Entertainment and Games Software
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Industry Overview
The US entertainment and games software industry includes about 1,000 companies with combined annual revenue of about $12 billion. Major companies include Activision Blizzard, Electronic Arts, Take-Two Interactive, and THQ, along with divisions of Microsoft, Nintendo, and Sony.
Manufacturers of video game consoles and computers used for gaming are covered in the Electronic Gaming Products and Computer Manufacture profiles.
Competitive Landscape
Demand is driven primarily by personal income and gamer demographics. The profitability of individual companies depends on an understanding of consumer needs, timely product development, and effective marketing. Large companies have economies of scale in manufacturing, marketing, distribution, and selling. Small companies can compete successfully by developing creative products.
Computer and video games compete as a leisure-time activity with TV, movies, music, the Internet, and other forms of electronic and non-electronic entertainment.
Products, Operations & Technology
Major entertainment and games software product segments are video game software (about 70 percent of revenues) and PC game software. Video game software is made for dedicated gaming machines that work with TVs, such as Sony’s PlayStation, Microsoft’s Xbox, and Nintendo’s Wii; the category also includes content for portable handheld devices such as PSP (PlayStation Portable); Nintendo’s Game Cube and DS systems; and cell phones.
Development studios bring together the talents of game designers, producers, programmers, graphic artists, sound engineers, and play testers who may work for months or years to deliver a completed software product. Development studios work with software development kits (SDK) issued by gaming machine makers. These kits provide tools and instructions to ensure products play efficiently on the selected hardware platforms. After extensive play testing and quality assurance checks, a “gold master” disk, along with documentation and packaging design, is prepared for each hardware platform release.
Prior to release for manufacture, publishers must obtain a rating of age appropriateness and thematic content from the Entertainment Software Rating Board (ESRB). Game ratings must be prominently displayed on packaging at retail. Disk or cartridge duplication, packaging, printing, assembly, warehousing, and shipping are by third-party printers, replicators, and fulfillment houses. To protect hardware designs, game equipment makers specify a pre-approved third-party source or manufacture and assemble themselves. In addition to the cost of manufacturing, publishers pay royalties to platform licensors for each unit manufactured.
Development studios are of three types: 1) in-house development studios owned by publishers; 2) third-party studios that have close relationships with publishers and may be partially owned by the publishers; and 3) independent studios, which operate autonomously and may shop each development project to the highest bidding publisher. Typically, third-party and independent publishers are paid a royalty on sales generated from product sales. Advance royalties, used by development studios as the source of cash for development activities, are common.
Publishers are responsible for marketing, distributing, and selling software products from development studios. Publishers also influence product design and content, as they're attuned to market demands, and generally maintain a mix of internally and externally developed content to ensure creativity and originality. Many titles become franchise properties (such as Electronic Arts' "Madden NFL"), with each new edition adding features to improve game play and take advantage of new hardware capabilities.
Content distribution is divided between packaged and downloadable software. Software is packaged in CD; DVD; UMD (universal media disc); and cartridge forms. Downloadable software, bought at online retail outlets or directly from the publisher’s online store, is a growing distribution option.
Consumers frequently reserve copies of new games at retail outlets prior to launch by paying a small purchase deposit and receiving added value, like special hints and tips for game play or extra maps. Pre-ordering helps publishers gauge demand for new products when setting initial manufacturing volumes.
Technology advancements propel the rapid rate of change in the video games industry. Higher processing speeds, more advanced visualization technologies, and improvements in artificial intelligence enhance the gaming experience. Software game demand typically slows in anticipation of the introduction of hardware systems that incorporate the latest technical innovations.
