VIDEO GAME PIRACY

A CASE STUDY
VENKATESH KBS
 TOPICS FOR THE DAY
CASE FACTS – PRESENT MARKET
THE BIG THREE
COMPETITIVE LANDSCAPE
BUSINESS MODEL
GAMING IN ASIA
IMPORTANCE OF EAST ASIA
PIRACY AND MODS
STRATEGIES TO COMBAT PIRACY
WTO
 CASE FACTS- PRESENT
MARKET
Over the past decade, video game industry has grown into a
global colossus worth more than $20 billion a year in revenues.
The four largest markets for video games are the United states,
Japan, Canada and United kingdom.
Console and portable software sales: $6.2 billion, up 8% from
2003
Console and portable hardware and accessory sales: $3.7 billion,
down 35% from 2003
GLOBAL GAMES MARKET
 THE BIG THREE
SONY MICROSOFT NITENDO

XBOX
PS2 GAME CUBE
 COMPETITIVE LANDSCAPE
Market forces seem to dictate that there is only enough room in the games
console market for three major players.

in recent years Sega once a major player has been edged out of the hardware
market by both Sony and Microsoft.

Sony’s PlayStation2 was the most popular regular console in the 2003, the
machine dominating all the major console markets across the world.

Although only holding a comparatively small share of the console market,

Microsoft’s X-box has enjoyed strong sales growth. The machine’s technically-
advanced offering combined with a strengthening software library, which taps
strongly into the online gaming community, has helped boost the popularity of
the machine.
 COMPETITIVE LANDSCAPE
Nintendo, famous for being one of the original electronic games
manufacturers, has enjoyed something of a renaissance since the
release of its hand-held Game Boy Advanced.

Although the market is expected to experience a slight contraction

in 2005 as unit sales of aging systems decline, it is predicted that
2005 will experience strong growth with the release of Sony’s
PlayStation 3 and Microsoft’s X-box 2 reinvigorating the market.
 THE BUSINESS MODEL

The razor and razor blades business model

Here console {razor} is sold at a loss and profit is made on the
sale of the game {razor blades}
For example in the case of Microsoft Xbox, estimates suggests
that company loses as much as $200 on each Xbox it sells. To
make profits Microsoft collects royalties on the sale of games
developed under license, in addition to producing and selling some
games itself. Each game typically retails for about $50, so
Microsoft has to sell 6 to 12 games to each Xbox user to recoup
the initial $200 loss on the initial sale and start making a profit
 GAMING IN ASIA

The Asia-Pacific games consoles market has

experienced fluctuating but ultimately negative
growth in the 1999-2003 period.

Industry estimates suggests that Asian gamers will

spend some $7.6 billion on videogame software in
2005, much of it on low priced pirated games.
ASIA PACIFIC GAMES MARKET
QUESTION 1

HOW IMPORTANT IS EAST ASIA TO THE

LONG TERM FUTURE OF THE VIDEO
GAME COMPANIES, MICROSOFT,SONY
AND NITENDO?
 IMPORTANCE OF EAST ASIA
•The Asian economic crisis is long over. Current growth in the
region is unparalleled. Asia-Pacific's markets are getting bigger
and more prosperous all the time.
•According to PricewaterhouseCoopers' Global Entertainment
and Media Outlook: 2005-2009, Improved economic conditions
and an advertising upswing, combined with expanding online
distribution of music, films, books and video games, will be key
drivers triggering end-user spending in East Asia.
•Overall, the video game market will expand at a 16.5 percent
CAGR to $55 billion in 2009 driven by growth in Asia/Pacific,
the largest market.
 Industry estimates suggests that Asian gamers will
spend some $7.6 billion on videogame software in
2005, much of it on low priced pirated games,
compared to $7.4 billion in the U.S.

Overall, the video game market will expand at a 16.5

percent CAGR to $55 billion in 2009 driven by growth
in Asia/Pacific, the largest market.
 In 2008 the Asia-Pacific games consoles market is forecast to
have a value of $1.6 billion, an increase of 22.1% since 2003.
QUESTION 2

How big a threat are software piracy and

mod-chips to the profitability of the video
game business of these companies?
 AHOY PIRATES HERE

The industry is threatened by rise in piracy, which cost

the industry an estimated $2 billion dollars in 2001.

The piracy problem is particularly serious in East Asia,

excluding Japan, where video games are routinely
chipped – sold with modified chips called “mod-chips”.
 LET’S TALK ABOUT MODS
• Modchip stands for modification chip and is a
device used to play import, backup, or homebrew
games and/or circumvent the digital rights
management of many popular game consoles,
including the Xbox and play station.

Video game consoles are routinely chipped with

“mod-chips”, that overrides the console’s security
system, allowing it to play illegally copied games
and CDs.
 Mod-chips allows users to play illegally copied
games. Consoles with mod-chips installed offers a
gaping gateway for software pirates.
This directly threatens the profitability of console and
game makers who follow razor and razor-blades model.
For example if the users are purchasing pirated games
and playing them on “chipped” X-box consoles,
Microsoft collects nothing in royalties and may never
reach breakeven.
In East Asia, some 70% of game software sold
in the region may be pirated thanks to the
popularity of the “chipped” consoles and low
price of pirated games, which may sell for
one-third of the price of the legal game.
QUESTION 3

What strategies or tactics might the companies

pursue to stop piracy? How successful do you
think these strategies might be?
 TACTICS BEING USED TO
CHECK PIRACY
The big video game companies tried to deal with the
piracy problem in East Asia by ignoring the market.

Sony launched its Play station 2 in East Asia two

years after its Japanese launch, and Microsoft delayed
its East Asian launch for a year after it launched
elsewhere in the world. Questionable tactic
Another tactic is to regularly alter the hardware
specifications of its consoles, rendering the existing
mod-chips useless. Temporary solution

Third tactic was to push the local authorities to

legally enforce existing intellectual property rights
law that in theory outlaws the mod-chip practice
 WINNING STRATEGIES
The answer may be online gaming. Access to popular
titles available only over the Internet is more controllable.
The game code is harder to copy because it resides in a
secure central "server" — a computer run by a trusted
third-party such as an Internet service provider.
"Whenever illegal access is detected, they can shut
[unauthorized users] out."
 INTELLECTUAL PROPERTY
POLICY
One of the key tools for battling piracy is the Digital
Millennium Copyright Act (DMCA). It is used to
protect intellectual property in the digital age.

One side affect of the DMCA is that it empowers

game companies to protect their property through a
side door..

Not only the person making the software available

but also, the ISP that he is using to facilitate the
connection could potentially be held liable as a
violator of copyright.
• Global Gaming Alliance: Between the 3 major
players, ensuring regular checks, common
encrypting software with the objective of
collectively combating piracy, bring down costs
of new game development
Question 4

What role might international institutions

like WTO play in such particular problem?
The wto’s agreement on trade related aspects of
intellectual property rights {trips} is an attempt to
narrow the gaps in the way I.P rights are protected in
the world and to bring them under common
international rules.

WTO helps by being a global policeman. It solves

cases of disputes between member countries. It made
sure that India recognizes the process patent. Similarly
it can ask South Asian countries to raid game hackers
and make strict rules and regulations against piracy.
THANK YOU