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Figure 18. Percentage of genre innovations taking place in new device generation introduction years and the following five years, third generation onwards.
Tschang (2007) concludes that game development is a mature industry since no new dominant designs, i.e. genres, have emerged in recent years. According to him, the latest one of these, the artificial life genre, was brought onto the market in 2000. In light of the research presented in this chapter there have been several genre introductions since artificial life, which was in fact already introduced in 1986. Thus the maturity of the games industry should not be argued for on the basis of the levelling off of genre introductions as this is not the case.
Genre innovations do not conform to the idea of discontinuities advancing the price-performance frontier posited in the industry life-cycle theory. Rather new genres are widening innovations that introduce different kinds of entertainment. Genres serve as focusing devices in marketing and perhaps also in game development projects. Nevertheless each game needs to bring something new onto the market to justify any sales. A new game in an existing genre broadens the genre definition.
This leads to the conclusion that even though games conform to genres to a significant degree, genres also conform to games that are introduced.
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independent developer that became a subsidiary of Microsoft during the project, likewise Tomb Raider started by the independent Core Design which became a subsidiary of CentreGold during the project. Somehow such independent developers manage to create an appealing concept and penetrate the wall set up by major global players and are frequently bought afterwards. The publishers buy such developers to ensure a good in-house team, to ensure that this particular team will not develop games for competitors, to secure the IPs related to a hit title and to keep the mark- up from all future games by that team in-house. This process can be described as a tide where innovative start-ups emerge, are tested in the market and become parts of established firms. It is an integral part of the industry dynamics.
This dynamic was already present in the 1980s, but the major wave of industry consolidation began in the early 1990s resulting in the formation of large game companies (Johns 2006, p. 165). One example of such a formation process is the American developer and publisher Activision.
Activision already acquired the developers Infocom and Gamestar in the 1980s (DeMaria and Wilson 2004, p. 302-3). During the 1990s Activision acquired the developers Raven Software, Neversoft Entertainment and Expert Software in addition to few European distribution companies.
They also made an equity investment to found Pandemic Studios. In the new millennium Activision continued to acquire developers and to make equity investments in such companies. Acquisitions included Treyarch Invention, Z-Axis, Luxoflux Corporation, Infinity Ward, Shaba Games, Vicarious Visions, Toys for Bob, Beenox and RedOctane. In September 2007 Activision announced that it had acquired the UK-based developer Bizarre Creations. The motivation for the purchase was reportedly the ongoing strategy of Activision to enter new genres. (Boyer 2007b) In December 2007 a merger between Activision and Vivendi Games was publicised. The new company was to be the largest game publisher leaving Electronic Arts in second place. (French 2007b)
During the 1990s Electronic Arts acquired Distinctive Software in 1991 to make sports games, Origin Systems in 1992, Bullfrog Productions, Maxis, Westwood, DreamWorks game division and finally Kesmai. (DeMaria and Wilson 2004, p. 302-3) In addition, Wikipedia lists 24 current and 11 former EA development studios. A significant number of these were formed through acquisitions.
Furthermore, in October 2007 Electronic Arts acquired independent developers BioWare and Pandemic to fill a gap in their genre selection (French 2007a).
The case of Ubisoft is likewise complicated. During the 1990s they acquired The Learning Company, which had previously acquired Software Toolworks and Brøderbund, which in turn had previously acquired Mindscape which had acquired Strategic Simulations Inc. (DeMaria and Wilson 2004, p. 302-3) In the spring of 2007 Ubisoft acquired the German developer Sunflowers (Boyer 2007a) and later on the same year the Japanese developer Digital Kids (Graft 2007). In October 2007 Ubisoft announced that, despite persistent rumours, it would not be acquiring SCi.
The other rumoured interested parties included Time Warner, an unnamed Chinese company and Electronic Arts. (Jenkins 2007) SCi is a UK based game publisher which had previously acquired Eidos famous for the Lara Croft game series. In late 2004 Electronic Arts had already purchased a 20 percent share in Ubisoft, which claimed the purchase to be hostile (Feldman 2004).
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According to Johns (2006, p. 166) the motivation for acquiring game developer firms stems from the increasing game development costs. According to Tschang (2005, p. 114) the average number of personnel in a game development team has traditionally been between 15 and 30, but nowadays there are teams of 100 or more people. This also means that development budgets are growing.
Tschang reports that around 1998-2001 the average game development budget was just over 2 million USD, whereas later on the budgets increased to 10 million USD or more. As a result of the growing project size, publishers wish to increase their proportion of the revenue by owning more stages of the production process. This also means that the number of independent development studios is decreasing as they are acquired by publishers and console manufacturers. (Johns 2006, p.
166) Aoyama and Izushi (2003, p. 432) report that both Nintendo and Sony have extensive in-house publishing operations. However, Nintendo also deals with 355 third-party game publishers, whereas Sony does business with 540 external publishers worldwide. Some of these publishers develop their games in-house, while others act more as coordinators and outsource most functions to independent developers. (ibid.) Johns (2006, p. 168) adds that all console manufacturers outsource a proportion of their game development. Thus, the aim is not to have all game development done in-house. As external developers are given a chance the publishers and console manufacturers have an opportunity to screen them for purchase and thus buy only proven talent to become a part of their in-house resources.
The consolidation of the industry has been noted by the industry associations and especially in the UK this is seen as a threat. Table 16 presents the mortality rates of independent developers between 2000 and 2007 in major game development countries. In France and the United Kingdom the mortality rate is reported to have been as much as 45%. Even the smallest mortality rates noted here have been 25%.
Table 16. Independent developer mortality rates in 2000-2007 according to Games Investor Consulting Ltd. (2007).
Country Independent developers Mortality rate 2000-2007
Australia 45 25 %
Canada 110 40 %
France 85 45 %
Singapore 25 40 %
South Korea 211 35 %
United Kingdom 160 45 %
United States 650 25 %
After such decreases in the numbers of independent developers the consolidation should also be visible in the indexes of industry concentration. To find out whether this is the case Develop 100 rankings on the UK sales for 2006 and 2007 are used to calculate the values of the Herfindahl index, reciprocal Herfindahl index and four-firm concentration.
Figures 19 and 20 respectively plot the sales of the top 100 development studios for 2007 and 2006, respectively to provide a picture of the game development industry structure. The data covers sales
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in the UK, thus GBP is used as the currency. However, the data includes sales by studios located all over the world and not only UK-based firms.
Figure 19. Sales per studio in the UK in million GBP in 2007.
Figure 20. Sales per studio in the UK in million GBP in 2006.
The sales of the studios appear to follow the power law with few dominant sellers and a long tail of lesser sellers. However, it should be noted that many of the studios are owned by a larger firm. As the sales of each studio are allocated to their owners we are left with 65 firms in 2007 and 58 in 2006. Figures 21 and 22 plot the sales per firm. They exhibit a similar power law even though the curve for 2007 appears to be slightly less steep than that for 2006.
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Figure 21. Sales per firm in the UK in million GBP in 2007.
Figure 22. Sales per firm in the UK in million GBP in 2006.
In addition to allocating the sales to each firm the data should be modified to cover the entire market. The sales of the top 100 studios account for a major portion of the market, i.e. 72% in 2007 and 74% in 2006. This was calculated by summing the sales of the top 100 studios and comparing them to total UK sales. For 2006 the UK market size of 2,650 million dollars is retrieved from the Games Investor Consulting Ltd. (2007, p. 45) report. For 2007 the UK market size is approximated based on the US sales for 2007 and the relationship of US and UK sales in the 2000s. The US sales figures come from the ESA (2008). This gives a figure of 3,420 million dollars. To get the GBP figures a conversion rate of 1.95 was used as this was also used in the Games Investor Consulting Ltd. (2007) report to obtain comparable figures for different countries. To take into account the
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entire market, the difference between total sales and sales by the top 100 studios, 28% for 2007 and 26% for 2006, is ‗filled‘ with firms smaller than the smallest ones in the top 100 ranking list.
These modifications allow us to calculate four different versions of the Herfindahl index, the reciprocal Herfindahl index and the four-firm concentration index for both years. Table 17 presents the results. In the Studios column the index values are calculated by treating the studios as independent market actors. In the Top 100 column only the studios appearing on the ranking list are included whereas in the Entire market column the residual market is filled with small studios. In the Firms column the sales of each studio are allocated to its owner and these firms are treated as market actors. Again, calculations are made for both Top 100 including only the top 100 studios and their sales and Entire market including the residual small firms. The column farthest to the right contains the most realistic values, meaning that the assumptions made in them follow most closely the facts that are known about the industry. The column that fills the entire market with independent studios (third from the right) functions as the lowest limit of concentration indexes whereas the column including only the owner firms that appear on the ranking functions (second from the right) as the highest limit of concentration indexes. Thus even though the ultimate truth is not revealed here, the upper and lower limit values accurately pinpoint the area where the ultimate truth lies.
Table 17. Concentration indexes and benchmarks for comparison.
Studios Firms
2007 Top 100 Entire
market Top 100 Entire market
Herfindahl index 0.0265 0.0141 0.0714 0.0375
Reciprocal Herfindahl index 37.8 70.9 14.0 26.7
Four-firm concentration 23 % 17 % 45 % 33 %
Studios Firms
2006 Top 100 Entire
market Top 100 Entire market
Herfindahl index 0.0313 0.0176 0.0784 0.0436
Reciprocal Herfindahl index 32.0 56.7 12.8 22.9
Four-firm concentration 27 % 20 % 42 % 31 %
Comparisons
Herfindahl index US Department of Justice
Reciprocal Herfindahl index Early automobile industry Four-firm concentration Monopolistic competition
The comparison values are identified at the bottom of Table 17. The Herfindahl index values are compared to the US Department of Justice criteria according to which an unconcentrated market has an index value lower than 0.1. A moderately concentrated market has an index value between 0.1 and 0.18. High concentration is indicated by a value higher than 0.18. The reciprocal Herfindahl index is calculated to be able to compare it to the figures reported by Abernathy (1978, p. 30) concerning the maturation process of the early US car manufacturing industry. In the very early
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1900s the car industry showed a reciprocal Herfindahl index value of around 11 which stabilised to around three and four as mass production emerged with the Ford model T. The four-firm concentration is compared to the definition of monopolistic competition. A very low value indicates perfect competition and a value under 40% indicates monopolistic competition. A value over 60%
indicates oligopoly.
The Herfindahl index values shown in Table 17 all indicate an unconcentrated market. Even when the 65 (for 2007) and 58 (for 2006) firms owning the top 100 studios are treated as making up the whole market, the index values still stay in the unconcentrated area (0.0714 and 0.0784 are below 0.1).
The reciprocal Herfindahl index values are all above the value 11, which was characteristic for the unconcentrated early automobile industry. The most realistic values, 26.7 and 22.9, are more than double that. Thus even during its era of ferment the car manufacturing industry showed a higher level of concentration than game development nowadays.
The four-firm concentration results in 33% and 31% calculated with the most realistic assumptions.
The values are well below the 40% limit and thus indicate monopolistic competition. The upper limit values go above that to 45% and 42%. They are the only calculations made here that indicate anything but an unconcentrated industry.
In light of these calculations it is safe to say that the game development industry is unconcentrated.
There may have been mortalities among independent developers but it would still be an exaggeration to call this industry consolidated. In many industry accounts and also academic papers (e.g. Tschang 2007; Grantham and Kaplinsky 2005) the game developers reporting difficulties in getting a publishing deal is treated as evidence of increasing consolidation. This logic begs the question: Has it ever been particularly easy?