Mario, Luigi and the Global Economy - Part I

Last year, before the hype and launch of both Sony’s and Nintendo’s latest next generation consoles, I wrote an essay on how we could learn from the developments in the video game industry in embracing the future of the global economy. I am reproducing the essay here in three parts.

A Glimpse into the Future Economy:
Pay attention the next time your son fires up his Playstation 2™

By Elanor Tan
7 July 2006

What we can learn from the interactive entertainment industry.
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Talk about video games to an average Malaysian adult and you would be able to command as much seriousness as a conversation on a badly-dubbed Japanese cartoon on free terrestrial television. Okay, that might have been a slight exaggeration, but with a medium that is dominated by brightly coloured characters, catchy tunes and addictive fun, it is difficult to look beyond the levity that is projected. Serious adults do not talk about video games, or formally, the interactive entertainment industry; they talk about more important issues like the 9th Malaysia Plan, national policies on the automotive industry and foreign direct investments (FDI) and perhaps, when it is after business hours, the World Cup 2006.

The global size of the interactive entertainment industry in terms of sales revenue is more than US$36 billion (which is roughly more than 3 times what the government plans to spend yearly in the 9th Malaysia Plan) and the US domestic market alone is approximately US$10 billion yearly, more than the Hollywood box-office total receipts and is expected to overtake the whole music industry by 2008. Exports of video games from Japan alone are bigger than the entire net FDI inflow into Malaysia; the market capitalisation of Nintendo in Tokyo is currently 36 times that of Proton, and Sony’s R&D expenditure in 2005 on video games, at 62 billion Yen, is bigger than the entire budget for the World Cup 2006 Organising Committee (approximately 400 million Euro).

But the purpose of this write-up is not to elaborate on the enormity of the interactive entertainment industry, its ascendance to be one of the biggest entertainment businesses, or the entertainment value of poorly-dubbed cartoons. The attempt is to introduce briefly the structure of the video game industry, dissecting the lively market and economic dynamics it has, and from there, draw lessons on what lies ahead in the future global economic landscape. It is the author’s sincere opinion that the interactive entertainment industry today epitomises some essential elements that will shape the future economy.

Brief Introduction:
Boxing Matches, Marriage of Art and Technology, and Dinner Conversations

The video game industry is very distinctively organised. The entire industry can essentially be divided into two distinct segments, both with decidedly unique features. The first is the video game console market - the market on video game hardware. It is an extremely concentrated market, characterised by traditionally not more than 2 major players, with one main console each. The current configuration of 3 major players supporting 3 main consoles - Sony with the Playstation 2, Microsoft with the Xbox and Nintendo with the GameCube - is unprecedented (and partly explained by newcomer Microsoft’s immense financial capacity to absorb losses).

While economists use deeply sophisticated models to understand the nature of markets like the video game console market, those who do not speak Economics may find that the console market is best understood from the perspective of boxing matches. Like boxing, industry players fight it out in rounds of predetermined duration; 1-3 minutes for boxing, approximately 5 years for console battles. In these rounds, players introduce their consoles and compete intensively for a tacitly decided 5-year period (the console market will enter its 5th round in 2007). In these matches, losers hardly last for more than 2 rounds and KOs happen quite often (Atari, Sega and recently, Nokia, are good examples). In fact, there are even pre-match press conferences in the form of massive international electronic entertainment expos in which the players try to out-compete each other even before the matches begin.

The other segment is the games or software market. Unlike the console market, in which technological brawn and processing agility dominate the main arena, the games market is mostly a competition of artistry and creativity, much akin to the movie and music industries. Participation in this market is significantly different from the console market, with much less concentration. Games publishers range from huge companies, such as Electronic Arts, to micro-teams of independent game designers from downtown Tokyo. Different from the console market, the games market is much less susceptible to product saturation but have much shorter retention period per product. Hundreds of games get published yearly, with most games staying on the radar of gamers for no more than a few months. Like the console market, the games market is also highly competitive, but in a significantly different manner. There is no definite success formula for a successful game; some games sell millions of copies, while others bankrupt their publishers. The basic requirement is that games have to be addictively fun. Unfortunately, making something that is addictively fun is neither an exact science nor a time-invariant concept; but generally, creativity, innovation, passion and gamers’ empathy are required.

Clearly, the video game industry is unique, and much can be learned from it if you know where to look. For economists, it is essentially a goldmine of experimental opportunities. For those interested in clever dinner conversation topics, like the proverbial VHS versus Betamax standard war, the video game industry has dozens of similar if not more interesting anecdotal examples. But for this author, it presents 3 important lessons in embracing the future of the global economy.

… to be continued…