Industry formation

The formation of the games industry was not smooth. The nascent game market crashed around 1976 and 1977 because there were too many rival home devices and the stores began to reduce the prices which forced some firms out of business (King 2002, p. 19; Kent 2001, p. 107;

Poole 2000, p. 20). At this point the future of the games industry seemed non-existent in the USA

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but in Japan it takeoff was just beginning. The Japanese Pachinko⁹ manufacturer Taito launched Space Invaders in 1978 and soon the game was available in every arcade and coffee shop in Japan (Poole 2000, p. 20; Masuyama 2002, p. 36).

In 1983 the games market crashed in the USA for the second time (King 2002, p. 19). Oversupply and substandard games were blamed for the disappearance of demand (Aoyama and Izushi 2003, p. 427; DeMaria and Wilson 2004, p. 104). Atari incurred serious losses and was sold off in 1984. In 1988 Coleco filed for bankruptcy (Kent 2001, p. 240, 255). In 1983 Mattel closed down the Mattel Electronics department and the rights to Intellivision were sold. In 1982 the very expensive E.T. film licence game by Atari for the VCS was a miserable failure and contributed to a loss of faith in the video games industry (DeMaria and Wilson 2004, p. 99). The industry recovered again through Japanese imports. Nintendo Famicom, known as Nintendo Entertainment System or NES outside Japan, was launched in 1983.

The crash of 1983-84 was due to too many firms trying to get a piece of the market and the market not being able to absorb such a quantity of products. In addition, many of the games were ―rush jobs of dubious quality and appeal‖. Many of the newer companies began dumping their games as they needed cash to pay their suppliers. This also led the established companies, like Activision, to dump their massive inventories. Finally Atari resorted to literally dumping their cartridge inventory in the desert of New Mexico. As Atari collapsed, the credibility of the whole industry suffered. Retailers stopped stocking games and consumers thought that games were ‗out‘. (DeMaria and Wilson 2004, p. 104)

The crashes in the early games industry appear to be caused by overshooting: too many firms, too many products and not enough paying customers. However, a significant drop in market size accompanied the shakeout. Consumers became disillusioned with the products of the new industry and demand disappeared. The shakeouts were not followed by eras of incremental innovation, but a discontinuity. Both times superior products from Japan were required to reinstate the market.

The separation into hardware and software made it possible for independent game developers to emerge. The first home consoles came packaged with built-in games. As hardware and software were separated it was possible to play several games on one machine. Early game consoles and home computers were open systems in the sense that the device manufacturers did not control whose games were played on their systems. This approach was maintained in computers, but not in consoles. Games were published for Commodore 64, Amiga, Macintosh and IBM PC without any corporate oversight. This was partly due to the fact that computers could make profits on their own as they had also other uses besides gaming. This means that throughout the history of the games industry home computers have been the platform that is available for all game developers independent of their connections with hardware manufacturers or publishers.

Console manufacturers soon realised that the profit potential was in games and not in the consoles.

Thus, console manufactures began extracting revenue from licensing the rights to publish games for

9 Pachinko is a Japanese pinball-like game played at arcade halls.

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their consoles. This also meant that the cartridge format allowed the console manufactures to dictate who publishes what and for which device. This era of console domination took place until the late 1990s (Grantham and Kaplinsky 2005, p. 190).

As hardware was becoming more sophisticated more interesting software could be developed. This was enabled by the division between hardware and software which meant that firms could concentrate on the development of only one of these. Electronic Arts, one of the current game development giants, was founded in 1982 and made many games for Commodore 64. EA shipped its first products in May 1983 and three of the six games became hits. In 1984 EA licensed a baseball player‘s face to be included in a game which was the first deal of this kind.

(Kent 2001, pp. 260-265) Other early game developers included Accolade, Supreme Brain Software and Infocom (DeMaria and Wilson 2004, p. 110-115). Origin Systems Inc. was one of the innovators bringing a series of sequels to a successful game. One of the earliest of such game series was their Ultima series, of which the first game was released in 1980 and new releases were made throughout the 1980s and 1990s (p. 120). The emergence of independent developers also enabled the emergence of different game-related professions. Crosby (2000) lists these as game designers, artists, sound designers, programmers, testers and producers. In addition, development firms hire intellectual property lawyers, market analysts, technical support workers and foreign language translators.

According to Grantham and Kaplinsky (2005, p. 190) in the 2000s the domination of the console manufacturers changed into the domination of publishers. This means that to a growing extent publishers can decide who gets to make games and what kinds of games they are. There is also variation in the role of developers. Grantham and Kaplinsky (2005, p. 193) divide them into super developers, original IP developers, work-for-hire, niche developers and service providers. Super developers have the capabilities to develop games for many platform types and are well-established companies. Original IP developers create their own content and try to offer it to publishers, whereas work-for-hire publishers compete on licence-based projects from publishers. Niche developers have a strict strategy on which genre to concentrate, but they can be either developing original IP or making work-for-hire in that niche. Service providers do not develop game titles but sell specialised services, such as audio, to other developers. Traditionally developers have been assigned to three groups. First-party developers are in-house studios owned by console manufacturers. Second party developers are independent companies whose games are published by console manufacturers. Third party developers get their games published by independent publishers. (see ELSPA/TIGA 2005, p. 21)

The history of the games industry is heavily concentrated on the USA and Japan. However, Europe has been involved from an early stage. France has a robust home-grown games industry with its own international stars Infogrames and Ubisoft. The UK has also had a lively games industry since the early 1980s, whereas in Germany the industry began to emerge only in the mid-1990s.

(Lange 2002, pp. 52-53) In a report prepared for the UK Department of Trade and Industry, Australia, Canada, France, Singapore, South Korea, United Kingdom and United States are identified as major game development countries (Games Investor Consulting Ltd. 2007). Data on

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the industry volume in these countries is presented in Table 12. The omission of Japan is probably due to unavailability of data.

Table 12. Industry volume in major game development areas (collected from Games Investor Consulting Ltd. 2007).

Country Independent

developers Publishers

First company

founded

First global hit

Development jobs in 2005

Australia 45 15 1980 1982 1 250

Canada 110 21 1985 1985 6 100

France 85 20 1983 1987 1 750

Singapore 25 15 1999 NA 500

South Korea 211 20 1994 1998 9 000

United Kingdom 160 70 1982 1983 8 000

United States 650 120 1971 1972 25 000

These figures show that the United States is the number one country in game development. The United Kingdom, South Korea and Canada are also very strong. These countries have been active in game development since the early 1980s. South Korea is a newer game development country that has become a strong player in the international market. Canada overtaking France and growing to match the UK is explained by the generous support to Canadian firms in the form of tax exemptions, subsidies and grants by the Canadian government (Games Investor Consulting Ltd. 2007, p. 2). In Finland the first game firms were founded in the early 1990s and the first international hit was Max Payne developed by Remedy Entertainment in 2001. Finnish game firms employ around 1000 people. (see Figures 22 and 23 in section 5.5.1)