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Real World Case Responding To The Wii?

The document discusses the video game console industry and two-sided platform pricing models. Some key points: 1) Console makers sell their systems at or below cost and make money through licensing fees and royalties from game developers. 2) Nintendo's Wii discovered a new market beyond young males and outsold Sony's PlayStation 3 despite entering later. 3) Platform producers must attract a critical mass of developers and consumers to overcome the "chicken-and-egg" problem through quality control, advertising, and managing expectations.

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Antoine Colders
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0% found this document useful (0 votes)
273 views12 pages

Real World Case Responding To The Wii?

The document discusses the video game console industry and two-sided platform pricing models. Some key points: 1) Console makers sell their systems at or below cost and make money through licensing fees and royalties from game developers. 2) Nintendo's Wii discovered a new market beyond young males and outsold Sony's PlayStation 3 despite entering later. 3) Platform producers must attract a critical mass of developers and consumers to overcome the "chicken-and-egg" problem through quality control, advertising, and managing expectations.

Uploaded by

Antoine Colders
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Real world case

Responding to the Wii?


Summary
• The videoconsole/videogame industry started with Atari, and
successive generations of videoconsoles have witnessed different
dominant firms
• It is always the case that consoles are sold at or below cost and that
royalties are charged to game developers
• Ever since Atari’s collapse, quality control of videogames by console
producers has been typical
• Sony was the dominant player with the PlayStation 2, but Nintendo’s
Wii has beaten PS3 (both in sales and profits)
• Microsoft entered with its Xbox and competed with PS2, but was not
very successful; something similar happens with the next Xbox
• Wii has discovered a new market segment beyond young males
Differences with PC industry

• Console producers also produce the OS, unlike the PC industry


• In the PC industry, the OS can be seen as the platform; the vendor
of the OS (i.e., Microsoft) makes money on end users, and
application developers pay no royalties
Background: Markets with two-sided platforms

Platform producer
(e.g., Nintendo)

License License fee & Video Console


royalties console price

Games
Game developers Game players
Game
prices

4
Background: Real world examples

• In markets with two-sided platforms, the product sold is a


physical or virtual platform that can be shared by two types of
agents who want to interact with each other
• Important examples: Hardware platforms that perfectly
complement software goods, such as
– DVD players
– Personal computers
– Video consoles
• Other examples: Market exchanges (eBay), shopping malls,
newspapers, etc.
5
Background: Two-sided pricing by platform providers

• Platform provider charges prices to both sides of the market,


even if they transact with each other at a later stage
• Ceteris paribus, a game player benefits from more developers
because it leads to lower prices  positive inter-group
network externalities
• Ceteris paribus, a game developer benefits from more players
because it leads to a larger market and hence higher prices 
positive inter-group network externalities
• Two-sided pricing policy must account for these two (indirect)
network externalities

6
Most relevant issues when pricing

• Are developers critical for the success of a platform?


• Chicken-and-egg (coordination) problem: players will not buy a
console if there are not many games available, and developers will
not produce games for a console unless they foresee a large
installed base of players
– A console producer needs to attract a critical mass of
developers before launching its console so as to have some
games ready at launch and thus convince players of the
availability of games throughout the lifetime of the console
• Hence, managing consumer expectations is critical
Most relevant issues when pricing (continued)

• The role of expectations: If developers expect a console to fail,


then they will not develop for such a platform, and hence no
player will ever purchase the console, thus fulfilling the
developer’s expectations
• The same can be said about favorable outcomes
• How can expectations be managed?
– In-house development of games before launching the console
– Costly advertising campaigns that may signal that a console
manufacturer believes it will be successful in attracting both
sides (otherwise, why would it spend so much in promotion?)
Why quality control?

• Because Atari collapsed because the initial games were of good


quality, but then bad games started to be sold and the market
collapsed because consumers stopped relying on the value of
videogames (and hence videoconsoles)
• But nowadays there is much more independent assessments of
the quality of a videogame (i.e., more market transparency)…
• However, quality control ensures that the best features of the
console are exploited and highlighted by videogames
• It also limits competition among developers, and hence allows
more royalties to be generated
Why did Microsoft fail in exporting the PC business model?

• Probably, hardware manufacturers saw no future in the


videogame industry for Microsoft and were unwilling to incur
costs of developing hardware that could not be recovered through
sustained revenue
• The low royalty fee was probably refused because it invites too
much developer competition, which means that the videogame
market will not be very profitable
Why persistent leadership in PC industry,
but not in console industry?
• Backward compatibility of Windows: Creates switching costs
and allows for the exploitation of direct network externalities
• Technological evolution is probably bigger in videoconsoles
than in OS
Recommendations for Sony

• Remain as a powerful home entertainment platform for


“sophisticated” consumers (probably a mature segment, but with
plenty of mileage to go) in competition with the evolving PC
platform, led by Microsoft towards integration with the Xbox
• Cover the segment identified by Nintendo, based on superior
technical capability and higher support from third-party
developers (perhaps based on tight quality control); however,
how can this be achieved (another console, modifying current
design of PS, adding a controller)?

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