Question

Case 3 The Home Video Game Industry: Atari Pong to the Nintendo Wii

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C35-C51

An Industry Is Born In 1968, Nolan Bushell, the 24-year-old son of a Utah cement contractor, graduated from the University of Utah with a degree in engineering.1 Bushnell then moved to California, where he worked briefly in the computer graphics division of Ampex. At home, Bushnell turned his daughter’s bedroom into a laboratory. There, he created a simpler version of Space War, a computer game that had been invented in 1962 by an MIT graduate student, Steve Russell. Bushnell’s version of Russell’s game, which he called Computer Space, was made of integrated circuits connected to a 19-inch black-and-white television screen. Unlike a computer, Bushnell’s invention could do nothing but play the game, which meant that, unlike a computer, it could be produced cheaply. Bushnell envisioned video games like his standing next to pinball machines in arcades. With hopes of having his invention put into production, Bushnell left Ampex to work for a small pinball company that manufactured 1,500 copies of his video game. The game never sold, primarily because the player had to read a full page of directions before he or she could play the game—way too complex for an arcade game. Bushnell left the pinball company and with a friend, Ted Dabney, put up $500 to start a company that would develop a simpler video game. They wanted to call the company Syzygy, but the name was already taken, so they settled on Atari, a Japanese word that was the equivalent of “check in the go.” In his home laboratory, Bushnell built the simplest game he could think of. People knew the rules immediately, and it could be played with one hand. The game was modeled on table tennis, and players batted a ball back and forth with paddles that could be moved up and down sides of a court by twisting knobs. He named the game “Pong” after the sonarlike sound that was emitted every time the ball connected with a paddle. In the fall of 1972, Bushnell installed his prototype for Pong in Andy Capp’s tavern in Sunnyvale, California. The only instructions were “avoid missing the ball for a high score.” In the fi rst week, 1,200 quarters were deposited in the casserole dish that served as a coin box in Bushnell’s prototype. Bushnell was ecstatic; his simple game had brought in $300 in a week. The pinball machine that stood next to it averaged $35 a week. Lacking the capital to mass-produce the game, Bushnell approached established amusement game companies, only to be repeatedly shown the door. Down but hardly out, Bushnell cut his hair, put on a suit, and talked his way into a $50,000 line of credit from a local bank. He set up a production line in an abandoned roller skating rink and hired people to assemble machines while Led Zeppelin and the Rolling Stones played at full volume over the speaker system of the rink. Among his fi rst batch of employees was a skinny 17-year-old named Steve Jobs, who would later found a few companies of his own, including Apple Computer, NeXT, and Pixar. Like others, Jobs had been attracted by a classifi ed ad that read “Have Fun and Make Money.” In no time at all, Bushnell was selling all the machines that his small staff could make—about 10 per day; to grow, however, he needed additional capital. The ambience at the rink, with its mix of rock music and marijuana fumes, put off most potential investors, but Don Valentine, one of the country’s most astute and credible venture capitalists, was impressed with the growth story. Armed with Valentine’s money, Atari began to increase production and expand its range of games. New games included Tank and Breakout; the latter was designed by Jobs and a friend of his, Steve Wozniak, who had left HP to work at Atari. By 1974, 100,000 Pong-like games were sold worldwide. Although Atari manufactured only 10% of the games, the company still made $3.2 million that year. With the Pong clones coming on strong, Bushnell decided to make a Pong system for the home. In fact, Magnavox had been marketing a similar game for the home since 1972, although sales had been modest.2 Bushnell’s team managed to compress Atari’s coin-operated Pong game down to a few inexpensive circuits that were contained in the game console. Atari’s Pong had a sharper picture and more sensitive controllers

Strategic Issues and Discussion Questions

1. How did Nintendo successfully recreate the home video game business following the Atari-era boom and bust?

Supplementary Question: Why the rapid growth of Atari?

Supplementary Question: Why the 1982-85 collapse?

Supplementary Question: So how did Nintendo’s rebuild the industry? What was its strategy?

2. How was Nintendo able to capture value from the home video game business?

3. How was Sega able to gain market share from Nintendo?

                       

4. Evaluate the competitive strategy of 3DO? What flaws can you see in 3DO’s approach?

Supplementary Question: What was 3DO’s strategy?

Supplementary Question: What are the problems with this strategy?

5. Why has Sony PlayStation succeeded where 3DO failed?

6. What drove Microsoft’s decision to enter the industry with its Xbox offering?

Question 7: What lessons can be learnt from the history of the home video game industry that were used to help launch the Sony PlayStation II and Microsoft’s Xbox? Do Microsoft and Sony appear to have learnt and applied these lessons?

8. Evaluate the introduction of the Xbox 360, Sony PlayStation 3, and Nintendo’s Wii. What lessons can be learned from these events? How did Nintendo reestablish itself in this market with the Wii?

Answer 1

1. As a first mover in home video gaming frameworks in Japan, Nintendo had a focused advantagein catching the piece of the pie rapidly. It focused on its capabilities and innovation toimprove the business. Further, it increased upper hand with cost initiative inmanufacturing and with item separation as far as quality.

Cost leadership:To bring down the creation costs, Nintendo subcontracted the assembling ofgaming framework and cartridges keeping last get together in house. The electronic supplies wereprocured at extremely ease with mass requests buy. With ease producing, Nintendosold gaming framework at half of it rivalry cost at $100 and improved the commitment marginfrom game cartridges by 70% thought about that of rivalry.

Separation in quality:Video gaming market basically determined by specialized highlights, realistic graphics and sounds. To beat the challenge, Nintendo concentrated on these perspectives to provide product separation in execution and specialized highlights with high preparing specs,flexibility to extend its abilities for future augmentations, security to fakes and hacking, and durability to build the life of item. Organization put vigorously in game improvement and technology R&D to offer premium recreations.

2. Organization

o

Research and development separate from promoting to empower advancement

o

Concentrate on just 1-2 hit diversions for every year instead of a few minor victories -

Contenders

o

Nintendo had 95% of Japanese market in 1990 and 90% offer of US advertise

o

Similarity issue would make it difficult to enter the market, once Nintendo had one framework in each third family unit

o

amusements met with obstruction on the grounds that unapproved -

Clients

o

Showcasing to kids with high flow magazine

o

Advancement accomplices with Pepsi, McDonald's, P&G

o

Toys R Us earned 20% benefits from Nintendo in 1989

o

Retailers required to pay not long after conveyance

o

Walmart didn't stock contending amusements

o

Nintendo

doesn't satisfy all requests mentioned by retailers, and pulls amusements with low

request, making a shortage.

Complements

o

Packaging equipment with programming

o

Support, controller, cartridge. Just Nintendo affirmed cartridges would work with their comfort (Famicom) -

Providers

o

Ricoh had save limit and gave low costs ($8) for enormous request (3M)

o

All licensees needed to submit assembling requests with Nintendo, in addition to 20% sovereignty, in addition to take care of assembling costs

o

In US, needed to convey the diversions, fabricate through NOA, and

couldn't move

to other computer game machines for multi year.

3.

4. Offer expanded usefulness by utilizing another innovation: 32 bit RISC chip and CD-ROM stockpiling innovation rather than cartridges. Innovation took into consideration more noteworthy authenticity and increasingly complex game play/visual and sound conditions.

License innovation to equipment engineers for nothing!

Charge $3 per circle eminence for improvement of correlative programming. No limitations on programming licensees.

Thrust: free equipment licenses should make impetus for different organizations to enter equipment showcase. Low eminence rate and guarantee of innovation ought to empower programming improvement. This should empower 3DO to quickly develop an introduced base and catch what the organization (over-hopefully accepted would be an immense market of $17 billion).

3DO's principle procedure was item separation. Their definitive objective was to switch the current cartridge-based configuration to a CD-ROM-put together stage to store amusements with respect to. In addition to the fact that they are littler and progressively advantageous, however they could give bigger abilities and more noteworthy designs preparing capacities than cartridges.

Their greatest piece of their methodology was the way that they offered their equipment innovation for nothing. Game engineers would just pay a sovereignty of $3.00 per plate for access to the 3DO working code. The objective was to be progressively alluring to game fashioners, with the goal that a progression of amusements could be propelled so as to understand some piece of the pie.

Issues with 3DO's StrategyThe issue with 3DO's methodology was that they charged too high a value premium for their comfort, and in spite of the fact that the reassure is amazing, there were insufficient diversions offered on it and 3DO overlooked the way that a great deal of cash and time was expected to build up the game. The item was great, yet it needed solid help programming, and a definitive defeat of 3DO was the way that contender's new items were offered at much lower costs and a lot more recreations.

5. Sony tackled a considerable lot of the issues that 3DO proved unable. The cost at first for PlayStation was just $299, much lower than 3DO. only likewise given 4,000 game improvement instruments to licensees with the expectations of accelerating the way toward getting recreations to advertise. They had a quality in promoting too. They had an objective market of 18-multi year olds, and utilized item situation and put the PlayStation in motion pictures. Their general forceful value system worked amazingly well for them just as their pre launch work.

6. Microsoft choice to enter the business with its Xbox offering depended on two things. In the first place, it was driven by the possibility that in light of the fact that the Xbox depended on recognizable PC innovation, it would be a lot simpler for programming engineers to compose recreations for it, and be moderately simple to change over PC diversions for the Xbox comfort. Their great association with providers and large scale manufacturing diminished expense too.