A brief and instructive history of video games

    I am interested in different business models and decided to briefly retell the history of video games. From this story, you can catch some patterns in the battles of different platforms in order to try to predict where all this will lead in the future. The same laws apply to the music business, publishing, film, and a number of other creative industries. I hope it will be useful.

    1975-1985 The rise and fall of Atari

    Back in the 70s, the first gaming devices for TVs appeared. In the 75th Atari released the first toy Pong (table tennis). At 76m they sold them for about $ 200M. Somewhere in the years 76-77 there was a sharp decline in the cost of semiconductors. Atari released Atari 2600 - the first device with a replaceable cartridge. This allowed changing cartridges to play different games. At 77m, industry sales were around $ 420M.

    Many other players fell onto the market, and each had its own set-top boxes, devices and cartridges for them. An interesting fact - 2/3 of the sales were made during the holidays and weekends.
    Atari has successfully implemented the “vest” strategy (hand out razors to everyone and make money on blades). They managed to sell consoles more than anyone and eventually became the market leader. The main sales were through large retail chains. There were about 1,500 games under their platform.

    The victory was not long. In 82-84, people stopped buying consoles. The market was just saturated - everyone who needed it had already bought it. Manufacturers in warehouses and in retail have accumulated a huge number of unsold cartridges with games and consoles - had to be sold at bargain prices. Turnover from $ 3 billion fell to $ 100M - Atari went bankrupt and was taken over by Warner.

    1985-1990 The Nintendo Age

    After the collapse of the industry in 1984, everyone decided that video games were a passing hobby. All but Nintendo, which decided to enter this market. They made several correct conclusions:
    - Altari poorly managed the assortment and flooded the market with poor-quality games. Not having studied demand. In short, they created overproduction.
    - There were a lot of games, but they were all alike and the quality did not develop, so people had no motive to buy the next 101st game.
    - And finally, they positioned themselves as “computerized toys” - which are prone to recessions and sales during the holidays.

    In 1985, Nintendo entered the market with an 8-bit NES prefix (Nintendo Entertainment System). They also adhered to the strategy of "vest" (low-margin iron and high-margin games). But here’s what they came up with cunning:
    - They became a monopolist in the production of cartridges and tightly controlled the number of cartridges in circulation. To avoid overproduction and subsequent dumping of prices.
    - Equipped each cartridge with a chip that blocked all third-party non-Nintendo applications.
    - Some of the games they developed themselves, some licensed from independent game developers.
    “We strove for diversity and attracted the best developers, while at the same time limiting the annual release of games.
    - And Nintendo also forced developers to buy part of the cartridges forward (!). So that they are responsible for the quality of the final product, and not just for software.
    - First launched in New York. We tested the market there. And then they started an aggressive national company with the Super Mario game.
    - The focus was on children. Children persuaded parents "buy us a piece that you can play in Mario!". I, too, ached in childhood.

    In the 1990s, in every 3rd house there was a Nintendo prefix (about 30 million) and the company's turnover exceeded $ 3 billion.

    1990-1995 Entering the Sega Market

    In 1990, Nintendo dominated the market. It would seem, how can someone else enter this market? Nintendo adhered to a closed architecture strategy, as did IBM and Apple. Third-party manufacturers were not allowed in the platform. Like Apple, they built the entire business model on full control: hardware, distribution channels and third-party developers for their system.

    But Nintendo missed several important factors that gave way to a new player:
    - Independent software developers didn’t really like them: Nintendo took a high commission, demanded quarterly certification, limited release (so that there was no overproduction) and forced to redeem some of the cartridges in advance.
    - The retail also did not like Nintendo, since they worked “without returns” - all the costs of returning were borne by retail chains.
    - Well, finally, technology stepped forward and they, as a very large company, did not keep pace with them.

    Sega launched a 16-bit set-top box called Genesis in 1989. She worked on the Motorolla 68000 processor. And gave better graphics, speed and sound compared to the 8-bit Nintendo. They started looking for game developers for their consoles. And of course, several dissatisfied from Nintendo (including EA) - agreed to make applications for them. Sega began to quickly build distribution channels. And many retailers also agreed - to reduce dependence on Nintendo and increase their assortment.

    But their games were not better from the point of view of users. Sega continued to search for a hit - eventually it became Sonic Hedgehog (Sonic the hedgehog).
    In 1991, during the summer holidays, they brought the game to the market and lowered prices. The game was for older children and was faster and cooler than Mario. As a result, their sales soared from several hundred thousand in the 1990s, to $ 5M in 1992m.
    Nintendo also did not stand still and released a 16-bit system (Super NES) for their 8-bit games. In 1993, both players occupied 75% of the video game market with an industry turnover of more than $ 5.3 billion.

    1995 - 2005. The influence of the Internet and the PC market.

    In 1993, Nintendo and Sega had excellent positions. But there were a few "buts":
    - Iron manufacturers had to adapt to different platforms.
    - The same is true with game manufacturers who are able to make "hits". Software began to occupy an increasing share of profit, while iron was gradually getting cheaper. The average check of an average game was about $ 60, and sales of more than 1 million pieces were considered a hit.
    In 1995, several large companies planned to launch 32 and 64 bit consoles: Nintendo, Sega, Sony, Amiga.

    The main industry trends in the 95th:

    - The industry flourished and grew steadily at 12% per year. The video industry generated more than $ 6 billion in profit, more than Hollywood.
    - The trends were such that by 2005, about 50% of households in the USA should have game consoles.
    - The key was access to capital - without it it was impossible to start anything. The cost of producing one product was $ 200-400k, and for 32bit and even higher - about $ 2-5M.
    - In time, a typical project took about 15 months (9 months - game development, 1 month - testing, 1 month - approval from the platform, 4 months - production of cartridges, etc.)
    - Marketing was also very expensive (in mainly through retail stores). About $ 10M was spent on promoting Mortal Kombat.
    - The PC gaming market was relatively small and accounted for about 15% of all sales. Sega and Nintendo apps were not available on PC. The high cost of switching between platforms. There were games on the CD-ROM.

    Game production was very similar to film production. In Hollywood, 3 main laws of the movie business have long been formulated:
    1. Costs are fixed and onward. Regardless of whether it is a blockbuster or not, money is being spent onward. Production - 20M, marketing - 7M, others - 3M. Regardless of how much the film will bring later.
    2. The law of the blockbuster. 4 out of 10 films beat off costs. 5% of films bring 50% of the revenue.
    3. No one knows anything. In the sense of nothing impossible to predict.

    The increase in sales in the video game market is usually associated with the release of a new generation of consoles. On average 1 time in 5 years. Sales of consoles and games are closely related. Usually a certain coefficient of mutual sales was deduced.

    Typical console life cycle

    - A few months before the launch, manufacturers began to announce the release of a new console.
    - Typically, the novelty came out at an increased price. Then about 1-2 years there were price wars between competitors.
    - For 3-4 years of the war faded, the prices of the console reached its minimum.
    - In the 5th year, again, everyone lived waiting for a new console.

    The end of the generation of 32/64 bit consoles.

    Sega and Sony launched 32-bit consoles in 1994m. In 1995, Nintendo introduced a 64-bit console. Sony became the dominant player by 2000m.
    A new round began in the 2000s, when Sony presented the PS2 - a 128-bit platform. The market for PC games reached more than $ 1 billion by 2001. The main suppliers of software were 4 companies (64% of the market), including EA. Unlike the set-top box market, the PC market developed much faster - a new processor appeared every quarter. For example, in 2002, some computers were equipped with 2 GHz and 512 MB of memory, while the consoles still had a processor of about 300 MHz. Plus PCs were connected over the internet. Plus, the PC market was more attractive to developers.

    The phenomenon of online games

    Back in 1991 there were network games such as Doom, Duke Nukem. Next came online games. Further games on the portals. In 2006, about 114 million people played online and about 23 million through consoles.
    The development of multiplayer games is naturally more expensive than single-player. The task in such portals is to retain the interest of users. To do this, constantly adding new content to the game. Many have started a $ 10-20 subscription model for unlimited game time. For example, the game EverQuest (from Sony) generated more than $ 5M per month from 400 thousand subscribers with a margin of more than 40%. Online games required more investment in advance than regular games + servers + support. There are online console games. Xbox launched Xbox Live in 2002m. We spent about $ 2 billion on the development of this network. They planned to sell the service by subscription for $ 50 per year.

    In 1999, Sega with its console (Dreamcast) after several previous years of losses (due to competition with Sony and others) decided to leave the console market and become a software developer for the same Sony and others. + Focused on the production of arcade games.

    2005-HB. Social networks, AppStore, mobile games

    In 2008, the video game industry reached $ 21 billion. For comparison, here are the sizes of related industries for the same period in the USA:
    - Music market - $ 10.4 billion
    - Cinema - $ 9.5 billion
    - Books - $ 35.69 billion
    - DVD - $ 23 billion (purchase - $ 16 billion, rent - $ 7 billion).

    At the same time, such a major game producer as EA (Electronic Arts) suffered losses of more than $ 1 billion per year. From what?

    - The price of game development grew (about 10M then rose to 25M)
    - Sales of games and the desire of people to pay fell. (the game cost an average of $ 60 and sales an average of 150 thousand pieces - which did not cover the costs)
    - There were many free games on the iphone
    - They missed with a choice of hits. Underestimated wii (Nintendo)

    In 2008, Apple launched the AppStore. And now any developer could create his own game in a matter of days and place it for sale. Moreover, these games were in a mobile phone, which is cheaper and more convenient. EA began to cut salaries. Reduced 16% of workers. EA decided to enter the market of mobile games and games under social networks through the purchase of other players.

    The second platform that has begun to undermine the video game industry is Facebook. Games on social networks grew explosively, gaining an audience of several million people in just a few months after launch. EA decided to enter this market by purchasing Playfish for $ 400M (the 2nd largest developer of games for social networks after Zinga)

    Nevertheless, the video game market as of 2013 is not feeling bad. Here are the main numbers around the world:
    - Turnover of the AppStore - $ 22 billion.
    - Turnover of games on Facebook - $ 24 billion.
    - Turnover of retail (drives through stores) - $ 20 billion.
    - The video game market is estimated at $ 58 billion.

    Major consoles by sales: PlayStation (Sony) - 77 million pieces, Xbox (Microsoft) -77.2 million pieces, Wii (Nintendo) - 99.8 million pieces.

    The main developers of games by turnover: Activision Blizzard - $ 4.99 billion (Call of Duty, World of Warcraft), Electronic Arts - $ 3.79 billion (Battlefield, Madden NFL), Take-Two Interactive Software - $ 1.22 billion (Grand Theft Auto and Borderlands), Ubisoft -1.26 billion euros (Assassin's Creed, Just Dance)

    By the way, the recently released GTA V game brought in revenues of $ 1 billion to its creators in just 3 days after launch - thereby setting a new world record for selling video games.

    Conclusions. What's next?

    As can be seen from this instructive story, the main battle is fought between: users, manufacturers of iron (consoles) and game developers.
    People (users) have consumed and will continue to consume spectacular content. And they try to do this for free, due to which they kill the platform:
    - First, they buy both content and part of the platform (game + console). This allows you to grow a new platform (PlayStation or Sega)
    - then they pay only for the game (they don’t pay for the platform itself) and they want the platform for free (AppStore, Facebook)
    - then people want the game for free, agreeing only on built-in purchases (freemium). For example, the game “Farmer” on Facebook
    - Then people want to do it completely free. While watching ads. (Free games with advertising)
    - This leads to poor quality of content (since good content providers went where they pay) and to an abundance of annoying advertising. There is nowhere to fall further than the advertising model. The platform is still alive, but there is more and more advertising in it and people are more and more unhappy with it. (Facebook, Twitter, Google)
    - This leads to the need for new quality content. Usually this is possible only on some new technological platform. This is where the opportunity arises for the emergence of a new platform. For example, Google Glass. And it all starts in a new way.

    If we talk about trends, then judging by numerous sources, they are:
    - Virtual reality. She once tried to appear, but the technology was weak, now apparently the time has come to appear again.
    - Additional screens, game control on TV via iPhone, etc., what wii did
    - Google Glass, glasses, etc.
    - OpenSource game development
    - Augmented reality
    - Games in the "cloud"

    in general, somewhere here the next big companies should grow.

    References to sources:

    I got a lot of information from cases when I studied at Stanford, especially from cases about Electronic Arts. They can be bought here somewhere for $ 7 per case.
    Also thanks to Wikipedia and Reuters .
    Something I took from my blog about business models.

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