Tuesday, 1 December 2015

Competitive advantage of a game company

In the shadow of fairly recent M&A news of Activision-Blizzard buying Candy Crush Maker King with $5,9 billion and many, many others, I've recently pondered what is the REAL competitive advantage of a game company nowadays.

In order to understand what is the real competitive advantage of a gaming company, you have to first study the market dynamics of the games industry. In this analysis, I'll review the game industry based on Michael Porter's Competitive Advantage -theory and 5 competitive forces that play crucial role in determining the competitive advantage of a company in any industry.

Pace of Change

This factor is actually not in Porter's Five Forces model, but I wanted to add this here, because it makes a world of difference when thinking
As most of us know, games industry is one of the most fast changing industries in the world. Eight years ago, no-one would have bet their money on the mobile gaming landscape due to the shortcomings of Java-games on earlier smartphones.

The Entry of New Competitors
The democratization of game development with free or low-cost such as Unity, Game Studio and alike, it is much, much more easier to start making products to gaming in gaming industry than it is to do e.g. restaurant business.

In addition to lowered costs of production tools, the costs of distributing the products to customers have lowered substantially with new distribution channels that have come along with internet and smartphones.

So it is good to say that game industry is one of the most competitive industries in the world that puts a lot of pressure to new and existing game companies.

Threat of a Substitute Product

Threat of a substitute product means the extent of threat of substitute product from a different industry that can substitute the value of the industry's product.

Reflecting this into a games industry, it is very clear that the value of game industry product (=entertainment value, escapism value) can be substituted with e.g. a book industry product, a sports industry product or a movie industry product, to name just a few.

Hence, it is clear that the threat of a substitute product is very high in game industry.

Buyer's Bargaining Power

Buyer's bargaining is the level of leverage the buyers can use to alter the price, quality and customer service of a product. There are many factors which affect buyer's bargaining power: buyer concentration, switching costs of a product, level of backward integration of a product and purchasing volumes of a buyer of the product.

Relating these to games industry, we can conclude that there are more buyers than there are sellers (despite that it doesn't always seem like this within the industry, with more than 450k games on App Store alone). Also, switching costs of a product is fairly low due to the high amount of competitive products on any given platform these days. Level of backward integration and purchasing volumes are not factors in games industry since we are B2C industry and selling digital products mainly.

My conclusion is that because of very low switching costs, buyer (player) has a significant bargaining power in games industry.

The Bargaining Power of Suppliers

The supplier's bargaining power in Porter's theory means the extent to which suppliers can put pressure to businesses by raising prices, lowering quality or reducing the availability of their products.

In games industry, suppliers don't really have that much bargaining power since most of the outsourced work (namely, quality assurance, localization and graphic production) have so many suppliers worldwide that they really don't have that much leverage to game developers or publishers.

So, what gives?

In porter's original theory, company would have choose strategy based on two basic types of competitive advantage; cost leadership, differentiation. In cost leadership, you would select a strategy that focuses on cost-aware consumers and reducing the production costs of a product. In differentiation strategy, you would pick up a niché in selected vertical and differentiate your product based on the attributes of competitive products so that the product satisfies a (unidentified) market need.

Either of these strategies are not applicable per se to a game company, due to marginal costs approaching zero and due to high competitive landscape in the games industry.

So what to do in an industry where in four out of five forces, there is high pressures and there is no seemingly clear strategies for sustaining growth and increase your position in the market?

In my view - and strictly hypothetically speaking - learning, and in particular, organizational learning is an aspect of corporate strategy that is too often neglected. The importance of learning comes very clear when you reflect the speed of change of games industry. In order to create a long-term profitable businesses, you have to focus on not only the core competencies of your employees, but also the meta-competencies of your whole firm. This can also be viewed as a rate of learning of an organization. 

Not only it is required that individuals learn, but it is fundamental that teams, departments and whole organizations learn at the same time when doing the day-to-day business.

I will cover more how organization learning translates to games industry, and how game companies are able to implement organizational learning in the operations in following articles.


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