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3. An overview of the home videogames industry

3.1 Overview of the market

The videogames industry, including hardware and games, was worth between $15billion and $20billion worldwide in 2000. North America, Europe and Japan are the three most important markets for home videogames.

It is the games, which drive console sales. The variety and quality of games available for a console are the key purchase criteria for console buyers .

The industry is also characterized by a generational nature. Every generation has its cycle, and when it is over, another generation arrives to replace the old one. In each generation, consoles are introduced to compete against each other, and in general most of them have the same technical capacities. Once new technology comes up, it is a new generation and companies offer new machines and compete again every four to five years. The tradition in the industry is that the generations are classified according to the improvement in Bits. Although this does not always mean superior technology, it has become the criterion to characterize different generations.

The market size has more than tripled over the last ten years. The overall market declined by about 5% in 2000, following rapid growth from 1996 to 1999, when it grew more than twice as fast as the market for movies or music (See Chart 4). Growth subsequently declined due to Sony and Nintendo’s product transition to the fourth generation.

3.2 Brief history

The videogames began in arcade forms, specifically with Atari whose Pong arcade game was so successful that it was adopted the home videogames in 1975. Atari dominated the industry until 1981. The story of Atari’s rise and fall is often told as a tragedy. Atari did not know how to control the market; a flood of bad games software for its machine led to its downfall as people became less and less interested.

3.2.1 The First generation: 8-bit

From 1981 to 1984, the industry suffered a crash but everything changed when Nintendo, a venerable Japanese company with a growing arcade business, pumped new life into it. With huge investment in advertisements, and the good technology of its 8-bit system, sales for the Nintendo Entertainment System (NES) skyrocketed over the next years. Nintendo learned a lesson form Atari’s failure: it was important to control the supply of game cartridges to ensure quality and prevent fierce price competition. The company also developed hits games exclusive to its console, e.g. Mario Brothers, which triggered Nintendomania worldwide.

3.2.2 The Second generation: 16-bit

In 1989, it seemed that every gamer owned an NES, but then Sega introduced its 16-bit Genesis advanced system and started a fierce competition with the transition from 8-bit to 16-bit generation.

Nintendo gradually lost its grip on the market due to complacency and slow reaction to Sega. Nintendo waited 18 months before coming out with its 16-bit system, the Super NES, because it did not want to cannibalize the sales of its old consoles. By this time, Sega had introduced its own popular game, “Sonic the Hedgehog” which stole popularity from Mario Brothers.

Over the next five years, Sega and Nintendo battled for supremacy, neither really pulling ahead of the other nor dominating the market exclusively.

3.2.3 The Third generation: 32-bit &64-bit

3DO was the first to introduce the 32-bit console to the market in 1993. 3DO’s mission was to shift the home videogame business away from the existing cartridges system towards a CD-Rom based system. To bring in companies to manufacture the hardware, 3DO licensed its technology for free, aiming to be the standard in the market, but it was not successful as the console was always expensive. It was not until 1995 that the real 32-bit market emerges with the Sega Saturn system, and then the Sony Playstation. Sega lacked the financial clout to support dual marketing and software development, and both its Genesis and Saturn machines struggled.

New to the industry, Sony hoped to partner with an established player, but after Sega and Nintendo passed, Sony decided to go it alone, launching its low-cost, high-performance 32-bit machine, the Playstation. With very popular games, the Playstation rapidly took market share away from all other players.

In 1996, Nintendo introduced its 64-bit console the N64, but it had always suffered from a lack of software support, though it was technically superior to Playstation. Nintendo was the only one