Video Games & Consoles

INDUSTRIAL CODES

NAICS: 33-4111 Electronic Computers Manufacturing, 33-9932 Game, Toy and Children's Vehicle Manufacturing, 51-1210 Software Publishers

SIC: 3944 Games, Toys, and Children's Vehicle Manufacturing, 7372 Software Publishers

NAICS-Based Product Codes: 33-41117019, and 51-121035652

PRODUCT OVERVIEW

Video games are a part of the computer industry. They are an entertainment outgrowth of computers, an interactive, electronic, graphically-based gaming genre. The term video game covers a large and diverse variety of games including those played on arcade game systems, on home computers (in which case they are generally referred to as computer games), on gaming consoles connected to TVs, on hand held devices, and even on some cell phones. What all video games have in common are the following features: software that manages the electronic game, the use of a video display, and an input device of some sort with which the player interacts with the game. The input device is usually built into a system designed primarily for gaming, such as an arcade game system, a game console, or a handheld game device. The input device used when playing a video game on a computer is either the mouse or a similar peripheral device, often one called a joystick.

The game software is usually stored on a CD-ROM disc or, in the case of handheld gaming devices, on self contained and specially designed cartridges. Any computer is capable of running a computer game as long as the game and computer are on compatible operating systems, and the computer itself has the minimum hardware requirements to run the software. A video game is played on a video game console or other device designed for this purpose. The majority of consoles are manufactured by one of three large electronics firms: Nintendo, Microsoft, and Sony. The video game industry has been successful in large part because the games it offers feature complex graphics, robust sound effects, and an interactive story.

Early History

Video games got their start in the arcade market; many successful games eventually made their way to the home video game market. Early arcades contained mechanical games such as pinball machines. They were found in many malls and family-friendly places and served as a popular hangout for teenagers. The earliest arcades began in the early 1880s but it was not until the advent of the computer age that video games made their appearance on the scene.

The 1950s and 1960s were a time of significant development in the computer industry. Manufacturers started shipping the first computers aimed specifically at the business community. Computer giant IBM shipped the first computer with a hard drive in 1956. These early computer were large and cumbersome, requiring specialized environments and a large capital investment. Early computer languages such as Fortran or Cobol were developed during this era. The term Artificial Intelligence was first used in 1955. The first microchip was displayed in 1958. The first computer mouse was patented in 1963.

Games were played on computers even at this early stage of computer development in the computer labs on corporate and college campuses. The building of simple games such as tic-tac-toe or chess was a useful programming exercise for scientists because such programs were short and easy to write. A game also tested the capacity of the machine on which it was playing. In 1960 the Digital Equipment Corp. developed the PDP-1. The PDP-1 was a computer consisting of a series of 16-bit microcomputers that became popular with programmers because of some of its unique features, and because of the ease with which it could be programmed. The PDP-1 reached the labs at the Massachusetts Institute of Technology (MIT) and a team of programmers there decided to challenge its limits with a new game.

The First Computer Games

In 1962 Steve Russell and his team developed Spacewar!, the first computer game. The game consisted of at least two spaceships. The ships could fire weapons, had a supply of fuel that had to be monitored, and had the ability to escape into hyperspace. Today's game player would certainly find elements of the game very familiar: the two buttons that controlled the ships was the first joystick, for example, and the fantasy aspect of the material.

John McClathy, Steve Russell, and the rest of the team left MIT for Stanford University, where Spacewar! was introduced to the West Coast. There, technology again played a hand in the development of the video game industry. The newest PDP model, the PDP-11 was available. It was cheaper than its predecessors and sophisticated enough that it could be programmed to perform a single task. Bill Pitts and Hugh Tuck developed a game patterned on Spacewar! for this new computer called The Galaxy Game, the first coin operated video game. It appeared in the student union of Stanford University in September 1971. Only one unit was ever built and it cost one dime to play (it cost $20,000 to develop). Students lined up to play until it was removed in May 1979.

Bill Nutting, the head of Nutting Associates, was looking to make his own version of the game. The company was already active in the arcade game market. In August 1971 Nutting hired Nolan K. Bushnell and Ted Dabney to design a game. Bushnell had first played Spacewar! as a computer engineer in the labs at the University of Utah. The two men developed Computer Space, the world's first commercially sold, coin-operated video game. The Galaxy Game appeared two months before Computer Space, but was never sold commercially.

In the game Computer Space, a player controls a rocket ship and must evade enemy fire from a pair of flying saucers using a thruster and a pair of rotational buttons. The player can destroy the flying saucers by firing missiles from the rocket ship. Unlike, Spacewar!, Computer Space was designed for a single player. The game sold between 500 and 1,000 copies, but was not considered a commercial success.

The Evolution of Video Game Consoles

The world's first game console was developed by Ralph Baer. He had a working prototype in 1968, which he sold to Magnavox. The Magnavox Odyssey—affectionately referred to as the Brown Box—appeared in stores in 1971. With it people were able to play sixteen games, including volleyball and baseball. The game console suffered from a poor marketing strategy and from flawed development decisions. Advertising for the console left consumers with the false impression that the game would only work on Magnavox televisions. The console was priced at $100 but the light gun that was needed to play some of the games was sold separately for $25. Additional plug-in games were kept behind the counter in stores, and sales people were never trained to tell consumers about them. Sales were also restricted to Magnavox franchise dealers. By 1973 many stores had cut their prices for the Magnavox Odyssey. The Odyssey 2 was released in 1978 and sold over a million units, but suffered with its limited library of games and the increasingly competitive market.

Nolan Bushnell had seen a demonstration of the Magnavox Odyssey in May 1972. Bushnell and Dabney had already left Nutting Associates to start their own company, Atari. One of the games Bushnell played on the Magnavox Odyssey was Ping-Pong. Atari released PONG as an arcade game on November 29, 1972. PONG is modeled after the sport of table tennis, with two players hitting a ball across the screen. Magnavox perceived Bush-nell's game as a copy of its own and the resulting conflict was eventually settled in court. Both games, in fact, owe considerable debt to William Higinbotham's Tennis for Two, which was developed in 1958 and simulates a tennis game on a computer oscilloscope. PONG was a great success, selling 19,000 copies.

In early game consoles it was normal to have only a single game hardwired into a console. By the late 1970s, new games on cartridges began to be sold for the game consoles on the market at the time. These games were programmed onto a computer chip and encased in a plastic cartridge designed to be plugged into the console for uploading. More and more games came onto the market and allowed players to build personal libraries of games. The Fairchild Channel F, released in August 1976, has the distinction of being the first console to use programmable cartridges. In October 1977 Atari released the Atari 2600. Its console had, what were considered at the time, to be the superior games and technology and Fairchild would leave the console market a few years later. The Atari 2600 would eventually lose market dominance in the United States but remained active in Europe and Asia. The console was officially retired on January 1, 1992, after selling more than 40 million copies. Atari is the longest-lived game console in the relatively short history of this industry to date.

Space Invaders was created in February 1978 by Toshihiro Nishikado of Taito Corp. The game was distributed in the United States by the Midway division of Bally. In the game the player assumes control of a single laser base, and must do battle against hordes of invaders. The invaders advanced in tight columns, shooting lasers and dropping bombs on the cannon. The player could move left to right along the surface of the earth and fire back. As the player kills the invaders, their speed would increase. If the player kills all the invaders more would come. If an invader reaches the ground, however, the game is over. An estimated 65,000 machines were produced for the United States and an estimated 500,000 were produced worldwide (approximately 350,000 were sold in Japan). In 1980 Space Invaders was released on the Atari 2600, making it the first video game available for home use that had originally been a coin-operated video game in arcades. The Atari version of the game generated over $500 million in revenue for the Taito Corp., which had created the Atari version of the game, making it one of the most successful games of all time. It spawned a number of imitators. The Taito Corp. has released several sequels to the game.

The video game industry continued to evolve throughout the late 1970s and early 1980s. The first magazine on the video game industry, Electronic Games, was published in 1981. Dragon's Lair, the first game on laser-disc, was released in 1983. The popular puzzle game Tetris was developed in 1984. Zork was highly influential in the interactive fiction computer game market; in this genre, players use text commands to control events in the game. Other games released during this period were the first to employ character health monitors and radar maps (radar maps allow players to see a character's location in the game world). Such features are standard in modern gaming. The industry benefited from new, faster home computers such as the Commodore 64, released in August 1982. Also the first video game character to grasp the national consciousness appeared, Pac-Man. The game was developed in Japan in 1979 by Namco. It was released in the United States by Midway, the same company that published Space Invaders.

The Pac-Man himself looks like a pizza with a slice missing. The game is very simple. The player moves Pac-Man around a maze eating dots as it goes. Pac-Man, in turn, is being pursued by characters named Blinky, Pinky, Inkey, and Clyde. Part of the game's success was that it was a change of pace from the outer space shooter games in arcades, part of it was also good marketing. Once the game caught on the character appeared on lunchboxes, stickers, cartoon shows, and even songs. Both men and women found the character and game appealing, which is an important finding because at the time few girls played arcade or video games. Namco estimates that the game has been played over 10 billion times, which also suggest the game's crossover appeal. The game has been consistently updated.

In the early 1980s the industry was flooded with consoles and video games. A number of new consoles came to market, often copies of best-sellers Atari, Intellivision, and Colecovision. Publishers jumped into the market, looking to make the next PONG or simply to capitalize on consumer interest in video games. Much of what they produced was of dubious quality. In some cases, marketing opportunities took precedence over engaging game play. The Kool-Aid Man and the Chuck Wagon dog got to star in their own titles. Even industry leader Atari made missteps: it sold 7 million copies of a low quality Pac-Man game and 5 million cartridges were returned. MGM and Steven Spielberg struck a deal to release a video game based on his film ET: The Extra Terrestrial. Atari rushed the game into development and produced a game with bad graphics and a simple story. In some circles it is considered the worst video game ever made. Nearly all copies of this game were returned. Quite famously, Atari buried the 5 million returned ET game cartridges in a New Mexico landfill.

This collapse in the video game industry from 1983–1984 happened for several reasons: there were too many consoles, too many low quality games, and titles that were too similar to each other. Retailers slashed prices on game cartridges to reduce unsold inventory, which cut into industry profits. Demographics contributed to the collapse as well. According to Census figures, there was a decline among those 5-14 years of age in the early 1980s; this did not reverse until later in the decade. In 1982 there were approximately 33 million children 5-14 years of age. In 1982 an Atari spokesman noted that 30 million game systems had been sold since the industry's birth—game sales simply had nowhere to go. An industry that saw sales of $3 billion in 1982 generated sales of approximately $100 million in 1985.

A rejuvenation of the industry was, however, about to get underway. The Nintendo Entertainment System (NES) had been initially released in Japan on July 15, 1983. It was released under the name Famicom (Family Computer). After some initial technical problems, the system was a great success. By 1988 Nintendo had taken 90 percent of the system market in Japan; one third of all Japanese homes had a Famicom. Nintendo revealed the renamed Famicom in North America at a Consumer Electronics Show on October 18, 1985. The console was available nationwide in February 1986. The NES is widely credited with revitalizing the video game industry. The main reason behind the console's success was one of its games—Super Mario Brothers.

Super Mario Brothers was actually a spinoff of the arcade game Mario Brothers, which was itself a spinoff of the game Donkey Kong. Super Mario Brothers was released in Japan on September 13, 1985. The player takes the role of Mario; a second player takes the role of Mario's brother Luigi. The player then races Mario through the Mushroom Kingdom. He must evade or eliminate King Koopa's forces, and save Princess Peach (known as Princess Toadstool in North America until 1996). It is the best-selling title on the Nintendo System. The game has been updated several times; Super Mario 3 and Super Mario 2 are second and third respectively on Nintendo's all-time best-seller list.

Sega of America had been successful in the arcade market, but it was eager to challenge the NES on the home console market. The Sega Master System was released in 1986 but was unsuccessful. The Sega Mega Drive was released in Japan in 1989. For its release in Europe and North America the console was renamed the Sega Genesis. Sega's first challenge to Nintendo would come on June 23, 1991, when the first Sonic the Hedgehog game was released. Sonic is a blue hedgehog with super speed and the games are typically built around this ability. The game's success gave Sega a flagship character similar to Nintendo's Mario. Sonic is still Sega's mascot, and his series has sold more than 44 million copies. Sega no longer manufactures hardware.

In 1986 Sony struck a deal with Nintendo to manufacture an add-on CD-ROM drive for the Nintendo game console called the Super Disc CD-ROM. However, shortly before the joint agreement was to be announced at that year's Consumer Electronics Show, Nintendo discovered that the contract gave Sony licensing rights to the new format. At the meeting to announce its partnership with Sony, Nintendo officials instead announced a partnership with electronics maker Philips, whereby Nintendo would maintain control of titles used on Philips equipment. The crowd was taken by surprise, as was Sony. One source has questioned how this must have played in the Japanese business community—a Japanese firm publicly rejected working with another Japanese company in favor of a European company.

Sony officials decided to go ahead with the research and release its Play Station as a standalone console. Nintendo filed suit, claiming it owned the Play Station name. Nintendo and Sony would eventually work out their differences. By 1993 the console had been renamed Playstation. It was released in Japan on December 3, 1994 and then in the United States on September 9, 1995. By June 1998 over 37 million copies had been sold worldwide, surpassing the Walkman as Sony's best-selling electronics product.

Sony released the console's successor the Playstation 2 on March 4, 2000 in Japan and October 26, 2000 in North America. The console sold for $299, offered state-of-the-art technology and could play DVDs, video games, and CDs. The consoles were also backwards compatible, meaning they could play games designed for the Playstation console. Sony had underestimated demand and consequently had serious problems supplying retailers with a sufficient number of consoles. Sony also faced various manufacturing problems, and some bad press, when some consumers claimed the Playstation 2 would not play DVDs or older games as advertised. However, despite its rocky start, the Playstation 2 is the fastest-selling gaming console in history.

The computer game industry saw two important titles released in 1993. Myst is credited with advancing the first-person puzzle game. The game lets the player assume the role of the Stranger. He arrives on Myst Island and is transported to surrounding islands to collect a series of books. The game won three awards from the Software Publishers Association in 1994 and praise from reviewers and gamers. The game spawned imitators, several revisions, and a sequel.

The game Doom was also released in 1993. The player assumes the role of an unnamed marine who must fight zombies on a military base. The story is simple, but the game is given credit for advanced 3D graphics and multiplayer gaming (the game can be played online with people playing various roles in the game; in short, one plays other gamers, not the game). The game helped spark the growth of sophisticated first-person shooter games, in which the game camera assumes the point-of-view of the player. The genre is different than a third-party shooter, in which a player manipulates a character that can be seen in the game. Some feel that the first-person shooter immerses the player more fully in the game experience. An estimated 100 million people downloaded the game. Doom was the best-selling PC title until dethroned by The Sims game, which arrived in 2000.

The Sims is described as a strategic life simulation game. It helped establish the genre of games in which players control the game rather than just participate in it. The player becomes a character in a suburban home on the outskirts of SimCity. Creator Will Wright is thought to have come up with the idea for the game after losing everything in an Oakland, California, fire in 1991. Just as Wright had to rebuild his life, so too the player must manage the lives of his characters. The player must go shopping, pay bills, care for pets, and fix appliances. Adults go to work and children to school. Players may even die. There is no real way to win in the game, although characters do have specific goals to achieve, and the player must manage his or her time effectively. The pleasure of the game is in building healthy social experiences. Some players do let their virtual families become dysfunctional. Characters may become sick or deeply depressed from loneliness or other game experiences. Suicide is not, however, permitted in the game. The Sims spawned a sequel, and a number of expansion packs for the original game. It has been translated into 16 languages. It became the best-selling PC game in 2002, and is a very successful franchise.

Microsoft had certainly taken notice of Sony's success with the Playstation console. It released its own console in November 2001. The Xbox was more sophisticated than its rivals the GameCube (Nintendo) and Playstation (Sony). The Xbox included a hard disk drive and an ethernet port, making it very computer-like (a logical design for the king of operating systems). Critics and gamers praised the device's graphics and processing abilities. This admiration did not translate into high sales, however. Part of the problem was that, being new, the Xbox had a limited library of titles because many games are exclusive to the Playstation console. The console sold slowly in Japan and Europe. However, the Xbox did feature an online gaming option called Xbox Live.

Online games are games that are played over some sort of computer network, generally the Internet. Online gaming existed in a very modest form in the 1980s. The field developed slowly in the 1990s, and both Sega and Sony hoped to expand their popular products onto the World Wide Web. Playing games online became more feasible in 2001 because more households had the high-speed Internet connections necessary for the games. Xbox Live became operational in November 2002. In online video gaming, players assume an identity in the game and may communicate live with other players using headsets and keyboards. By July 2004 subscriptions reached 1 million, and by July 2005 subscriptions doubled. Xbox Live reported 6 million subscriptions in March 2007.

The Xbox console and Xbox Live service owes much of their success to the game Halo. Halo: Combat Evolved was released on November 15, 2001. In this game, the player assumes the role of the Master Chief, part cyborg and part soldier, who battles a race of aliens known as the Covenant on the distant planet Halo. The game's sequel, Halo 2, was released on November 9, 2004. It sold over 2.3 million units on its first day and generated sales of $125 million. It is the fastest-selling game in history.

The online gaming market would develop further with the success of Massively Multiplayer Online Games, or MMOGs. These are games played by potentially thousands of players over the Internet. Unlike other online games, MMOGs create a persistent world in which players participate periodically but the world is constant. This fantasy world has its own towns, residents, and rules. Everquest, Final Fantasy XI and Meridian 59 were among the early successful MMOG titles. The market is currently dominated by the World of Warcraft series, which had 53 percent of MMOG subscriptions in June 2006. Approximately 8 million players pay $15 a month to play this game, as of March 2007. Players may assume the role of a human, orc, dwarf, elf, ogre, or a number of other beings in the world of Azeroth.

Seventh-Generation Consoles

The three largest game console makers each released a new console in 2005 and 2006. Microsoft released the Xbox 360 on November 22, 2005. Nintendo released the Nintendo Wii on November 19, 2006. The release of the Playstation 3 was the most anticipated, considering the hold Playstation 2 has long had on the console market. The Playstation 3 (PS3) was released November 11, 2006 in Japan and November 17, 2006 in North America.

Video Game Recognition

A consortium composed of Stanford University, the University of Maryland, and the University of Illinois submitted a list of the most important video games to the Library of Congress in March 2007. They were inspired to do so by the film preservation work of the National Film Registry, also managed by the Library of Congress. The top ten were: Spacewar! (1962), Star Raiders (1979), Zork (1980), Tetris (1985), SimCity (1989), Super Mario Bros. 3 (1990), Civilization I/II (1991), Doom (1993), Warcraft series (1994 start), and Sensible World of Soccer (1994).

MARKET

Video game hardware and software sales generated approximately $12.5 billion in retail sales in 2006, according to industry analyst NPD Group. Another $1.5 billion was spent on video game accessories, such as memory cards, controllers, and charger kits. (NPD receives data representing approximately two-thirds of U.S. retail sales and makes projections for the remainder of the market based on a sampling of consumers.) A.G. Edwards believes the global video game market to be worth $30 billion.

Hardware

The video game console industry is divided into generations based on bit technology. Eight-bit technology, for example, refers to computer architecture (central processing unit, memory and other units) that is 8-bits wide. There are seven recognized generations of video game consoles:

• The first generation is defined as the period between 1972 and 1979.
• The second generation is punctuated by the Atari 2600 and the Magnavox Odyssey. It extended from 1979 to 1982.
• The third generation began in 1983 and ran through 1986. This generation includes the Nintendo NES, and many consider this the beginning of the modern video game industry.
• The fourth generation started in 1987 and marked the beginning of the 16-bit era. This generation extended through 1993.
• The fifth generation includes 32-bit and 64-bit architecture and started in the mid-1990s. This generation includes the Sony Playstation, Sega Saturn, and Nintendo 64.
• The Sony Dreamcast marked the beginning of sixth generation consoles and 128-bit technology in November 1998. The Xbox and the Playstation 2 followed and this generation extended through 2004.
• The seventh generation began with the release of the Microsoft Xbox 360 in November 2005. It also includes the Nintendo Wii and Sony Playstation 3.

Nintendo and Sega were the leaders in the video game market in the early 1990s. In 1993 Nintendo took a 51 percent share of the U.S. market and Sega a 39 percent share. Sega had half of the global video game market that year, according to industry sources.

Sony's Playstation would lead the market after its release. Instat reports Sony had 47 percent of unit sales from 1995 to 2000, followed by Nintendo with 28 percent and Sega with 23 percent. In 2006 the Playstation 2 claimed 41 percent of unit console sales in the United States according to A.G. Edwards estimates. The Xbox 360 had 34 percent of the market, the Wii 9 percent, the GameCube 7 percent, the Playstation 3 6 percent, and the Xbox 3 percent. The Nintendo DS claimed 46 percent of all portable video console sales in 2006. The Nintendo Gameboy claimed a 28 percent share and the Sony Playstation Portable a 26 percent share.

A new generation of consoles, those categorized as the beginning of the seventh generation of game consoles, has recently come to market. This makes predicting future game hardware sales difficult. Figure 225 presents the forecast market shares for current video game leaders in the year 2011 based on data from analysts at Merrill Lynch and published in the International Business Times.

Merrill Lynch expects the PS3 to eventually lead the market. Some analysts expect the PS3 to rebound from its slow start and lead the market sooner than 2011. SFG Research estimated that Sony's console would take 46 percent of the global market in 2010, followed by the Xbox360 and the Wii with 34 percent and 20 percent respectively. Some insist that Wii's market share should be higher, considering how it had outshined the PS3 in sales in the first months since its release. Strategy Analytics estimates that there will be 121.8 million Playstation 3 consoles sold worldwide through 2012, 59.7 million Xbox 360 consoles, and 23.3 million Wii consoles.

Software

Electronic Arts is the leading software publisher in the U.S. with approximately 20 percent of the market during the first half of 2006, according to UBS Bank and NPD Group research. Nintendo was second with 10 percent, and Take-Two had a 9 percent share of the market. Activision and Ubisoft each had a 7 percent market share. Sony and THQ tied with 6 percent market shares each. Other firms took the remaining 35 percent of sales. The best-selling games of 2006 were:

• Madden NFL 07 (Electronic Arts): 2.8 million
• Super Mario Bros (Nintendo): 2.0 million
• Gears of Wars (Microsoft): 1.8 million
• 2 Kingdom Hearts II (Square Enix): 1.7 million
• Guitar Hero 2 (Activision): 1.3 million
• Final Fantasy XII (Square Enix): 1.3 million
• Brain Age (Nintendo): 1.1 million
• Tom Clancy's Graw (Ubisoft): 1.0 million
• NCAA Football 07 (Electronic Arts): 1.0 million

The best-selling genre of video games was action games with approximately 30 percent of unit sales. Sports games followed with 17 percent of sales. Strategy games were the top selling computer game genre with 30 percent of sales; these games rely on decision making skills and should not be confused with action games, which represented only 5 percent of computer games. Family and children's games were the second most purchased type of computer game with 20 percent of sales.

Some critics have complained that the game industry needs to take more risks. However, with increasing licensing and development costs, fewer game developers may be willing to stray beyond proven, successful formulas.

The top-selling game franchises of all time, as of December 2006 are:

• Mario (Nintendo): 193 million
• Pokemon (Nintendo): 155 million
• Final Fantasy (Square Enix): 68 million
• Madden NFL (Electronic Arts): 56 million

• The Sims (Maxis/Electronic Arts): 54 million
• Grand Theft Auto (Rockstar): 50 million
• Donkey Kong (Nintendo): 48 million
• The Legend of Zelda (Nintendo): 47 million
• Sonic the Hedge Hog (Sega): 44 million
• Gran Turismo (Sony): 44 million

The popularity of video consoles has meant less interest in computer games. Computer games generated sales of $970 million in 2006, according to NPD Group. The market is down significantly overall from its high point in 1999, when the industry saw sales of $1.9 billion. Many gamers switched to console games for a number of reasons, including more reasonably priced consoles, portable consoles, and better video and sound. The industry may see improved sales from new operating systems.

KEY PRODUCERS/MANUFACTURERS

Hardware

Sony first became involved in the video game market in 1988, when it struck a deal with Nintendo to develop a CD-ROM drive for the Super NES. It is the maker of the popular Playstation consoles. It employs 158,500 people and generated revenues of $63.8 billion for the fiscal year ended March 2006.

Microsoft manufactures the Xbox console and many software programs. It employs 71,000 people and generated revenues of $44.2 billion for the fiscal year ended June 2006.

Hiroshi Yamauchi started the Nintendo Playing Card Company Ltd. in 1889. In 1963 he renamed the company Nintendo Company Ltd. The company expanded into various toy, electronics, and food markets. It secured the rights to distribute the Magnavox Odyssey in Japan in 1975. It began its expansion into the arcade market in 1978. In 1981 Nintendo created the very successful Donkey Kong. Nintendo created the Nintendo Entertainment System in 1985. Its Game Boy was released April 21, 1989 and the company has controlled the handheld game market ever since. Nintendo employs 3,013 people and generated $4.5 billion in revenues in 2006.

Software

Electronic Arts was created in 1982 and is the leading independent video game publisher with annual revenues of approximately $3 billion. It employs 7,200 people. Its best-known game is the Madden football series. The company claims 70 percent of the sports game market in North America. It was also the leading publisher of racing game titles with a 56 percent share in 2006, according to A.G. Edwards.

Activision was the first independent video game publisher when it was created in October 1979 by a group of former Atari programmers. It generated revenues of $1.4 billion in 2006. The company publishes a number of popular titles, such as Doom 3, the Spider-Man series, the Tony Hawk series, and the Call of Duty series. Activision was the leading publisher of shooter games in 2006 with a 21 percent market share according to A.G. Edwards.

Take-Two Interactive employs 2,020 people and generated $1 billion in revenues in 2006. It publishes a number of sports titles as well as the controversial Grand Theft Auto series.

THQ was formed in 1989. The company has always made toys and only began making video games in 1994. It generated $756.7 million in revenues of 2005 and has has 1,300 employees. THQ's popular titles are based on the World Wrestling Entertainment, World Wrestling Federation, SpongeBob SquarePants, and The Simpsons. It has a significant market share in some categories. In 2006, according to A.G. Edwards, it was the number one producer of fighting games with a 30 percent market share. It was the second largest producer of adventure games, with a 19 percent share, and the leading producer of children's entertainment games, with a 56 percent share.

Ubisoft was created in 1986. It employs more than 2,350 people. It is the distributor of Myst and the successful Tom Clancy franchise. It was also the leading publisher of flight software games. It had a 44 percent market share in 2006, according to A.G. Edwards.

MATERIALS & SUPPLY CHAIN LOGISTICS

Sony, Nintendo, and Microsoft are the three major gaming platform companies. They require that publishers obtain a license from them to develop and play games on their gaming platforms. These hardware manufacturers can then control the number of titles produced for the platform. This process also helps Sony, Nintendo, and Microsoft ensure that games meet their quality standards.

Development Costs

A current generation game costs approximately $4-$16 million to develop, according to A.G. Edwards. However, a game for a next generation console is more expensive. In early 2007 publishers have only just begun to develop games for these consoles, but A.G. Edwards estimates a game for the Xbox 360 or Playstation 3 to cost $10-$20 million to develop, while a game for the Wii might cost $5-$8 million. It costs approximately $1 million to move a game from one platform to another. Publishers often advance funds to independent and third-party developers to help in game development; these funds are usually seen as advances on royalties to be earned from product sales. A development studio may have fewer than 10 people or be a much larger operation. Various development team members would include the following: a game producer, who manages the schedule, budget, and licensing agreements; the game designer, who develops the game's concept, layout, and gameplay; and the game programmer, who writes specific software code for the game.

At various points in the production process the developer will send software code, artwork, manuals, warranty information, packaging designs, and prototypes to the hardware manufacturer for approval. Games manufactured by Sony, Microsoft, and Nintendo are generally shipped within two weeks of a manufacturing order.

Another cost issue is royalty payments. Hardware companies earn royalties on the video games produced to play on their systems by the software publisher. According to A.G. Edwards, the hardware makers earn $4-6 per unit manufactured on a portable game, $6-8 per unit on a current-generation game, and $8-9 per unit on a next-generation game. Royalties are also paid to the celebrities, sports organizations, television studios, or comic book publishers for the use of their trademarks or licensed images. The rights to such licensed materials are usually for some period of time; at the end of this period the rights may be renewed. Games based on original concepts have higher margins because they require fewer royalty payments. However, because these games are original it is more difficult for them to find favor with the average video game player. An average video game player is going to be drawn to games with known concepts—a game starring Spiderman or NFL teams, for example. According to A.G. Edwards and NPD Funworld, half of video game software retail sales came from licensed properties.

A.G. Edwards offers some insight into the manufacturing cost of a next-generation game. An average retail cost is $59.99. The retailer gets approximately 20 percent of this, or $11.99. The wholesale price is approximately $48.00. Other costs include hardware royalties, content license royalties, external development royalties, and manufacturing and packaging fees. These costs may reach $19.50 per unit. This produces a gross profit of $28.50—a figure that does not include spending on marketing and other necessities. Other manufacturing costs include spending on price protection and third party distributors, which would lower the gross profit to $20.50. A.G. Edwards stresses such figures are only guidelines; manufacturing costs and production agreements vary by company.

Video Console Costs

Video game consoles are manufactured using plastics, metals, and electronics. Parts include motherboards, optical drives, hard disk drives, cooling mounts, and other hardware. The market tracking firm iSuppli conducted a study to analyze the costs associated with video game console manufacturing. According to the iSuppli study, the combined materials and manufacturing cost of early Sony PlayStation 3 consoles was $805.85 for the model equipped with a 20GB drive, and $840.35 for the 60GB HDD version. Estimated material costs for Microsoft's early Xbox 360 was reported by iSuppli as $323.30. Because the newest generation of video game consoles is made up of high-powered computers, their costs are likely to vary greatly depending on the components that they include such as memory and processors, parts that are, for the most part, purchased by the manufacturer for installation in their game consoles.

It is the human labor that accounts for the greatest portion of the cost of producing the game—the video game software itself. The materials used are capital assets and for the most part are not used up or consumed in the production of the game software. According to the U.S. Census Bureau's report on the Software Publishing industry, in 2002 there were 440 establishments in the United States involved in game software production and publishing.

DISTRIBUTION CHANNEL

A consumer may purchase a video game at many types of retail chains, including mass merchandisers, consumer electronics stores, video stores, specialty video game chains, and online vendors. According to A.G. Edwards, approximately 45 percent of all video games were sold through consumer electronics stores, such as Best Buy and Circuit City, and video game stores in 2006. Video game stores became popular in the 1980s and 1990s during the development of the specialty retail industry. The largest video game stores were GameStop and EB Games, which merged in October 2005. Mass merchandisers and discount stores such as Wal-Mart represented another 36 percent of industry sales in 2006. Direct mail and online vendors represented 7 percent of sales and toy chain stores 5 percent of sales. Supermarkets, drug stores, and other types of outlets represented the other 8 percent of sales.

The toy store has traditionally been the major seller of games for children, but as video games became more popular (and not just for children) more retailers began stocking them. Blockbuster Video cleared space in its stores to begin renting and selling video games in 2004, for example. A market for used game has developed online through eBay and other sites; one estimate places the size of this market at $800 million. The battle for what video games get shelf space can be considerable. Meanwhile, the migration of video games from the toy store to other outlets has cost toy stores valuable market share. In 2004 toy stores had 9 percent of video game sales; by 2006, the share had dropped to 5 percent.

According to A.G. Edwards the video game market is dominated by a handful of retailers. In 2006 Wal-Mart had a 25 percent market share, GameStop a 22 percent market share, and Best Buy an 18 percent market share. Target was fourth with a 10 percent market share, Toys R Us was next with a 5 percent market share, and Circuit City had a 4 percent market share. Other retailers had the remaining 16 percent of the market.

Media tracking firm Rentrak estimates that video game rentals are approaching $1 billion in revenue. Blockbuster had approximately 41 percent of this market in 2004, according to the NPD Group. Games are also rented through other video rental chains and through online vendors. Online rentals operate like the popular online movie renting service Netflix. A user pays a monthly fee and is able to rent games; Gamefly is the most popular online provider.

KEY USERS

An early review of the Playstation 2 described it as a slim black box that would look at home in any home entertainment center. This description was telling in that it showed how the video game console was moving from being a young person's toy to an entertainment device. As video games became more popular, consoles looked more sophisticated, and game content became more sophisticated as well. More adults started playing games, and the average game player became older. The average computer and video game player was 18 years old in 1990 according to the Entertainment Software Association. By 1993, the average age was 29. In 2005 the average player was 33 years old.

In 2005 approximately 31 percent of players were under 18 years of age, 44 percent were between the ages of 18-49, and 25 percent were over age 50. The typical adult video game player has been playing for 12 years. Men represent 62 percent of game players; women represent the remaining 38 percent. Women are believed to be the major players of games on mobile devices, however. Industry firm Telephia estimates women represent 65 percent of all those who play games on phones and other portable devices.

In the fourth quarter of 2006, approximately 41 percent of U.S. household or 46 million households reported owning a video game console. According to statistics from analysts Veronis, Suhler and Stevenson, the average consumer (12 years of age and older) spent 64 hours per year playing video games in the year 2000. By 2004, the average consumer was spending 75 hours per year. This figure is projected to be at 82 hours per year in 2006 and 96 hours in 2009. Spending per person on video games is forecast to nearly double between 2000 and 2009, from $27.89 to $44.30.

ADJACENT MARKETS

Video games are connected to the larger toy and game industry. The toy industry generated sales of $22 billion in 2006, up less than 1 percent from 2005, according to the NPD Group. Toy sales are driven by demographics and by merchandise tie-ins to popular movie franchises such as Star Wars and Spider-Man. Video games are similarly linked to the motion picture industry. Many films, particularly those aimed at children, have a video game to accompany the film's release. While the video game industry does benefit from successful movie franchises it is a powerful industrial force of its own. Video games have been generating more revenues than Hollywood since 2004. The Motion Picture Association of America reports $9.5 billion in U.S. ticket revenues in 2006, compared to the $12.5 billion spent on video games. Globally, the movie industry generated $25.8 billion in 2006.

A video game release is often joined with a strong marketing campaign; however, advertisers have started seeing video games as a medium in which to advertise. The Yankee Group expects advertising in games to rise from $120 million in 2004 to $800 million in 2009. Game advertising includes such things as billboard and consumer products strategically placed within a video scene.

RESEARCH & DEVELOPMENT

Research and development work in the field of video games tends to follow the advances in the underlying technology. The area of virtual reality is one that is rife with potential. Although the specific areas under development are not made public until they are ready to be launched, the remote aspects of the Wii system are suggestive of what may be more common in the near future in the video game sector—namely, the use of wireless devices that are sensitive enough to allow a user to interact with the video image with movements similar, if not identical to, those used in actual games, such as tennis or golf.

Ergonomic concerns are also fueling research into better designs for input devices. Heavy users of video games are in danger of developing repetitive motion injuries, which if left untreated can make it almost too painful to continue playing video games. Terms like Nintendenitis have become commonly used within the gaming community to describe the rising number of gamers suffering from repetitive motion injuries. Game console manufacturers are working on devices that will be more flexible than the traditional button pad and joystick. The Nintendo Wii is a development in the field that suggests the direction of future hardware developments. The Wii console includes a wireless input device that looks like a small TV remote control. It is equipped with a highly sensitive motion sensor and allows the user to move freely, giving the user maximum flexibility when playing Wii games.

A few companies are doing research into the best gaming console of all, the brain. Emotiv Systems, NeuroSky, and CyberLearning are conducting research with electroencephalography, the measurement of brain waves. Emotiv Systems' work has generated the most interest. It is trying to develop a helmet equipped with electrodes to read brain signals. A player could put on the helmet and then issue mental commands to control events in the game. Such technology can recognize basic mental states, but Emotiv Sytems admits it will be a challenge to develop technology to recognize specific thought patterns.

CURRENT TRENDS

New computer technology can render more realistic people and environments. Just as programmers created more complex games to test computers in the 1960s, game developers of the 1980s and 1990s pushed the envelope with more complex, explicit games.

Video Game Violence

As video games became more popular, more parents and adults expressed concern about the media's effect on children. In 1982 Surgeon General C. Everett Koop said arcade and video games produce "aberrations in childhood behavior" and that they ultimately teach children to "eliminate, kill, destroy." A 1989 study by the National Center for Television Violence drew national attention when it noted the prevalence of violent and war-themed games in the video game industry.

Games such as Night Trap, Grand Theft Auto, Carmageddon, and Mortal Kombat have all drawn protests for their violence and explicit content. The protests prompted some retailers to pull these games from their shelves. Senators Joseph Lieberman (I-Connecticut) and Herbert Kohl (D-Wisconsin) announced hearings in December 1993 about the explicit content in video games and how such games are marketed to children. The major video game companies feared government intrusion and moved quickly to police themselves. The Entertainment Software Association formed the Entertainment Software Ratings Board (ESRB) in 1994. This rating system is voluntary, although the major game makers all comply. The categories are:

• C—Early Childhood
• E—Everyone
• E10+—Everyone 10+
• T—Teen
• M—Mature
• AO—Adults Only
• RP—Rating Pending

Games, like movies, are rated based on violence, sexual content, language, and themes. From 2001 to 2005 approximately 58 percent of video games sold were rated E (for Everyone), 38 percent were rated T (for Teen) and 18 percent were rated M (for Mature). The ESRB rated 1,285 games in 2006.

According to some research, many parents consult the ratings of a game before purchasing it for a child, but the industry still draws complaints and outrage. Both Senators Lieberman and Hillary Clinton have called for tougher game legislation.

Portable Devices

The early twenty-first century saw the expansion of portable electronics such as handheld organizers, including Palm Pilots or Blackberries, tablet PCs, and cellular phones. Video games were available for each of these platforms. The major console makers have also released consoles intended for portable gaming. Nintendo released the Game Boy Advance in 2002 and the Nintendo DS in 2004. Sony released the Playstation Portable in 2005. The Playstation Portable, or the PSP, was a challenge to the lock on the handheld game market that Nintendo had long enjoyed with its Game Boy product. These devices offered great video and audio capabilities. Of particular interest is the multipurpose functionality of these new devices, they feature non-game functionality such as storing personal photos. Console makers realized consumers were increasingly interested in integrated devices; they wanted a device that could not just play a game, but retrieve e-mail, browse the Internet, and store photos.

Next Generation Console Issues

Both Microsoft and Sony announced price cuts on their next generation consoles in mid-2007. Microsoft dropped the price on its Xbox 360 by $50 and Sony dropped the price of the 60 GB Playstation 3 by $100 (even as they introduced an expensive 80 GB version). Microsoft faced another lawsuit claiming that its Xbox 360 damaged video game software. Microsoft also extended the warranties on its console because of numerous reports of hardware failure. This failure has been nicknamed the "Three Red Lights of Death" by gamers because of the three red lights that appear on the front of the device when it fails. Microsoft set aside $1.1 billion to make repairs to the estimated 2.5 million affected consoles. Sony's price drop was perceived by gamers and media analysts as a way to stimulate sales for the console. The $100 price drop brought the retail price of the machine to approximately $500 at the end of the first decade of the twenty-first century.

TARGET MARKETS & SEGMENTATION

Many experts anticipated Playstation 3 to top the sales chart for the next generation consoles; however, the shipping problems and its steep price tag allowed Nintendo's Wii to gain market share. Japan and the United States both reported the Wii outselling the Playstation 3 at a ratio of nearly two-to-one in December 2006 and January 2007. Consumers have responded to the novelty of its wireless handheld remotes. Players are physically doing something, rather than sitting, pressing buttons, and watching movement onscreen. The Wii is also packaged with games such as bowling, tennis, and boxing that are universally understood. People also enjoy designing their avatars, the player's online persona within the game.

Nintendo's sales were helped by some effective marketing. Nintendo took the game to an American Association of Retired Persons meeting in early 2007. The seniors initially demurred, thinking Nintendo officials were there to get them to purchase devices for their grandchildren. Focusing on this audience proved a smart move for Nintendo, as the game system has caught on with seniors. Grandparents play with grandchildren. The Chicago Tribune reports the game is a hit at the Hillshire Retirement Community, where residents have even formed their own bowling league and hold tournaments all without leaving the building.

The Wii may have another unintended effect, weight loss. One Philadelphia man reported losing nine pounds playing the Wii 30 minutes each day for a month. Researchers at Liverpool John Moores University published findings stating active gamers using the Wii controllers might lose as much as 27 pounds in one year.

Video games have other potential health applications. Researchers point to improved cognitive ability among gameplayers. This exercising of the brain may help combat dementia and Alzheimer's. A study at the University of Maryland suggested game play might distract patients from uncomfortable medical procedures. Research also indicates that video and computer games build strategic thinking and planning skills. Video and computer games also help children improve math, spelling, and reading skills. The military uses video games to train soldiers by simulating battlefield situations.

Video games have also been opening up new social possibilities. The popularity of Wii has prompted Nintendo to develop a channel for the Wii console. Through the channel gamers are able to compare their customized avatars and to vote on favorites. Sony is planning a new gaming service called Home, where people's avatars can meet each other in a 3-D online world. The participants, meanwhile, never leave their couches.

RELATED ASSOCIATIONS & ORGANIZATIONS

Entertainment Software Association, http://www.theesa.com

Entertainment Software Ratings Board, http://www.esrb.org

European Leisure Software Association, http://www.elspa.com

International Game Developers Association, http://www.igda.org

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see also Borad Games, Personal Computers, Toys