EE290x Project1: The Sony PlayStation Success Story

March 9, 1998 Pedro Arroyo, Ray Gilstrap, Randy Huang, and Peter Laudat

I. Introduction

A recent press release from Sony Computer Entertainment America Inc. announced that it overtook Nintendo as the industry leader with 53% of the next generation console market. Yet as early as September 1995, Sony was virtually an unknown in the game console market in the United States. How did Sony PlayStation become the dominant player in this relatively short amount of time?

In this paper, we plan to explain the factors contributing to the successful entry of the Sony PlayStation by using a derivative of Porter's Five Force model: Competitors, Suppliers, Consumers, and Substitutes. In the Competitors section, we will describe the major players in the video game console market when Sony joined the competition in 1995. In the Suppliers section, we will describe how Sony's design and industry partnering decisions allowed it to lower the price of its system to meet acceptable consumer price points. In the Consumers section, we will describe the factors that led to overwhelming acceptance of Sony's next generation video game console, the PlayStation. In the Substitutes section, we will examine potential competitors from outside the video game industry. These substitute products are alternate means through which users can obtain electronic entertainment.

II. Competitors

In this section, we will describe the major players in the video game console market when Sony PlayStation entered the market in 1995.

Nintendo and Sega dominated the console game market from the mid 1980s until the mid 1990s. In 1995, both companies were in transition from 16 bit systems to higher performance platforms: Sega introduced its Saturn game system while Nintendo was a year away from introducing its 64 bit platform.

Sega Entertainment Corp.

Sega released the 32-bit Saturn system in May for $399.99. Early adopters were overjoyed as popular arcade games like Daytona USA, Panzer Dragoon, and Virtual Fighter came home early. Overall sales were very low, and very few titles were released for the machine as developers were taken completely off-guard by the early debut. Predictably, the few games released were not of high quality.

The Saturn system is powered by two Hitachi 32 bit 28 MHz processors, distributed 4 MB of RAM, double-speed CD-ROM drive, but no special purpose hardware for 3D graphics or for decoding movies.

Nintendo Company Ltd.

Nintendo delayed the launch of the Ultra64 64-bit game system, telling fans of Nintendo products to keep on supporting 16-bit Nintendo software producers for another few months. Nintendo eventually demonstrated Nintendo 64, the new name for the Ultra 64, at Shoshinkai - its own Japanese trade show. The system's main attraction, Super Mario 64, was playable and impressed gamers, but rumors persisted that very little software is in development for the machine.

Nintendo 64 is powered by 64 bit 93 MHz R4300 MIPS processor, centralized 4 MB of RAM, a 3D graphics coprocessor that can render 160K textured, tri-linear mipmap anti-aliased Gouraud-shaded polygons per second.

Sony Computer Entertainment of America Inc.

Sony released the PlayStation with twenty game titles during the aforementioned platform transition in the United States for $299, $100 less than expected. Because of its superior system architecture and easy-to-use Application Program Interface, game writers developed games that were not previously seen on the home game machines. Arcade hits like the Ridge Racer and fighter game like Toshinden utilizes the 3D graphic capability of the hardware while the movie-like game WingCommander V utilizes the CD-ROM and MPEG Decoding capability of the PlayStation.

Sony PlayStation is powered by a 33.3 MHz R3000 processor, distributed 3.5 MB of RAM, 3D graphic coprocessor that is capable of rendering 360K polygons per second with texture mapping and Gouraud shading, a MPEG decoder that can translate compressed movies and a double-speed CD-ROM drive.

With innovative but reasonably priced hardware and plethora of spectacular games, Sony PlayStation quickly captured the majority share of the 32 bit game console world market.

III. Suppliers

Hardware Suppliers

From examination of the console gaming industry one may conclude that, without question, this industry exhibits much less stratification than the computer gaming industry. The lack of quasi-commoditized industries from which one is able to purchase the subcomponents of his products leads to very intimate and symbiotic supplier relationships. For example, if one were to construct a gaming platform using a general purpose computer architecture, one would enjoy the freedom to choose between dozens of suppliers of video accelerators, sound cards and other peripherals. However, in the performance critical console gaming industry, much of the functionality of the device is found embedded in custom ASIC's

In order to develop the CPU for its PlayStation product Sony enlisted LSI Logic. Using LSI Logic's CoreWare technology Sony was able to incorporate virtually all of the functionality of the PlayStation into a single chip. This integration and single chip solution is what enabled Sony to hit a magic consumer price point. Earlier attempts at high end consoles by other companies faded into obscurity due to inappropriate pricing. An example of this was Panasonic's 3DO. When it initially appeared in 1993, it was the only 32-bit gaming platform available- inarguably the technology leader- however even with the commitment of a huge consortium of software developers, the retail price of $699 did little to push the product into the mainstream. A similar fate befell SNK not three years before, who's attempt to market a 24-bit system was thwarted by its prohibitive cost.

Software Suppliers

One of the factors that greatly influenced the early adoption of the PlayStation and its subsequent success is the large software library the company was able to vaunt. By developing early partnerships with various software developers Sony was able to offer a library of 20 software titles for the initial release of the PlayStation, which enabled the PlayStation to quickly gain entry into the market. The role of software is evident in retrospect when one witnesses how relatively unknown Sony was able to harness a considerable amount of market share, even with the release of the Saturn 32-bit game machine in the same year by renowned Sega. The Saturn initially offer ed a small library of mediocre titles.

Nintendo Company Ltd. also suffered loss of sales due to a initially meager software library. Upon the release of the Nintendo's 64-bit game platform in Japan, sales were phenomenal, yet nearly vanished after a few weeks due to the fact that there were only two software titles available.

Media:

There are many reasons Sony chose to utilize industry standard CD-ROMs in order to deploy its software titles. First, by using CD-ROM technology Sony is able to cut the incremental cost of producing games substantially as the CDs cost considerably less than the masked ROM chips that traditional game cartridges are based on. Secondly, from a supply standpoint, Sony (as co-developer of CD technology) is able to source the media internally. For example, the PlayStation's CD-based games are pressed by the same domestic state-of-the-art plants that churn out millions of audio CDs for Sony's music companies, Epic and Columbia. By synergistically drawing on its other subsidiary industries, Sony is also able to reduce the time to market of new software titles. This expertise also allows Sony to produce game titles in approximately one-tenth of the time it takes to produce masked-ROM game cartridges. The result: "just-in-time" managed inventories for retailers.

IV. Consumers

In this section, we will describe several reasons why consumers buy the PlayStation.

Decision Makers

Parents tend to buy the game consoles with the largest software selection and cheapest prices because they are price conscious and want more bang for their buck. Sony PlayStation has always been the price leader, incorporating aggressive pricing strategies. As a new entrant in 1996, Sony recognized that it would have to reduce switching costs for existing consumers while attracting new customers, so the company led with a market share strategy entailing low prices. Today, the top three game consoles are priced at $150, far below pre-1996 levels of $300 to $500. With over 300 software titles, Sony commands the largest economies of scope.

Sales

Consumers are buying the Sony PlayStation in droves. The video game market is making a major comeback thanks to new technology from Sony, with its PlayStation (PSX), and Nintendo, with its Nintendo 64 (N64). According to NPD Group, sales of video game hardware and software rose 51% from 1996 to 1997 to reach a record $5.5 billion. Sony, which surprised the industry with its rapid attainment of critical mass for its PlayStation in 1996, now controls 53% market share of the next generation console market, followed by Nintendo with 41%, according to a post-Christmas household survey done by Fairfield Research of Lincoln, Nebraska. Sales of Sega's Saturn have lagged because of an old game console with confusing add-ons and very few games.

Distribution Channels

Interactive entertainment software distribution channels have become more mainstream than in years past, with mass merchants like Wal-Mart and K-Mart increasing their share. A variety of retailers, from Toys R Us and The Electronics Boutique to J.C. Penney, Sears, Blockbuster, as well as the smallest "mom and pop" stores, continue to profit. Few retailers stock every game available - they want quality titles that will attract the gaming audience and that are backed by companies that market aggressively and effectively. Thus, retailers have become more selective when deciding which (and how many) publishers will service their stores. Sony's existing extensive distribution network has led to its successful entry into the video game business.

Brand Identity

Analysts say that Sony leveraged its strong brand name and distribution capability from its consumer electronics business to give it great credibility, reducing its barriers to entry. For example, decision makers unfamiliar with the gaming industry might not have heard of Nintendo or Sega but are likely to be familiar with Sony consumer electronic products, such as the Walkman, and are therefore more likely to buy the Sony PlayStation.

Compatibility

There is no standard for video game software that ensures compatibility between different video consoles. Thus, video game console makers continue to develop stovepipe systems. As a result, customers are to some degree locked in to a particular set of game titles, since switching costs are high for those who wish to change consoles.

Network Effects

Indirect network externalities exist, since PlayStation owners can trade games. Positive feedback mechanisms exert themselves as more players buy PlayStations and games. This generates impetus for game developers to write games specifically for the PlayStation. Therefore more players will buy PlayStations. Multitap unit connections allow players to hook up their PlayStations to compete interactively, creating direct network externalities.

Lock-in

Video game console producers enjoy de facto lock-in with stovepipe solutions. As new generation consoles are released, consumers have no loyalty to a particular platform, the industry has yet to use backward compatibility or versioning to intensify the effect.

Product Differences

	Nintendo	Sega	Sony
Machine	Ultra 64	Saturn	PlayStation
Software Type	Cartridge	Cartridge/CD	CD
Console Price	$149.99	$149.99	$149.99
Software Price	$25-$70	$10-$50	$10-$50
# of US titles	60+	30+	200+
Popularity	++, not as popular because game writers are not writing as many for Nintendo as for Sony	+ least popular	+++, because there is more game software for Sony.

V. Substitute

In this section we will examine potential competitors from outside the video game industry. These substitute products are alternate means through which users can obtain electronic entertainment.

Perhaps the most significant substitute to console games is personal computer-based games. With the increase in processing power of modern personal computers such as those based on Intel's Pentium, developers have been able to create games for the PC with as much sophistication as a console game. As a result, the industry has witnessed a competitive convergence of the home computing and home gaming industries.

Nevertheless, the PlayStation does offer some key advantages over a comparable PC gaming system. PlayStation systems are significantly less expensive than PCs. The PlayStation also offers the simplicity of "plug and play" operation, in which a user simply inserts the game disc, turns the unit on, and begins play. In contrast, PC users typically have to go through the process of installing and configuring the game software on their machines, which can be somewhat cumbersome. Also, the PlayStation's user interface (a joystick-type controller with several buttons) is a simpler and more natural interface for high-speed gaming than a PC mouse and keyboard. Other advantages include portability (a PlayStation can be transported much more easily than a typical home computer), the availability of games from rental companies such as Blockbusters (which makes it easy to try many new games for minimal cost) and a large base of games that are available for the PlayStation, but not for the PC.

Another substitute product for the PlayStation is the standard coin-operated arcade game. While coin-operated games also facilitate playing many new games for a minimal investment, users are presented with the inconvenience of having to go to an arcade. And again, there are a number of PlayStation games that are unavailable in coin-operated format.

VI. Conclusion

We have examined several factors that have led to the success of the Sony PlayStation:

CD-ROM based with built in 3D graphics and decoder for movies
Easy to use Application Program Interface allowing game writers to harness the hardware quickly
Many high-quality games available
Using inexpensive commodity media and system integrated on a single chip lowers incremental production cost of software and hardware
Using CD-ROM based software media allows Sony to leverage its CD pressing infrastructure
Strong brand identity in entertainment and consumer electronics
Existing distribution networks
Multitap Unit promotes direct network effects
Easier to use than PC because of "plug and play" architecture
More portable than a desktop PC
More convenient than an arcade

Through savvy manipulation of the aforementioned factors, Sony was able to become and maintain as the dominant player in the video game console market.