7,619.5 million which was lower than previous years due to the effects of the world wide economic recession. Almost everything in society seemed to have been affected by the downturn in the economy which led to a decrease in sales to many industries. Although sales have managed to maintain growth, the recession has hit consumers wallets hard, and buyers are now looking for lower-priced gaming options. (Thormahlen, 2010 p5) This makes logical sense since video games was still a growing industry and consumers just didnt have the discretionary income to purchase the games they really wanted but had to substitute cheaper games for the ones they really wanted. It has also been said that since the video game industry is such a big market it will continue to show growth in the future. In 2006 the industry posted revenue of $32.5 billion, and it has grown on average 4.6% annually since then (Thormahlen, 2010). Another time of the early recession, clearly showing that video games in the economic is recession proof because of its annual growth rate of 4.6% which will increase while time progresses. While the economy has its ups and downs the part of the video gaming industry seems to hold up and make it through the tough times with little or very few effect. I believe that

Marketing Environment of the Video Game Industry

market for video games will only keep growing because all of the new technologies in consoles and games that are developed year after year which in turn contributes to increases in annual sales(Thormahlen, 2010). While the new product emerges onto the market consumers feel as if they need to get the latest console because it has newer technologies which allows for multiple purpose use. When consumers feel as if they need that new purchase it just simply grows the industry enormously which continues the growth in the market for video games. Business Life Cycles In the video game industry, the business life cycles consists of several steps: start-up, growth, establishment, expansion, the maturity of the product, and the exit stage. These are the basic concepts that each industry or company goes through to become successful. Following all of these steps carefully can help ensure the company does well. The start-up generally is the stage where you are trying to establish a new customer base along with managing your funds making sure they are spent wisely in areas needed. Growth of the company is the stage where you have seen an increase in sales and notice a larger customer base which is interested in your product or services. Also in the growth stage you must have a solid foundation of management that increases sales on a daily basis. During the established stage is basically the improvement of the product and to seek out if there are any competition and consumers having a change in taste for a particular product. Expansion part of the business life cycle is basically adding new products or services to your existing company and products. Maturity stage is trying to cut costs down finding other techniques to manage cash flow coming in and out. You will notice sales going either down or rising but you will have to make a decision in order to stay in business or find something else because it now moves onto the exit stage which you make the decision in order to stay in business or not (http://sbinformation.about.com/cs/marketing/a/a040603.htm). Business Life Cycles in the video game are huge because they all share these key concepts of start up, growth, establishment, expansion, maturity, and the exit stage, in order for a business to succeed in the long run. One key concept during the start up phase is where you build up a large group of clients which expand consistently which aids in making your business grow. It has a loyal client base that is regularly being expanded by a fresh generation of users, and older users have not deserted their favored toys at an age that they were originally expected to. (Thormahlen, 2010 p13) By building up a great relationship with consumers they are more likely to come back and give you business because in the gaming world the life cycle is changing rapidly having new products coming out to the market and failing while others start off and take off with full speed into a positive direction. As you can see the clients are loyal because they tend to keep buying services and products not determine just by age. The average age of gamers today has risen the the mid 30s, and these gamers continue to update their consoles (Thormahlen, 2010). Having these older consumers playing video games continues to contribute to the business life cycle because these are loyal clients which continues to support the video gaming industry by updating consoles and buying new games which will contribute to growth in the next few years where and this demographic is only increasing in number. Video gaming in America is going from strength to strength, with revenue increasing at close to double-digit rates, new firms entering the market despite high barriers to entry, and customers unwilling to forego their entertainment

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spending when times get tough. (Thormahlen, 2010 p13) When a new firm opens up a market they would need to establish the video game and see where it goes if it hits maturity stage whether to keep the product of discontinue it. Normally, you will see companies coming into the market and strengthening it where it benefits the gaming industry greatly. There are various types of video game industries that are going to be booming in the next few years and have already started to with phones, online play, and PC. In the coming years, the growing availability of games via online services through consoles will open up more new markets. Similar to apps on the iPhone, small, easy to play, low cost games will likely become very popular among older and female gamers, further increasing potential growth. (Thormahlen, 2010 p13) As you can see that video games come in various methods which will only continue to increase as technology advances. These games on phones and online play have made it easy for consumers to stay on top of the gaming industry is it evolves rapidly. Consumer Disposable Income Consumer disposable income is the amount of money that a household or consumer has available after taxes and other expenses. I have come to find that in the video game industry families or consumer disposable income is not a huge deal in the gaming world. In a normal economic environment, small declines in disposable income do not cause significant changes in video game sales, since it represents a very small portion of the consumers budget (Thormahlen, 2010 p6). Since video games costs are fairly low it doesnt affect the disposable income as much for a family. But it does make sense that during the recession there would be a possibility where familys disposable income did drop to the point where they would be spending less on video games. The recession was a large decline in which consumer sentiment dropped steeply along with disposable income, resulting in an unusually severe fall in spending (Thormahlen, 2010 p6). During a recession, the disposable income for some families decreases because they have to spend their money on more important things like food, gasoline, and clothing. They also tend to spend less money overall which means no purchases of games or game consoles. Consumer Demand & Spending Patterns All around the video game industry and other big industries have a demand and a certain type of spending pattern that they follow. Most buyers of video games and consoles purchase these items for a variety of types of reasons to fulfill their needs. For the buyer, games consoles and video gaming are an important source of leisure, education, social interaction and a crucial feature for any entertainment center (Datamonitor, 2010 p 13). Todays consumers will spend on consoles as a hobby or some form of entertainment to keep them entertained. Most consumers believe that they need to have the latest game console in order to stay on top of this technology life which changes so fast. Children and teenagers likely feel driven by their peers to have the most recent consoles (Thormahlen, 2010). This could be for many reasons one trying to compete with their friends at school to see who has the newest game station in order to be called cool, playing other video games that are made specifically for that new console, and to have
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technology to play online unlike older game consoles where you couldnt play online. There are also buyers who already have one type of console and a library of software for it and these consumers may be less likely to purchase a different console because it would be a large switching cost (Thormahlen, 2010). A consumer switching out an older console for a new one can be a little costly since he they would have to swap out all the games and a new console which isnt cheap to purchase. As a consumer you would have to consider the advantages and disadvantages in purchasing a new console and figuring out what to do with the old one. Overall, the demand and spending for gaming can be different as technology advances and seeing what the consumers want as well as the cost of purchasing a new system. Technological Environment Video games have now been means of entertainment for people for about 40 years now as a means of escape from reality in the form of entertaining users by engulfing them into racing games, first person shooter, role playing games, fighting, sports, and recently more education based games. Some people look to video games as an escape, some see it as just a fun thing to do to pass the time, and others make careers out of creating, playing, and marketing video games. In any aspect video games are a technological wonder today in our society and here is a brief look at some of that technology. The Early Generations The first generation of video games developed in the 1970s and this generation introduced households to the world of Telstar and Atari video game consoles. These consoles were at the forefront of video games but we are looking to focus on the big companies who to this day are still around and dominate the market. The first of these companies was Nintendo who in 1985 introduced the Nintendo Nes system. This system only used very simple 2 dimensional graphics and the unit was capable of using 2 separate, very simple, two button controllers. After this for Nintendo came the Super Nes in the year 1991. Graphics in this model were improved over that of the Nes. Game cartridges were more compact in size and the controllers now featured four buttons instead of two which allows for more in game features and interaction. Then in the year 1994 Sony entered the video game market by introducing the Playstation console. The Playstation was a leap forward from the Super Nes because it was the first console to go from having games on cartridges to compact disks. This allowed for the Playstation to be much slimmer and lighter than any system Nintendo had offered. Sony also incorporated texture, and crude three-dimensional figures into these games. Another innovation that Sony introduced was the idea of a memory card. This memory card unit plugged right into the console and allowed you to save the progress of each game the consumer was playing at any time. You no longer were only able to save at the end of each level or at certain milestones in a video game, this memory card gave people the freedom and enjoyment of being able to stop and restart at any time they desired and the convenience of this helped out with Sonys sales of the original Playstation. The final innovation brought forward on the Playstation 2 was the shock system in the controllers. What this meant was that when a player gets hit by a bullet, crashes a car, a bomb goes off, etc.. the controller would begin to vibrate. This gave the person more of a real life feel and excitement when interacting with the video game. Sony started off in this market and hit the ground running all in the process taking some of the steam out of Nintendos market shares on a massive scale. Nintendo answered back to Sony in 1996 with the introduction
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of the Nintendo 64. When this console came out it came with a brand new controller design. It offered a joystick in the middle of the controller which allowed for 360 degree movement of the characters in the game, no long tied to just going back, forth, up and down. Another leap taken by Nintendo in their technology was they incorporated the first levels and map that offered 360 degrees of movement along with the three-dimensional environments. This meant that when people wanted to go back they would turn the character around and the entire world surrounding would have new textures as opposed to the previously two dimensional stationary backgrounds. Playstation wasnt going to sit back and allow Nintendo to steal the spotlight again so in 2000 Sony released the new Playstation 2. The Playstation 2, just as previous game consoles, had made big jumps in technology as far as graphics. One big thing about the PS2 was it played DVDs. This made people more excited to purchase the product because now they could play their video games and then watch all the DVDs they own on the same console. This was beneficial in the sense that consumers now longer spent money on two different machines to do the job that the PS2 was capable of doing. In 2001 Nintendo tried to fight back by releasing Camecube. Gamecube was a dud due to the fact the technology was still far behind Playstation 2 graphics and variety. Nintendo had to go back to the drawing boards in order to develop a new console to release if they wanted to be a serious competitor for technological dominance. Also in 2001 Microsoft introduced the Xbox which was comparable to the Playstation 2 in graphics and speed visually although it was running on a much faster processor. Now people predicted that Xbox would be an amazing machine because it had a background in computer technology the companys use of PC technology in building its Xbox console allows for greater performance when compared to other 128-bit consoles like the Playstation 2 and Nintendo Gamecube.(http://www.time.com/time/interactive/0,31813,2029221,00.html). But Microsoft was not as dominant in the beginning as it was predicted to be because it had no background in the video games industry. These consoles I have just talked about were all the predecessors to todays video game market and have opened the door to what games have become today (http://vidgame.info/mini.htm). Todays Video Game Technology Now we will look at the super powerful consoles available today. This generation of video game consoles have come farther than anyone would have ever predicted. Now in 2005 the video game market was put into check when powerhouse company Microsoft entered the market with the introduction of the xbox 360. With this the market was in chaos in the eyes of Sony and Nintendo because their consoles didnt have the technology power to compete with Microsofts new dream console. The textures, sound, and memory in this unit were immense. Xbox 360 was unique also in the sense that it had a hard drive within the console itself. This was a great advantage to them because people did not need to purchase an extra piece (memory card) to track and save their progress. On another note Xbox 360 was capable of playing HD - DVDs. While this was a big leap forward when comparing to regular DVDs it was a bad decision to make so quickly because the race for dominance between HD - DVD and Blu-Ray was still being decided and there was no clear winner yet. Finally the last big, or we could even say huge, innovation of the Xbox 360 was the capability to play online. You could now hook up your console to the internet and play your favorite multiplayer games against anyone around the world. This was amazing to be able to race your favorite car at home in New York while your opponent was sitting on a couch in Japan racing their favorite. Leaps and bounds above other consoles at this

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time. Then we get into the year 2006 when it seemed like the video game market was at a its peak. In the middle of the year both Sony and Nintendo announced that they would be releasing their next generation console and it would be like nothing we had ever seen before. First we will talk about the Playstation 3. With this console release Playstation once again made themselves dominant in the graphics department. Their system now ran Blu-Ray disc which meant obviously you were able to watch Blu-Ray movies but it also meant they could now put their video game titles on these discs also. This allowed Playstation 3 to run at a resolution of 1080p which if the highest definition available today and this made them stand out against any other console because the highest definition they could run their graphics at a maximum of 720p, so visually the Playstation 3 was the gold standard. The sound and realism of games on there Blu-Ray discs proved beneficial to Sony and its efforts to be the best looking system out there. They also followed suit with Xbox and introduced the Playstation Network. This was Sonys version of an online market that, as stated before, allowed people to play on the internet against any other competitor on the planet. The only downside to Playstation Network was that it costs a monthly fee to play on it, so it turned some people off to the idea of purchasing a Playstation 3 and steered people towards the Xbox 360 and its free online network (Xbox Live). In the same year Nintendo jumped back into the ring with the introduction of the Wii console. The nintendo Wii may have been the most revolutionary system released this generation because it introduced motion detection technology. This was amazing because it eliminated the need to people to sit in front of the T.V. and got people into the game. All the player now needed to do was hold onto the controller and their body movement moved the character in the game. This technology rejuvenated people into video games and made them feel like they really were interacting with them. Now when a person wanted to bowl they would swing their arm forward and the system would bowl. To swing a bat in a game the person would pretend the controller was the bat and swing in. This system was so sensitive that the slightest tweak in your wrist would change the direction of the bat. This technology is amazing and the other video game companies have now followed in Nintendos footsteps. Xbox released the Xbox Kinect and Playstation has Move. The Playstation Move followed exactly in the steps if the Wii because it is just a connection that you place on top of your existing controller, so they did get into motion technology but didnt really make it their own. Now Xbox has really almost perfected the design of motion capture technology for video games. There is no controller needed, all you need to do is literally move because your body is the controller. Any movement you make will cause movement in the game so this is truly freeing technology. These are some of the things that engulf into video games and keep us interested into seeing what the next big thing will be in the industry. Recently the hot new thing out there is 3D technology. Video game companies have jumped on that bandwagon and are now offering games that are compatible with 3D T.V.s just to keep up with the times. (http://vidgame.info/mini.htm) The Future Now as far as the future of video games and technology go both Sony and Microsoft have speculated that neither the next PlayStation nor its Xbox equivalent would be ready until 2014. (www.electronista.com). It seems that these systems being released so far down the road shows that the product life cycle of current systems last much longer then the primitive systems that were released in previous generations. Video game technology used to be obsolete in about four to five years and something new would be introduced Only time will prove to us what

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technology packed new systems will shock us in the future of the video game world that we will be waiting so long for. Legal & Political Environment First Amendment & Freedom of Expression With the huge popularity of video games among a large portion of the population, it seems only logical that at some point, First Amendment issues would arise with regard to the content of the video games. A 2005 law passed in California has limited the sale of violent video games that appeal to a "deviant" interest and are "patently offensive" by the standards of what is commonly considered suitable for minors (Radia, 2010 p1). Whats unclear is what constitutes deviant interests or patently offensive and who gets to make that determination. The law which seems to have been authored with well intentions seems as an interference of government in families where parents are able to monitor their childrens game use and are generally okay with purchasing the games for their children themselves. Tim Ruten of the LA Times stated, Video games are not pornographic magazines, which can be purchased with pocket change and consumed in private. Even used versions of popular games can cost $50, and very few young children or even adolescents make discretionary purchases of that size on their own. Games, moreover, are played out in the open on televisions and computers. A home in which those things go unmonitored has issues of parental supervision alongside which inappropriate video games are a minor matter. (Ruten, 2010 p1) Supporters of California's law claim that violent video games can cause psychological harm to children. However, an extensive survey of the major scientific literature by psychologist Jonathan Freedman found no real link between the exposure to media violence in video games and aggressiveness in children. Additionally, according to research by the Mercatus Center's cyber-policy scholar Adam Thierer, violent crime rates among juveniles fell 36 percent from 1995 to 2008, at the same time the popularity of video gaming surged (Radia, 2010). The California law has been overturned by the 9th Circuit Court of Appeal, the court cited that the law infringed on free speech and is destined for the US Supreme Court (Ruten, 2010). Many feel that the industrys own self governing rating system is adequate and along with parental input is the key to monitoring the exposure of violence their children are subjected to.

Advertising & Product Licensing Advertising. In todays world, one cannot go through your day without being bombarded by advertising in every aspect of life. With radio, television, billboards, clothing, bus stops, all being canvases for advertising, it wasnt long before advertising began showing up in video games that simulate real life. A game simulating real life that doesnt contain any trademarks would seem less real and therefore would detract from realness the player expects from the

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game. The value of in-game advertising as a revenue source has become so great that the media ratings company, Nielsen, announced in 2006 that it was launching a video game ratings service(Tomlinson & Doyle, 2010). Static Advertising. Like product placement in movies and television, there are two broad categories of advertising in Video Games. Static advertising within a game is advertising that is fixed in the game when it leaves the manufacturer of the game, therefore, once it reaches the final consumer, the advertising content will always be the same, never changing. The most common form of static advertising in a game would be in-game product placement much like you would see in movies or on television (Tomlinson & Doyle, 2010). Dynamic Advertising. Over the last few years dynamic advertising has become hugely popular. Dynamic advertising is in game advertising that appears in games whose consoles are connected to the internet. The content can be remotely targeted in a time and geographic-specific manner which gives advertisers a greater amount of opportunities to target a market. President Barack Obama used dynamic advertising in a car racing video game on XBOX during his campaign. Though the game was released in early 2008, they capability of dynamic advertising allowed him to run ads during October only (Tomlinson & Doyle, 2010). Advergames. In recent years, the advent of advergames, a game built around a non-game brand, has spawned some unlikely games. One example of an advergame is the game, MojoMaster, which was a game about seducing women, it was developed by Unilever corporation to promote its Axe Body Sprays for men (Tomlinson & Doyle, 2010). Using advergames helps promote the product in an unconventional way that in the end helps spark interest, which in turns help drive sales. Licensing Issues. According to the Licensing Journal in 2006, computer and video game software sales were $8.4 billion, nearly tripling industry sales since 1996. With this amount of money on the line, licensing in the video game industry is crucial to the industrys continued success (Rosini, Marsh & Rupp, 2008). With the popular practice of cross marketing popular movies or novels with video games licensing has become crucial to minimize future legal action. Though licensing does not guarantee there will be no litigation, it greatly helps reduce risk. The guiding principal in licensing is that anything that appears in a video game that is not an original creation of the video game developer will likely need to be licensed (Rosini et al., 2008). Anytime you use the likeness of an actual person, living or dead, you need a license. If the game is based on a professional sports league, team or player, or if the game contains an existing musical work, a license is required. Finally, if the game is based in a major city with well known land marks, a license may be required by the architect or owner of the landmark or perhaps even by a city (Rosini et al., 2008). In the case of E.S.S. Entertainment 2000, Inc. v. Rock Star Videos, Inc., E.S.S. Entertainment, the owner of Play Pen Gentlemans Bar sued Rock Star Videos Inc because of the portrayal of a club that was very similar to Play Pen in their game and named it The Pig

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Pen. The California district court ruled in favor of the manufacturer saying their portrayal was protected under the First Amendment as an artistic work (Rosini et al., 2008).

End User License Agreement. The End User License Agreement (EULA) is an important license consideration when the game involves a virtual world. The agreement is between the user and the provider and the user can only take part in the game after agreeing to the terms of the contract. The agreement provides for legal authority and repercussions for rule violations. It gives the provider certain protections against the user if the user should happen to hack their servers or crash the virtual world. Another benefit of the EULA is that it makes it clear to the user of the virtual world that the provider is in charge, and they set all the rules and the user accepts these rules by entering the virtual world they provide (Rosini et al., 2008). Intellectual Property Intellectual property (IP) is defined as intangible property that is the result of creativity, such as patents, copyrights, etc. (Oxford Press., 2010). Currently, IP has been a growing problem in the United States and around the world. Yet, the problem is not only the consumer but also the producers and developer of games and gaming consoles. For example, in 2005, Anascape, a technology company, sued Nintendo for $50.3 million dollars, saying that Nintendo violated patents in three different types of console controllers. The court ordered Nintendo to pay $21million in damages and $2 million in prejudgment interest to Anascape (Hall, 2008 p1). The most popular hardware device that Nintendo has in the market is its Wii controller shaped like a wand. The controller uses a technology named gyroscopic motion sensor and infrared pointers. This technology nicknamed motion plus allows the player to play the game through a series of motions instead of the traditional button pressing. In 2008 Hillcrest Labs sued Nintendo citing allegations that it had infringed on their patents handheld threedimensional pointing device and software that works with it on a television (Hall, 2008). Companies from time to time will sue for a very broad range of gaming software and/or hardware patents. For instance, Fenner Investments sued Nintendo in 2008 alleging that the Wii console and its controllers, as well as the Nintendo GameCube, infringed on one of its patents (U.S. Patent No. 6,297,751) (Biotech Business Week, 2009 p1869). As you can see, intellectual property is a very important category because it gives the video game companies a competitive advantage thus companies do not hesitate to imitate or copy technology even if it may bring law suits. At the end of the day the amount of money the company might have to pay for breaking a patent is very low in comparison to the profit companies like Nintendo or Sony will attain. Piracy Piracy directly destabilizes the videogame industry by forcing creators and companies to compete with their own creations. This trend makes it extremely hard for companies to be compensated their respective profits associated with creative digital media. Thus, strong regulatory laws against copyright infringement are needed in ordered to allow the gaming market

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to operate efficiently and suitably. Consumers ultimately guide the makers of video games by choosing what distribution strategies they prefer. In a free market competition is created, companies who can correctly satisfy the customers by a wide range of choices and qualities will ultimately profit. As a result, the right for creators of digital media to protect their work must be a great concern to both consumer and producers. If these fundamental rights are not protected, we will be forcing the creators to give their work out at zero cost thus contributing to the detriment of the business models of capitalism (Parr, 2010). We can see proof of the damage of piracy Sony in this statement, irreparable injury and damages by distribution of code to circumvent technology that prevents the running of pirate games and other software. Unless the court enjoins defendants unlawful conduct, hackers will succeed in their attempts to ensure that pirated software can be run on the PS3 system, resulting in the destruction of SCEAs business, the compliant says. SCEA stands for Sony Computer Entertainment America, the unit responsible for the Sonys PlayStation, a multi-billion-dollar business.(Techweb, 2011 p1). Unless the gaming industry develops harsh rules against game piracy we will see corporations like Sony, Microsoft and Nintendo loose profits. For example, Microsoft said in a statement The health of the video game business depend on customer paying for the genuine products and services they receive from manufacturer, retailers, and the third parties that support them.(Moore, 2009 p20) Piracy occurs in many shapes and forms, it was common to assume that it mostly occurred when someone physically copies a disk, but that is no longer the case. Today people commit piracy by modifying video game counsels by physically attaching chips or other hardware to play pirated or foreign games(Moore, 2009 p20) that they can many time download online within minutes. We can see this trend in the game Call of Duty: Modern Warfare, which reached 4.1 million unauthorized downloads in the first two months of its official release. Lost revenue during this period was estimated at $US245 million(Wilcox, 2010 p21). Another example of the world wide effect of video game piracy would be the mistaken pre-release of New Super Mario Bros game for Nintendo in Australia. A game store accidently sold a copy of the New Super Mario Brothers before its release date; after the gamer had acquire the game he went home and uploaded to the internet according to TorrentFreak [popular downloading site] website, this title was the most downloaded Wii game last year (Wilcox, 2010 p21). We are able to see that video game piracy is a worldwide issue that does not only affect the United States Lobbying Groups/Trade Associations The Entertainment Software Association (ESA) is an association created in the United States for the specific purpose of promoting and serving the businesses that publish video games for online gaming, computers and consoles. Some notable members include Sony, Nintendo, and Microsoft Corporation makers of the most popular game consoles, as well as Electronic Arts and Capcom, manufacturers of games. The ESA has a wide range of services it offers to its members including global programs aimed at preventing piracy and protecting intellectual property, industry and consumer research, and government relations (http://www.theesa.com/about/index.asp). The ESAs president and CEO, Michael Gallagher, has extensive experience in dealing

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with the government and industry and was a logical choice for an organization that deals with the government. His positions while working at the US Department of Commerce included Assistant Secretary of Commerce for Communication and Information and Deputy Chief of Staff (http://www.theesa.com/about/leadership.asp). The ESA is also diligently working to change the perception of gamers by reaching a broader fan base than the narrow stereotype of the awkward teenager. They have also fought a gamut of proposed laws in several states to make it illegal to sell violent games to young people. Instead, the ESA advocates a self-policing ratings system similar to the movie industry's (Hillis, 2007). The self policing they endorse takes form in the Entertainment Services Rating Board established by the ESA in 1994. Corporations in the gaming industry are charged an average 4.5 million in annual fees, yet presidents of companies like Electronic Arts do not hesitate to say theres no thought of leaving the organization,[ Jeff Brown, President of EA] The funds that are collected goes after issues of concern to the industry, such as piracy and whenever a politician tries to make the sale of a violent video game illegal, the ESA legal team goes in to action (Musgrove, 2008 pF01). The ESA is also responsible for an annual trade shows named E3, the top names in the video game industry attend. In 2007 the E3 show was open to the public and as much as 60,000 people attended. Yet ESA opted to reinvent the show into a smaller and more intimate, invitation only eventthe next [E3 show] was down to around 5,000(Musgrove, 2008 pF01). Another popular association is the Entertainment Consumer Association (ECA), which was created for the consumer not the producer. The ECA promotes gamer to get more involved and offers information about digital rights, net neutrality, Schwarzenegger V. EMA and others important issue in the gaming industry. Most importantly ECA is a non-profit association, which offers the consumers a voice and resources to express their views.

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Social & Cultural Environment Games and Violence The social and cultural environment analysis also investigates if there is any scientific research that validates a link between video games and violence among youth. According to Sternheimer (2007), there is no relationship between video games and youth violence in the American community. There have been more misperceptions, bias studies and myths to blame the video game industry for the school shootings that happen in Paducah, Kentucky; Springfield, Oregon; and Littleton, Colorado after the Doom game released in 1993 (Sternheimer, 2007). High concerns about game players emerged with the appearance of new video games releases. The industry increased the amount of violent content to make it more engage able to adult consumers. The Interactive Digital Software Association (2001) demonstrates that such as industry strategy will not affect gaming consumers; most of the times, when it comes to children, parents support themselves by using parental control tools that come along with the highest demand gaming consoles. Assessing parental resource will be discussed later on my analysis. Reliable indicators showed that violence behavior among the young decreased dramatically since early 1990s as game sales became a must-have product to American consumers (Video Games and Violence, 2001). Youth Violence Has Declined As Game Sales Have Risen. According to the U.S. Department of Justice Office of Juvenile Justice and Delinquency Program between 1994 and 1999 violent crime among 15 39 year olds decreased. Furthermore, the biggest decreased came from juveniles between the ages of 15 and 17 (Video Games and Violence, 2001, p.6). By 1998, the U.S. Department of Justice and Department of Education jointly investigated the early reasons that can provoke children to become violent. Among the list we have: early social withdrawal, poor academic performance, affiliations with gangs, drug and alcohol consumption, and easy access to fire guns The investigation does not include the gaming industry as one of the motives to encourage violence among youth (Video Games and Violence, 2001). Public Health Study: The U.S. Surgeon Generals Report. Surgeon David Satcher evaluated recent research on the causes and prevention of youth violence. Surgeon Satcher reported that there is no research to support the notion that violent media leads to long-term violence. With regard to the research on video games, the impact of video games on violent behavior remains to be determined. What truly influence such a behavior is the background of the individual, the availability of guns, the early exposure of aggressive content among his/her close ones and etc. These factors are more relevant to understanding the cause of particular crime. Consequently, Mr. Satcher believes that family themselves play a critical role in guiding and preventing what reaches their children on a daily basis (Video Games and Violence, 2001). Monitoring Video Game Content Industrys efforts have made it possible to inform parents about the games they buy for their children. As a result, the video game industry implemented voluntary self-regulatory measures to help ensure that games not made for children are not played by them.

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In 1994, the electronic game industry established the Entertainment Software Rating Board and rated over 7000 products in the market (McCann, 2009). Furthermore, in April 2008, the ESRB teamed up with the Parent Teacher Association to develop a booklet that provides information about the ESRB ratings in order to increase parental awareness of the ratings and labels (http://www.esrb.org/about/pta_partnership.jsp). The ESRB ratings mission is to help video gaming consumers in determining games content and suitability, and help parents make informed choices about video games (McCann, 2009). All new video games include rating systems that make possible for parents to determine if the game is suitable for his/her child. The ESRB continues to lead all three industries in providing clear and prominent disclosures of rating information in television, print, and online advertising (Marketing violent entertainment to children, 2007, p. iii). As a result video games retailers are continuously working to enforce policies that will prohibit children under 17 from purchasing M-rated games without parent supervision. They must ensure to only sell games to those whose age is appropriate for the game. To date, major retailers such as Toys R Us, K-Mart, Wal-Mart, Target, Circuit City and Staples have agreed to participate in this effort in some way (Video games and violence, 2001). Particular parents have even decided to create and manage their own resources. We have the case of Andrew Bulb who created and launched a site called Gaming With Children (gamerwithchildren.com), which allow him, and other Internet savvy parents interchange and discuss ideas about new video games that hit the market. Volunteer parents get the chance to also rate video games and remain well informed about specific games (http://www.theesa.com/gamesindailylife/families.asp). The Federal Trade Commission reported in 2007 that all industry efforts are paying off. Today, over 87 percent of parents are aware of the ESRB rating system, over 89 percent of parents are involved in the purchase or rental of a video game for their child and over 87 percent of parents reported being "very" to "somewhat" satisfied with ESRB ratings (Marketing violent entertainment to children, 2007). In 2009, 59 percent of games sold were rated E (for Everyone), 20 percent were rated T (for Teen), 6 percent were rated M (for Mature), and 15 percent were rated E10 + (for Everyone 10 +) (McCann, 2009). Gamer Demographics Who Plays Video Games? The generation that grew up playing Nintendos Super Mario brothers is now in adulthood. As this generation and the video game industry develop, these same men and women are continuing playing video games and are now joined by their children and their parents, becoming a major source of entertainment for the entire family. The Entertainment Software Association reveals the somewhat shocking findings about gamer demographics. 67 percent of the American households now play video games, especially, those type of games that have overall family entertainment content. Secondly, 60 percent of game

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players are men and 40 percent are women and they are one of the industrys fastest growing demographics. Finally, the findings address that the average gamer is 34 years old and has been playing for 12 years (http://www.theesa.com/gamesindailylife/families.asp). Video Games In The American Household Nowadays, video games are becoming the main source of entertainment for American households. It has been proven that video games have become a major part of childrens lifestyles and family activity. With that been said, parents are using video games as a positive way to interact and communicate with their children. Research findings by Peter D. Hart reports that parent gamers spend just over nine hours a month playing games with their children, and 49 percent of parents say they play games with their children at least once per month (http://www.theesa.com/gamesindailylife/families.asp, p. 2). The top 4 reasons parents play video games with their children are: it becomes a source of entertainment for the entire family. Secondly, several children request their parents to enjoy the experience because its an opportunity to for parent to empathize with children; it also becomes a new medium of conversation for both the parent and the child. Finally, parent gets the chance to monitor the game content and the childrens reaction during playtime (http://www.theesa.com/gamesindailylife/families.asp).

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Appendix

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Marketing Environment of the Video Game Industry