Last week the Financial Times posted an article1 about how mobile gaming and cloud gaming are now reshaping the videogame industry, displacing some of the incumbents and letting new players join the competition. it is therefore interesting to analyse how the internet has influenced the platform business model that characterizes this industry and how technologies provided different ways for companies to implement platform envelopment.
In fact, since its birth in 1972, the video game industry was characterized by fierce competition between different platforms: Atari, Nintendo, Sega, Sony and Microsoft all competed for decades by managing both developers and gamers, understanding how to create value from their interactions and how to extract some of that value2. This was particularly difficult in the early years of the industry when companies did not have a clear understanding about how to how externalities could affect the different actors: the most notable case is perhaps the one of Atari, which lost market leadership in the 1980s due to its inability to charge the money side of the market3 (game developers), which lead to a decrease in the overall quality of available games that made its consoles less appealing for consumers4. Learning from this episode, firms like Sony and Microsoft understood how customers are sensitive to quality and implemented their pricing strategy accordingly (as is described in Eisenmann et al. 20065).
However, things have changed since 2006. With the diffusion of smartphones, developers realized that they could reach new market niches2 by distributing their games on these new platforms, rather than on the console ones. This allowed the entry of both Google and Apple, which were able to exploit their user bases and infrastructures to partially “envelop” their competitors by implementing a conglomeration attack and, by charging (questionable6) fees, obtaining a significant amount of market revenues.
More recently, the advent of cloud gaming (which exploits the high processing capacity of server farms to allow people to play with not-so-powerful devices) might potentially once again reshape the industry boundaries: new players like Amazon, with limited experience in the industry but large user base and computational power, are trying to enter7 implementing envelopment, while several incumbents are trying to defend their position using the same technology8.
1) https://www.ft.com/content/ed5aba41-c174-4b1f-8f14-8637f2da0af0
2) https://techcrunch.com/2015/10/31/the-history-of-gaming-an-evolving-community/
3) https://www.bugsplat.com/blog/video-games/great-video-game-crash-1983/
5) https://www.researchgate.net/publication/294221616_Strategies_for_two-sided_markets
6) https://www.macrumors.com/guide/epic-games-vs-apple/
7) https://www.ft.com/content/d017aadb-f865-4567-b0ec-c0f4bf3d6401
8) https://www.microsoft.com/en-us/p/xbox-game-pass-ultimate/cfq7ttc0khs0?activetab=pivot%3aoverviewtab
Hey Jacopo, very interesting and relevant topic. In general, I agree with you that Apple and Google were able to capture value from traditional gaming platform incumbents. However, I don’t think that mobile gaming platforms can and will envelop console platforms, because the technical capabilities of mobile devices are simply too limited. Many consumers value the great graphics and complexity of console games, and they will most likely not migrate to a mobile platform in the near future. With respect to Cloud Computing, that is a different story. If the processing capacity of server farms will allow players to the match in-game quality of consoles, traditional incumbents will face huge competitive risks. Thus, the traditional firms need to quickly develop strategies to invest into new technologies and defend their position in the market.
Hi Svante,
I agree that mobile gaming can hardly overturn the traditional PC/console gaming. But in my understanding, mobile games developers, such as the Finnish firm Supercell, are exploiting a different market segment than the OG developers. With the increased availability of smartphones, teenagers can seamlessly access addictive mobile games and share with their friends. These students with pocket cash to spare and low self-control could easily get hooked. And they are typically at the age where they can’t afford a PC or console. And just maybe in the future, when they become young adults, PC/console gaming would lose their edge over to mobile because of the new generation’s perception and habit of gaming. It is therefore not necessarily essential for mobile companies to try and retain these customers, as kids are always being born. But OG developers should definitely work on converting mobile gamers to their respective platforms.