Competitive Dynamics in PC gaming

According this NY times article, the PC gaming industry had US sales of $970 million in 2006, $953 million in 2005, and $1.1 billion in 2004. When you subtract out the revenues generated from online games such as second life, WoW, etc., what is left is a PC gaming industry that is in decline or making marginal growth. This is in stark contrast to the overall gaming industry, which PWC (here) believes will grow at a compound annual rate of 16.5% at least until 2009. What could cause such poor performance in the PC gaming industry? Well, other than substitutes such as consoles and online gaming which is related to PC gaming, three problems that I’m going to talk about are piracy, internal competition, and the lack of a gaming standard.

1. Piracy – Better to be a pirate than to join the Navy?

Let’s face it… any data that touches a computer is going to be pirated. Given that the PC is a multifunctional device that can be programmed to do whatever you want, it should come as no surprise that hackers have devised programs to bypass and copy any game. This is a little bit harder to do with console systems because at every generation hackers must reinvent the wheel, but over time every system has been or will be cracked to play pirated games. (here is a site that has a chip that has cracked the Nintendo Wii already.) An estimate from this BBC article states that global piracy cost the gaming industry $4 billion in 2004, with lost sales of 50% in the US, and over 90% in Eastern Europe, Asia, and South America! In that same article Doom 3 creator, Todd Hollendshead, claims that by using pirated games we are only poisoning the well from which we drink from as the PC game industry falls further in to decline. Todd goes on to say that the industry is always in a constant ‘One upmanship’ battle with hackers. Pushing the envelop on this battle, Sony was sued for its DRM rootkit and controversial software protection company, StarForce, offered a $10,000 prize for anyone who could prove that its software caused hardware malfunctions (although its known to make your pirated software crash).

2. Competition amongst Developers

Currently amongst the three major developers mentioned above there is a mad rush to sign up license agreements for what will be a future franchise hit. For example, Activision has obtained exclusive rights over the popular Marvel film titles and has plans already to release the Spiderman 3 game at the same time as the movie. While licensed games, such as EA’s sports series, can be profitable if done correctly, I’m reminded of the many licensed failures such as Shaq-Fu and E.T the extraterrestrial (which was a catalyst of the gaming industry’s early collapse). Furthermore, EA CEO, Lawrence Probst, points out, in an interview with the Wall Street Journal, that increasing development and licensing costs are hurting margins. Nevertheless, EA and many other licensees are locked-in to these titles because they continually bring in a sizable revenue base (40% for EA). To counteract this effect, developers are looking to establish wholly-owned IP titles such as EA’s upcoming title Spore (more on this later).

3. Lack of a gaming standard

One of the greatest strengths and weaknesses of the PC platform (as well as the mobile phone) is that improvements in hardware performance move along a continuous function, while console based platforms move in step functions. What I mean by that is if you were to graph performance vs. time you would see that the PC market exponentially curve upwards over time while the console systems take leaps forward based on the generations of gaming systems. Why does this happen you may ask? If you remember the discussion at the beginning of our course, Moore’s law is at play here, but not just in CPU’s. The greater density of transistors applies to all components of the PC including RAM, video cards, motherboards, etc., so when the market is looked at on the whole and one realizes that PCs are made from combinations of different products from different manufacturers, the performance of ‘latest’ PCs smoothly increases over time. If you want to see real data representing this trend check out Tom's Hardware or futuremark. In both of those links you can compare various hardware configurations across different benchmark tests to see this exponential trend.

So how does this affect the gaming industry? Well, let’s say that you bought the game in the picture below, Need for Speed: Carbon, and you want to turn on all the graphics so you can see the car shine in the sun, but after installing the game your computer crashes, or worse yet, you find out that your hardware is incompatible. Nothing is more annoying than not being able to play your new video game, and since piracy is a big issue, the retailer won’t accept refunds on any software. So, in order to stay up on the gaming curve you have to upgrade something in your system, only to find out two years later that your hardware is not up to par again. Hardware makers realize that games and graphics sell more components which is why AMD merged with ATI and Intel can now be seen sleeping with ATI’s archrival Nvidia (as seen below):

Intel and Nvidia: unlikely bedfellows?

Rather than dealing with all this, some consumers are moving toward consoles because there the game is guaranteed to work and are somewhat shielded from the rapid product lifecycles in the PC world.