The Factors At Play In Video Game Industry

The video game console industry is very much a two-sided market. Just as buyers prefer Internet auction sites with a large number of sellers, and vice versa, both gamers and game publishers prefer consoles that have a large market share.

However, size isn’t everything. As Vardit Landsman of Erasmus School of Economics and IESE Prof. Stefan Stremersch contend in their article, other factors are at play.

Single- or Multi-Home?

The authors look at the conditions affecting game publishers’ decision to opt for multi-homing, i.e., making a game available to more than one competing platform/console — both Xbox 360 and PlayStation 3, for example.

They also consider whether a decision to multi-home affects the sales of consoles.

These decisions can have a profound impact on profit. Rockstar Games, for example, reportedly received some $50 million from Microsoft to create two exclusive Grand Theft Auto episodes for its Xbox 360 system.

However, by single-homing, the company missed the potential revenues that these games might have generated from other platforms, such as Sony’s PlayStation 3.

Two-Sided Market

When it comes to the adoption of new technology, buyers want products that are likely to become popular and last. But just as with the famous Beta vs. VHS dilemma in the early days of video, uncertainty rules the market. This uncertainty decreases over time as one begins to dominate the market.

With this in mind, the authors surmised that newly introduced consoles, or those with low market shares, had a greater need for exclusive games or features than older, more established consoles with higher market shares.

Nintendo’s Game Boy is a case in point. Its competitive edge over rivals was the hugely popular game, Tetris.

In the two-sided market of the video game world, a game publisher’s choice of platform will also affect a buyer’s decision to choose one console over another, and thereby have an impact on the sales figures of platform owners.

Impact of Multi-homing on Sales

The authors studied the unit sales of 12 home video game consoles and the quality ratings for all games over 154 consecutive months, starting from July 1995. The consoles included Sega Saturn, Sony PlayStation, Atari Jaguar, Microsoft Xbox and Nintendo Wii.

The authors found that an increase in multi-homing led to poorer console sales.

For example, the Sony PlayStation 3, which had a high level of multi-homed games from its inception, had disappointing overall sales when compared with other seventh generation consoles.

Three major findings emerge:

1. The negative effect of platform-level multi-homing was found to be greater than the positive effect of offering a lot of games.
2. As suspected, the negative effect of multi-homing is greater for newer consoles, or those with smaller market shares. Therefore, game publishers are more likely to obtain single-homing offers early on, when the platform is still young.
3. As platforms mature and gain market share and consumer confidence, the need for exclusive games becomes less of an issue.

Lesson From Nintendo

As an example, Nintendo had disappointing results with its sixth generation GameCube. In response, the company chose to focus on single-homed applications for the Wii to establish a lead in its seventh generation.

Having achieved this, these findings suggest that Nintendo can once again increase the extent to which its applications are multi-homed.

So, the larger the market share of a mature platform, the more applications will be multi-homed.

On the other hand, the larger the market share of a newly released platform, the fewer applications will be multi-homed.

This may explain why games are increasingly multi-homed in the video game console market, a phenomenon seemingly at odds with the received wisdom on differentiation strategies.

Broader Implications

These findings are pertinent not only to platform owners and game publishers, but also to industry analysts, who commonly track the total number of sellers for a platform, but under-report the extent of multi-homing across platforms.

The results are also relevant to researchers. Previous research on two-sided markets has focused almost exclusively on quantity as the benefit to the two sides of the market.

However, these findings suggest that researchers may want to pay greater attention to the role of multi-homing.