Market Analysis Summary
According to a new report from DFC Intelligence, recent sales indicate that the video game market is poised for impressive growth. The report forecasts that annual unit sales of video games and PC games in the U.S. is expected to grow over 40% from 2001 to 2006. The successful introduction of four new game systems in 2000 and 2001 meant that the industry was able to avoid the major downturn in sales that has occurred in past platform transitions. According to DFC Intelligence, the industry should experience another year of record sales in 2002.
The interactive games industry is a major economic force. With an estimated global value of some $10 to $20 billion, the industry rivals Hollywood in revenues and is now recognized as a propulsive force behind the creation of markets for information and communication technologies. Games account for nearly one-third of consumer software sales in North America.
4.1 Target Market Segment Strategy
Not only was the video game market not slowed by a softening economy or the terrorist attacks, but 2001 turned out to be the best year ever for the U.S. video game industry. The total U.S. video game industry grew from $6.6 billion in 2000 to $9.4 billion in 2001. The previous all-time record was $6.9 billion in 1999.
DFC estimates that by 2006 the three leading games systems, the Sony PlayStation2, the Microsoft Xbox and the Nintendo GameCube, should have combined U.S. sales of over 60 million units. The report forecasts strong sales for all three systems. There are currently 3,000 gaming companies that are producing games for one or more of the leading gaming systems. While strong market growth is predicted, there are also many challenges facing the interactive entertainment industry.
Sales of the total U.S. interactive entertainment software market, which includes PC entertainment and video game software, approached $6 billion in 2001 versus $5.4 billion in 2000, DFC found. Console and portable software sales rose 8.3 percent in unit sales, compared to 2000, while PC entertainment software experienced a unit increase of 3.8 percent. The main challenge is that while unit sales are expected to rise rapidly, development and marketing costs are also soaring.
4.2 Service Business Analysis
Companies are combating development costs by outsourcing segments of the development project. Currently, it is estimated that 30% of project work is outsourced. There are a number of advantages to this strategy.
By outsourcing, companies can take advantage of a tremendous gaming experience base without paying the personnel price tag to retain the talent on payroll. By negotiating a price for the outsourcing, companies can also cap development cost. More importantly, as few larger companies compete in the marketplace for dominance, a number of service firms will emerge to fill the demand for quality developers that are necessary for specific projects, much like the rest of software industry. It is estimated that product development in the software industry can save upwards to 30% of development costs by outsourcing key elements of the development process.
4.2.1 Competition and Buying Patterns
The interactive game industry is based on the hype that is created by core players. The ability to create product that satisfies the gaming demands of core players is a critical consideration when outsourcing opportunities emerge. This unique cultural aspect of the industry influences how companies outsource. Technological expertise is secondary to the ability to create a product that the target group will immediately be comfortable with. Companies are looking for production track records with products with similar play devices that were focused on similar target users. Typically, a selected group of firms are asked to submit proposals for the outsourcing assignment much like an ad campaign. The firm with the best ideas and the best talent to implement the idea gets the contract. Over 80% of the interactive game companies have outsourced segments of game development. This represents a client base of 400 companies.
Currently there are 100+ firms that compete for outsourcing contracts in the interactive game industry. Because of the unique cultural aspect of the interactive gaming community, companies specialize in gaming devices or user groups in order to gain advantage in the proposal process.
The team's track record is the most important pivotal issue when competing for outsourcing contracts. A firm that has an intact team that has achieved past project goals has an advantage in the bidding process. Production companies are looking for assurances that deadlines will be met and the quality will be there. The production of a game is on a tight schedule and any missed deadline will ripple effect over the entire project, and could result in missed revenues and increased expenses.