Volume 10 2012

Otago Management Graduate Review

The Innovation Process in the Video Game Industry

Quentin !"stract
Since their first steps in the content industry, video games have expanded their influence tremendously. From the elitists research labs of the MIT in the mid 5 s to !orld!ide households, video game suppliers have managed to ma"e their products more accessible. #o!ever, the gro!ing competition of the sector has forced game manufacturers to constantly innovate in order to "eep their current customers and capture ne! mar"ets. Innovation is a vast concept that has been defined by Schumpeter $%&'() as being *The introduction of ne! goods + ne! methods of production + the opening of ne! mar"ets + the con,uest of ne! sources of supply + and the carrying out of a ne! organi-ation of any industry.. The definition illustrates the diversity of the fields that are included in the idea of innovation. /evertheless, these fields remain closely tied and rely on each other. For instance, the opening of ne! mar"ets depends on companies ability to provide consumers !ith goods that are different from those proposed by the local competition. 0i"e!ise, ne! goods imply ne! methods of production in that the manufacturing process is going to differ. #o!ever, if the results of innovations may ta"e different forms, it is relevant to analy-e the factors that contribute to generate it in order to understand its mechanics. Furthermore, as innovation directly impacts the companies competitive advantage and hence their performance, according to 1orter $2 ), it seems important to study the components that stimulate the innovation process. In my attempt to explain innovations in the video game industry, I am going to consider three aspects that I am going to illustrate through examples. In the first part, I am going to define and analy-e innovation leaning on the Schumpeterian approach in order to determine its limits !hen applied to the video game industry. In the second part, I am going to explore the mar"eting notions of mar"et pulls and technical pushes, and evaluate their relevance for the sector. 0ast but not least, I am going to examine the approach of clusters to explain the emergence of ne! mar"ets in the video game industry.

ucuel

Innovation
#chum$eter%s Theories o& Innovation 3oseph Schumpeter has been a pioneer in innovation study and most recent research still leans on his !or" $4ampbell, 2 %, 5op"e, 2 2). 6lthough the global competitive environment has changed enormously in nearly 7 years, the theories originated by Schumpeter in %&'( still are relevant to some extent in analysis of the innovation processes in the current industries. The economist died in %&5 , a fe! years before the first computer game !as created in a research lab of the MIT. Therefore, the conclusions defended by
This assignment !as for M6/T('8 6dvanced International Management 2 Supervised by 1rof 6ndr9 :verett

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Otago Management Graduate Review

Volume 10 2012

Schumpeter do not ta"e in account the specific features of this industry. #ence, !e are going to apply the ma<or hypotheses developed by Schumpeter in his boo" *Theory of economic development. $%&'() to the video game industry and explore their limits. =e !ill consider the follo!ing 8 hypotheses, put for!ard by 5op"e $2 2)> 1) :conomic development results from ne! combinations of existing resources. Therefore, an economy can gro! !ithout innovation and the production of outputs can be augmented by increasing the amount of inputs. #o!ever, the economy !ill not transform. Indeed, if the same outputs are created !ithout innovation, the system !ill stagnate, as !as the case in the Soviet ?nion. In their system, the entire economy !as planned in advance in order to design an optimal allocation of the resources. Innovations could not be ta"en into account because of their uncertainty, resulting in very fe! transformations in the Soviet economy and its eventual collapse. 2) :conomies can only transform through innovation, and innovation can be generated by ne! entrepreneurs and firms. #o!ever, because entrepreneurs are a rare asset, they need a supportive environment in order to generate innovation. 3) Therefore, entrepreneurs need capital in order to implement their pro<ects and bring innovations. @ecause of the uncertainty of the outcomes, it may be hard for public and private entities to invest in ideas. 4) Innovation is more efficient than price competition to develop a mar"et and producers !ho compete on price !ill be victims of destructive creation. This concept !as mentioned by Marx $%78') and developed more recently by Schumpeter. It refers to the process by !hich innovations arise from the destruction of prior economic order. 6 concrete illustration of this process is the disappearance of A#S caused by the rise of BABs. 4onse,uently, even if mar"ets had reached the best prices the A45 manufacturers could offer, the improvements featured by BABs progressively led consumers to give up their A#S. 5) The process of transformation is more relevant to innovation enhancement than the accumulation of inputs. The emergence of the internet for households in the mid & s has been the biggest transformation in communications since the telephone in the second th part of the %& century. In accordance !ith Schumpeters hypothesis, a large amount of internet start;ups emerged in the late & s, resulting in a ma<or speculative bubble and a crash in the stoc" mar"et. In 2 %2, internet users still have not figured its limits and ne! start ups "eep emerging, !ith ne! opportunities for the investors. 6) Bevelopments and innovations are endogenous in that they emerge from factors internal to economic systems. This hypothesis suggests that economic systems $companies, States, Free Trade 6reas, etc.) !ill generate their o!n innovations from inputs that belong to the economic system considered. For instance, innovations in a company !ill be generated by its 5CB department. #o!ever, the recent trends in "no!ledge exchange have blurred the borders of economic systems, as !ill be discussed further belo!.

Volume 10 2012

Otago Management Graduate Review

=hen combining the hypotheses mentioned above, !e observe the follo!ing cycle>
Innovatio n

Improveme nt by other companies

Investments

Imitation

Interests focused on the innovation

In conclusion, innovation breeds innovation. Innovation Theories !$$lied to the Video Game Industry th Innovation in companies has changed dramatically throughout the 2 century. 6lthough Schumpeter highlighted the significance of entrepreneurship for innovation, in;house research and development $5CB) department have become standard for big firms. For instance, /intendo 5CB has been designing the companys consoles since the release of the /:S in %&7', as !ell as most of the hard!are associated !ith their console. 0i"e!ise, ma<or publishers may choose to develop their o!n videogames, as is the case for ?bisoft and /intendo. /evertheless, entrepreneurship remains crucial to ensure a creative diversity on the mar"et. The current video game industry counts around %&D( traditional, online, and mobileEhandheld game developers around the !orld $Famedevmap.com, 2 %2). Most of them are small companies set up by entrepreneurs and contribute to the cultural diversity of media content. For instance, 5ovio, a Finnish mobile game developer that started !ith ' students in 2 ', released the very successful Angry Birds in 2 & for mobile and handheld platforms. The game has been do!nloaded over a billion times $1an, 2 %2) and the company no! employs around ' people. It is difficult to evaluate a fair price for video game products, !hether they are hard!are or soft!are. Should retail prices ta"e into account the mere ,uality of the components featured by a game console, or should innovation also be integratedG 0i"e!ise, should soft!are price be based on the ,uality of their content, since they all have the same pac"agingG 1ersonal observation led me to conclude that video games soft!are and hard!are follo! the same pattern, !hich is function of their success. Indeed, console manufacturers set their initial retail price, strongly correlated !ith the ,uality of the integrated components. 4ontrary to the /intendo =ii, !hich featured the greatest innovation through the integration of motion control, Sony and Microsoft merely improved the performance of the previous generation of console. 6s a result, the /intendo =ii sold more units than the other consoles, due to its affordability and accessibility by people !ho !ere not used to playing video games.
%%

#o!ever, !e can observe a drop in the retail price because of the console manufacturers desire to consolidate their mar"et share. Game onsole Technological 'egree o& (nits sold advancement innovation worldwide )2012* 0o! #igh &5.& +intendo ,ii #ony million Playstation #igh 0o! 8(.7 million Microso&t MediumE#igh 0o! 8D million ."o/-00 Initial retail $rice ?S H2(& ?S H5&& ?S H'&& urrent retail $rice ?S H%5 ?S H2&& ?S H2&&

The retail price for soft!are follo!s the same pattern. Aideo games developed on console are released approximately at the same price, !hich is around ?SH8 . #o!ever, their popularity !ill rapidly impact on the retail price. Therefore, a game !ith lo! popularity !ill have to decrease its price to sell more, !hereas a popular game !ill maintain its price in the longer term. Aideo game products seem to behave according to the follo!ing e,uation> Innovation I 4ontent ,uality I 6ffordability J 1opularity rate For instance, Angry Birds presents a high level of innovation through the clever utili-ation of the touch screen featured by smartphones and tablets. The content ,uality is very basic and offers a simplistic story line, fair 2B graphics and repetitive music and sound design. Finally, the retail price !as extremely lo! $?SH .&&) and even free for the demo version. If !e evaluate all these characteristics on a scale from % to % , the results are> 7 I nd 2 I % J %8 $#igh popularity rate). 4onversely, Time Crisis, 2 Strike released in 2 % on the same platform has been highly critici-ed because of its gameplay and its excessively high price for this type of platform $?SH&.&&). In fact, the main interest of the game lies in the possibility for the user to shoot enemies !hen touching the screen. #o!ever, because of the small screen of smartphones, fingers overshado! most of the image !hen touching it, !hich is a ma<or issue for an action game that re,uires good nd reflexes. In spite of its good content ,uality, Time Crisis, 2 Strike is merely a rema"e of a successful arcade gameK its innovation remains thus limited. 5epeating the calculation discussed above, the results are> 2 I 7 I % J %8 $0o! popularity rate). Lf course, the e,uation remains very limited in that it is highly sub<ective and does not ta"e into account the differences bet!een the platforms. For example, H% is very expensive for an i1hone game, !hereas it is very cheap for a console game. The recent expansion of the =eb 2. has considerably lo!ered the entrance barriers for content creation. Internet users are not only consumers anymoreK they have become actors of the "no!ledge exchange and innovation. Aideo games development has become extremely costly over the past % years, !ith an average spending of ?SH%7 to 27 million for multi; platform games in 2 % $4rossley, 2 % ). Some bloc"busters, li"e Max Payne 3, even reached an estimated cost of ?SH% 5 million in 2 %2. #o!ever, ne! gaming platforms have offered attractive alternative for developers !ith

games featuring basic graphics and targeting casual gamers. For instance, Angry Birds, mentioned above, only cost H%( , to build and update $4rossley, 2 %%). In addition, the distribution costs on such platforms enable individuals to publish their creation at affordable prices. For instance, 6pple only charges ?SH&& for the publication of applications on the 6pple Store. 4onse,uently, the capital re,uired for innovation has been lo!ered dramatically !ith the appearance of ne! gaming platforms and innovators do not depend on investors anymore. The massive entrance of ne! actors in the video game industry has obviously contributed to increase the competition in the sector. 5op"e $2 2) suggests in his study that if the competition is too strong, innovation suffers because the pressure on innovators !ill interfere !ith their creativity. Ln the other hand, !ea" levels of competition, often due to monopoly, !ill not generate enough incentives for entrepreneurs to effectively stimulate their creativity, resulting in lac" of innovation. Fraphically, the relation bet!een competition and innovation thus seems to describe an inverted ?; relationship. 4onse,uently, the high level of competition engendered by the lo!ering of the entrance barriers in video game development is li"ely to damage innovation on the long;term. Finally, video games are part of the creative industry, !hose mechanisms differ substantially from those observed in other industries. Indeed, creative industries rely mainly on intangible assets and hence do not involve a large diversity of physical inputs. Throughout the creation phase, three intangible inputs seem to particularly affect the process> The *#uman capital and "no! ho!. relates to the talents and experts gathered by developers in order to create successful products. This "no! ho! is influenced by the !or"ing experiences of the individuals, but also by the recent interest of academics in the industry, resulting in the development of education programs specific to the video game industry. The *4ultural. asset refers to the companys or countrys context and !ill influence the creative capabilities of the development teams. Indeed, a corporate culture oriented solely on productivity is very li"ely to impact creativity negatively. Ln the other hand, a company li"e Foogle, !hich encourages des" personali-ation and ma"es employees feel at home, !ill get better creative results. The *:nvironment and Institutions. includes the governments regulation and legislation impacts on creativity. :thnic diversity amongst companies has proven significantly superior in terms of creativity than homogeneity on the long;term $Mc0eod, 0obel, C 4ox, %&&8). Frances attempts to regulate immigration of foreign students trained in France !ould have a direct impact on ethnic diversity in creative companies, because these regulations primarily target young professionals featuring high levels of education. 4onse,uently, French legislation negatively impacts creativity.

The nature of physical inputs in the creative process has hardly changed since the beginning of video games. Thus, capital, human resources and computer hard!are have been the base of video game development since the D s, !hereas the different intangible assets have contributed to its evolution. /evertheless, !e have !itnessed a substantial augmentation of physical

inputs in the industry, such as capital, as discussed above. The increase in the investments has aroused the interest of institutions for video games, resulting in changes in the intangible assets mentioned above and leading to innovation. Follo!ing the list of hypotheses presented in the first part, and considering the arguments developed above, !e can conclude that> %) In the video game industry, innovation can be generated by increasing the amount of physical inputs, such as capital and human resources. Indeed, the actual generator of innovation lies in intangible assets, !hich !ill be influenced by the accumulation of inputs. For instance, investments in video games !ill arouse the interest of academics, !hich !ill result in the creation of courses of study specific to video games. These courses !ill stimulate creativity amongst the students, leading to innovation. 2) 5CB divisions have become integrated to the ma<or firms of the sector. #ence, entrepreneurship is not the only !ay to generate innovation, although it remains crucial for diversity. ') Than"s to the ne! communication technologies, entrance barriers for innovation have been lo!ered considerably, enabling entrepreneurs to create and publish their products !ith a small capital they may provide themselves. Therefore, investment is not a necessary condition of innovation anymore. () Innovation remains more efficient than price competition, as illustrated by the success of the /intendo =ii on the console mar"et. 5etail price of the products !ill mostly depend on their commercial success and popularity. 5) The appearance of ne! gaming platforms associated !ith the transformation of the !eb into !eb 2. has contributed to the emergence of ne! types of games, such as Angry Birds and Farmville. In 2 %%, game and entertainment have become the t!o most popular categories of apps of the 6pple store $IB6T:, 2 %2). Thus, transformation has generated innovation. 8) Trade barriers bet!een countries prevent an optimal allocation of resources and speciali-ation. #o!ever, in the video game industry, globali-ation has enabled access to the specialty developed by the different countries. 4reativity and innovation are not restricted to territories. #o!ever, they !ill be influenced by cultural flavors. For instance, /ordic countries !ill be imbued !ith their mythology, !hereas 3apan !ill be influenced by its history and arts. Bevelopments and innovations have been largely affected by globali-ation and exogenous cultural factors. The Schumpeterian approach seems inade,uate to completely explain innovation processes in the video game industry, in that it does not ta"e into account the influence of individuals on the mar"et. In conse,uence, I am going to explore a mar"eting concept !hich considers consumers effects on video game productions as !ell as firms contribution to mar"et transformations.

Mar1et Pulls and Technology Pushes

'e&inition #istorically, firms have al!ays been created to ans!ers customers needs> fishermen have been selling their fish to feed hungry buyers and doctors have been around to heal sic" patients. #o!ever, competition on mar"ets has compelled companies to care about !hat their customers !ant because of a simple logic> if a product does not satisfy the customers, they !ill purchase from rivals. In the previous part, !e have ac"no!ledged that innovation !as more relevant than price competition to determine products commercial popularity. 4onse,uently, innovation is crucial for firms to generate a competitive advantage. This innovation can be driven by> Technology pushes Mar"et pulls Technology pushes are the results of technology advancements and are usually characteri-ed by inventive products or processes. The pattern follo!ed by this type of innovation is very similar to the one described by Schumpeter and discussed above> transformations are follo!ed by innovations. For instance, the increased capacity of memory devices and the decreased si-e of components have enabled the creation of handheld consoles, pioneered by the /intendo Fame @oy in %&7&. 0i"e!ise, the diffusion of the i1ad has led to the development of applications commerciali-ed through the 6pple Store. 6 ne! application for i1ad thus enables children to combine their hot !heels !ith virtual trac"s $6F3A, 2 %2), lo!ering the barriers bet!een virtual and physical !orld. 6lthough successful technology pushes have a higher impact on the mar"et than mar"et pulls $6rnold et al., 2 % ), they are also considered more ha-ardous in that they need mar"et development and the right timing to be successful. For example, /o"ia spotted an opportunity to merge handheld consoles !ith mobile phones in Lctober 2 ', after they reali-ed that gamers !ere carrying both devices !ith them. Bespite their relative expertise in integrating games to mobile phones, as illustrated by the success of *Sna"e. on their early models, the /o"ia /;Fage !as a commercial failure. Indeed, the complexity of the buttons layout, the restricted range of games and the release of the /intendo BS in 2 ( did not allo! the /;gage to sell over ' million units, against %5% million for the /intendo BS $=i"ipedia, 2 %2). In 2 %%, Sony also decided to try their luc" !ith the convergence bet!een phones and handheld consoles !ith the release of the 1S Aita. ?nfortunately, the successful development of other handheld devices, such as tablets, has overshado!ed the potential benefits of Sonys product, resulting in remar"ably lo! sales $Famasutra, 2 %2). Mar"et pulls are the result of customers dissatisfaction !ith the products of the mar"et. The concept appeared along !ith the sudden interest of companies for consumers preferences, but remains completely sub<ective. Indeed, consumers tastes and preferences are specific to each individual and each product cannot please everyone. For instance, Biet 4o"e has been created for 4oca 4ola drin"ers !ho !ould li"e to limit their sugar incomes. #o!ever, some users may thin" that the taste has been compromised to give the priority to lo! fat and artificial s!eeteners. Fortunately, companies are fervent defenders of democracy and usually focus on the largest amount of

dissatisfaction. Therefore, the famous firm delivered 4oca 4ola Mero, supposed to combine the *real taste of 4oca 4ola. !ith the !ish to remain healthy !hile drin"ing soda. . Mar"et pull innovations thus see" for a technical solution to customers dissatisfaction and stimulate technological development, often through the improvement of existing products. Than"s to their insights on customers satisfaction !ith existing products, mar"et pull innovations induce less ris" for manufacturers and have a higher degree of commercial success than technology push innovations $6rnold et al., 2 % ). In regards !ith the t!o concepts revie!ed, I am going to adapt the cycle created after Schumpeters theories. Since technology push appears to be brea"ing ne! ground it is going to generate the first innovation, !hich is going to be follo!ed by mar"et pushes innovations until a ne! technology push arrives and starts a ne! cycle. The first A45s emerged in the early 5 s $technology push innovation) and !ere continuously improved by competitors on the !orld!ide mar"ets $mar"et pull innovations) until the appearance of the first BABs in %&&5 $technology push innovation), resulting in a ne! cycle due to the creative destruction explained in the first part.

/evertheless, the changing and uncertain environment ma"es it crucial for companies to consider both technology push and mar"et pull strategies throughout ne! product development. 6pple uses a hybrid approach, combining technology pushes !ith mar"et pulls innovations. For instance, the first i1hone released in 2 D !as expertly merging several functions featured by different devices into one. Indeed, the organi-er developed by 1alm, the phone mar"eted by lots of companies, the internet accessible via computers and the video camera have all been incorporated in the first 6pple phone. 6lthough 6pple merely combined existing functions, this integration !as only made possible because of the miniaturi-ation of the different components, leading to their technology push. /o!adays, 6pple is only releasing updates

of their products as illustrated by the recent release of the 8 generation of th rd i1od /ano, the 5 generation of i1hone $i1hone (S) and the ' generation of i1ad. These updates feature minor improvements in !hich customers feedbac" are ta"en into account, illustrating a mar"et push strategy. Mar1et Pull and Technology Push #trategies !$$lied to the Video Game Industry The video game industry is represented by t!o types of products that follo! different innovation strategies> hard!are $consoles, gamepad+) and soft!are $games). If the soft!are !ill establish what consumers are going to play, the hard!are !ill determine how they are going to play it. 4onse,uently, it is essential to distinguish the t!o types of products in that the changes in hard!are !ill impact innovation in soft!are. 4onsole manufacturers represent the ma<or part of the hard!are industry in 2 %% $IB6T:, 2 %2). Since the first video game console released by Magnavox in %&D2, platforms have only experienced a fe! ma<or changes aside from their continuous technical improvements. Indeed, from %&D2 to this day, console manufacturers have mainly provided gamers !ith platforms connectable to TAs, as illustrated by the latest generation of console. In %&7&, /intendo released the first handheld gaming device !ith the Fame @oy, enabling gamers to go out and sunbathe !hile en<oying their favorite game. In 2 , Sony integrated a BAB player to their 1laystation 2K for the first time, consoles !ere not entirely dedicated to video games anymore. Finally, in 2 8, /intendo integrated motion capture to their latest device, provo"ing a brea";up in the intimate relationship lin"ing the gamers bottoms to their couches. #o!ever, it !ould be inaccurate to separate the concepts of mar"et pull and technology push in these ma<or innovations. For example, the 1S' release by Sony in 2 8 gives the impression of being a mere improvement of their 1S2, !ith better graphics and a !ireless gamepad. This !ould match the definition on mar"et pull discussed previously. /evertheless, these improvements have been enabled than"s to the progress of graphic engines, processors and !ireless technologies, suggesting a technology push. Similarly, the /intendo =ii has introduced motion controlled games on the !orld!ide mar"et. This innovation is a brea"through in the sector and !as made possible by the development of infrared technologies, arguing for /intendo technology push innovation. #o!ever, it !ould be naNve to ignore the influence of controversies concerning the impact of video games on gamers obesity $=arner, 2 () and social isolation $Sabella, 2 %2) on /intendos innovation process, suggesting a mar"et pull strategy. /evertheless, the arrival of ne! gaming platforms on the mar"et, such as tablets and connected TA, is predicted to shatter the predominance of game console in the next fe! years $4ampbell, 2 %2K Tito, 2 %2). Tablet sales are going to gro! to an estimated ' million units in 2 %2 $IB6T:, 2 %2) and offer an alternative to handheld consoles, than"s to the diversity of applications and the performance they offer. 6s illustrated by the examples, hard!are provides users !ith ne! !ays to play. It is the role of developers to lean on these changes in order to create soft!are that !ill propose ne! gaming experiences to gamers.

th

Aideo games have been identified as being an intrinsically motivating activity $1oels, van den #oogen, I<sselstei<n, C de Oort, 2 %2). Indeed, they contain the three emotional dimensions of pleasure that !ill lead players to prolong their experience !ith the game> pleasure, arousal and dominance. 1leasure refers to the en<oyment of the gaming experience and is associated !ith the graphics, the storyline, the level of immersion, etc. This pleasure immediately determines the consumer preference for a certain game and !ill arouse the gamer enough to "eep playing the game. 6rousal relates to the physical and mental reactions triggered by the experience, such as the challenging aspect of a pu--le or the desire of improvement induced by online competitions. Through the ac,uisition of in;game items and techni,ues through achievements, the gamer !ill overcome obstacles more easily, leading to a feeling of dominance. Bominance describes the feeling of control and influence over the obstacles encountered in the game, such as other players, computer;controlled enemies or pu--les. 6s the player progresses in the game, this feeling !ill fade as the obstacles become more challenging, to be replaced by the pleasure to follo! the storyline. Than"s to their intrinsically motivating characteristics, it !ould be possible to thin" that the strength of video game soft!are lies in mar"et pulls. Indeed, gamers motivated through playing video games !ould see" for other sources of motivations once they finish their games. /evertheless, similar to the other content industries, each video game is uni,ue in that they feature their o!n combination of graphic design, sounds and storyline. Pleasur e

Dominance

rousal

Motivations are thus going to adopt different forms and game developers !ill have to convince gamers that their game is the most li"ely to fulfill their expectation for motivation. 6lthough innovation may be more subtle in certain productions, !e observe the same mechanisms of mar"et pulls and technology pushes. @ecause video games depend on the platforms they are developed for, they all include a part of technology push by definition. For example, the ,uality of graphics !ill rely on the technology integrated to the video game consoles. Thus, 'B games could not be developed before the fifth generation of console mar"ed by the first 1laystation in %&&(. The release of the /intendo =ii in 2 8 enabled game developers to integrate motion control, leading to more interactivity bet!een games and gamers. ?sers could finally become the s!ord masters they al!ays !ished to be !ith Zelda: Twilig t Prin!ess, or even hit their first home;run !ith =ii;sport. 1eople choose to play games for different reasons. 6mongst the types of players discussed in my previous study, casual gamers play to pass the

time, regular gamers loo" for ne! gaming experiences and hardcore gamers play for competition. Therefore, video games have different appeal for different gamers. For instance, MML51F, li"e "#rld #$ "ar!ra$t, appeal to many players because they match different !ay of playing re,uirements $Pee, 2 8). Thus, players see"ing social interactions !ill en<oy the camaraderie amongst their guilds, gamers loo"ing for adventure !ill have the possibility to explore immense virtual !orlds peopled !ith magical creatures, and competitors !ill fight against other members and loo" for the best combination of items for their characters. Therefore, mar"et pull innovations are used by developers to match video game contents !ith customers needs. #o!ever, mar"et pull innovation may also create ne! mar"ets for video games. =ith the gro!ing concerns of healthy lifestyle associated !ith the great motivational po!er of video games $1oel et al., 2 %2), /intendo developed =ii Fit. This soft!are enables users to design and plan !or"out sessions according to their needs, and to monitor the results of their efforts. =omen !ere the first targets of the soft!are $Oim, 2 &), !hich sold 22.8% million copies !orld!ide by May 2 % . 0i"e!ise, the recent casual gaming trend has allo!ed video games to reach the very challenging mar"et of !omen bet!een ( ;8 years old $Batagenetics, 2 % ), !hich has become the biggest audience of casual games. Thus, the appearance of ne! platforms has attracted mar"ets that !ere not interested by video games before. The development of platforms targeting these ne! gamers do not threaten the more *traditional. video game supports, such as video game consoles and offline computer games, in that they create ne! mar"ets. The mar"et share of *traditional platforms. !ill be impacted, certainly, because they do not hold their former monopolistic position anymore. /evertheless, their gro!th !ill not be affected because the gamers attached to the *traditional. platforms are not li"ely to move to the ne! forms of casual gaming, as illustrated by the figures published by IB6T: in 3anuary 2 %2 $See 6nnex). This pattern !as already observed by Schumpeter $%&'()> %... new !#m&inati#ns are, as a r'le, em&#died, as it were, in new $irms w i! generally d# n#t arise #'t #$ t e #ld #nes &'t start (r#d'!ing &eside t em). In fact, casual gaming could be a !ay for the ne! users of video games to familiari-e themselves !ith the mechanisms and appeals of this form of media. Lnce they get over their apprehension, mostly carried by information media, through regular interaction !ith electronic games, they may !ant to try the other products proposed on the mar"et. 4asual gaming could thus reinforce the *traditional. sector of video games on the long term. Aideo games on social media also enable their developers to gather data on their customers gaming preferences. =ith the findings, they have the possibility to improve their products and forecast changes though analy-ing the information in real time. The appearance of games on social media !as initially technology pushesQ innovations caused by the appearance of ne! net!or"ing platforms, such as Faceboo". /o!, those games are the result of mar"et pulls, and tailored to consumers preferences. Mar"et pulls and technology pushes strategies are thus al!ays interacting in the video game industry, both in the production of hard!are and soft!are. The degree of innovation perceived by the consumers seems to depend on the balance bet!een the t!o types of innovation. Indeed, products that include ne! gaming practices made possible by technological improvement !ill have a higher degree of innovation than products that !ish to improve existing practices. Therefore, the exchange of information has

become crucial for companies to "eep up !ith these existing practices as !ell as the current trends on the !orld!ide mar"et. In the follo!ing part, !e are going to investigate the process of exchange "no!ledge that occurs bet!een the actors of the video game industry on the different mar"ets.

lusters
Permanent lusters 1ermanent clusters describe localities that concentrate companies of a particular industry, generating a centrali-ed competition. They can arise through historical circumstances, sophisticated demand, prior existence of suppliers relevant to the industry, or stimulation provo"ed by one or t!o ma<or companies !hich successfully developed their business $1orter, 2 7). The notion of cluster gathers similar concepts developed by different authors and adds the idea of localEglobal communication $Torre, 2 7). 6mongst these concepts, !e can consider the follo!ing> *Innovative milieu. emphasi-es the importance of connections bet!een the local actors in order to reduce the technology lea"age and promote the local opportunities in the industry. Technopoles argues that grouping local high;tech firms creates synergy in innovation through collaboration 5egional innovation systems promote a local net!or" based on technological complementarities. The regulation implemented by the public authorities boosts or slo!s do!n the innovation process.

4lustering process has been defined by Feldman $2 5) as *a process of interaction that relies partly on spatial proximity to create and spread "no!ledge.. If the creation of "no!ledge can be generated !ithin the cluster, its spread re,uires the actors to maintain contacts outside. Mimmermann and 5ychen $2 7) distinguish 2 types of "no!ledge> Tacit> incompatible !ith distance, and re,uires face;to;face interactions. :x> establishment of trust, chemistry bet!een individuals, etc. 4odified> easily transferable through manuals and boo"s, and copes !ell !ith long distance communication. :x> theories, figures, analysis+

Therefore geographical proximity is essential to transfer both tacit and codified "no!ledge. The exchange of "no!ledge in local clusters depends mostly on the involvement of the actors in their net!or"s. 4lusters are thus not only locations that concentrate firms that produce the same productsK they are also communities of people !ith the same codes $Torre, 2 7), the same vision of the !orld and familiar !ith the same theories. The informal interaction of people in the cluster !ill contribute to create an *atmosphere. !hich individuals !ill get used to. Therefore, they have a better understanding of each other, contributing to an improved exchange of "no!ledge. This intra;cluster communication !ill ensure dynamic learning for the firms. 0ocali-ation is thus crucial in the short term in order to ac,uire the best and most up to date practices.

Many cities build cultural clusters or districts in order to stimulate creative synergy. The public, private and voluntary sectors ensure the location provides the right climate to !elcome and gro! successful clusters. For instance, #olly!ood !as merely a neighborhood of 0os 6ngeles before film directors started to promote it in the %&% s. 4ontrary to /e! Por", #olly!ood featured various different landscapes that enabled film directors to shoot most of their movie in the same location. The government rapidly identified the humongous potential of cinema in promoting the ?S6s image around the planet and supported #olly!ood in the development of the cinema industry. The success of cultural clusters !ill depend on the acceptance of its production by the !orld!ide mar"ets. Fortunately, the gro!ing influence of cultural tourism has emphasi-ed the relevance of cultural attractiveness for countries. For instance, the 3apanese predominance in the production of video games for over t!o decades has given the country a specific *cultural flavor., valued by tourists. 4reative clusters thus play a strategic role in the urban economy through the ma<or infrastructure investments made the public sector in order to attract these ne! consumers of culture. Traditional and ne! media are playing an increasingly important role in the promotion of these locations. 4lusters of creative industries can produce the conditions necessary to originate an *innovation milieu.. #o!ever, the management of these creative clusters should focus on ad<usting the balance bet!een productivity and innovation. Ln the one hand, innovation !ithout mar"et insights !ould eventually lead to products that !ould not match the mar"et, as !as the case in Fermany at the beginning of their video game industry. Ln the other hand, a focus on productivity !ould asphyxiate innovation and !ould result in poor ,uality products. For instance, bloc"busters releases in cinema are usually closely follo!ed by their video game adaptation, as has been the case for *arry P#tter and T e +#rd #$ t e ,ings. These games are usually ordered by producers that impose strict deadlines in order to surf the trend started by the movie release in theaters. 6s a result of the tight schedule, the games % contents are often disappointing. #o!ever, interaction bet!een a cluster and its external environment is vital. This interaction may be achieved through various configurations, of !hich !e !ill consider three> %) The multispot configuration> companies of the clusters establish subsidiaries in other relevant mar"ets, !hich !ill directly collect information and opportunities. This subsidiary also can act as an entrance gate for companies that !ould li"e to capture a ne! mar"et. Therefore, it is li"ely that other companies of the same sector adopt the same strategy, gathering into a ne! cluster. 2) The gate"eeper configuration> agents appointed by one or more companies to access and coordinate the flo! of information bet!een local cluster and external environment. The gate"eeper has 2 main functions> a. 4oordination of internal and external "no!ledge. :x> In the Italian pac"aging cluster of @ologna, a small group of companies connects the external demand !ith the speciali-ed smaller firms of the local mar"et. Indeed, than"s to their international
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implementation, these firms !ill capture a large part of the demand for pac"aging in Italy, and redirect the technically specific orders to their local connections. In this case, the cluster !ill be the gate"eepers for the Italian mar"et. b. Internal coordination and animation of the local cluster. :x> In a case in !hich the cluster is led by one or a fe! companies, the gate"eeper !ill gather external "no!ledge and diffuse it among the other firms of the co;location. #o!ever, !e may ,uestion the ob<ectivity of private "no!ledge gate"eepers !hen coordinating information. Indeed, leaders of clusters may be tempted to act in their o!n interest in order to preserve their leading position. Thus, independent gate"eepers appointed by non;profit institutions may be preferable to ensure that the resources are shared e,uitably. 0eading firms !hich adopt the gate"eeper configuration may expect economic returns from the other firms of the cluster in that they provide them !ith valuable information collected through the implementation of a costly international net!or". If the cluster does not feature a leader, local actors can decide to create a collective gate"eeper. ') Temporary proximity> Firms of the same sector agree to gather, either in another firms location or in a neutral site, in order to meet up and gain a better visibility of the industry. The !lternative O&&ered "y Tem$orary lusters The need for geographical proximity for innovators is rarely permanent and good cooperation does not re,uire durable co;location. 4ompanies may find long distance to be satisfying, as illustrated by 5emedy :ntertainment, a Finnish developer !hich effectively collaborated !ith 'B 5ealms, an 6merican based producer, to release the very successful *Max Payne. in 2 %. 5elations can emerge from former co;location, common education or temporary encounters and are at the base of partnerships bet!een firms. The development of information technologies has largely contributed to help these relations "eep in touch, and facilitated "no!ledge exchanges bet!een firms in spite of the distance. In fact, no!adays most of the interfirm exchanges are operated outside the clusters, and studies suggest that face; to;face interaction !ould only be necessary at certain stage of innovation processes or production of goods $Torre, 2 7). 4onse,uently, there may be alternatives to clusters, less constrained by time and space. Temporary clusters enable partners to meet in a cost;efficient !ay. Since innovation activities and "no!ledge production only re,uire limited face;to;face interactions $Torre, 2 8), temporary clusters offer a positive alternative to permanent geographical proximity. Through temporary encounters, firms get access to information about the technologies used by competitors that could not be disclosed on their !ebsites. This information is important for companies to stay in touch !ith the ne! trends exploited by their !orld!ide competitors. #ence, the learning process in a situation of geographical proximity is accomplished through interactions bet!een the different actors. 6t these occasions, competitors can benchmar" others products and learn through comparisons. Than"s to their insights on the latest innovation, companies !ill be able to adapt their strategy and protect themselves against creative destruction. The latest

/intendo console !as unveiled at a press conference at the :lectronic :ntertainment :xpo 2 %%, although they declared they !ould not conceive a ne! platform as long as the capacities of the =ii !ere not exhausted. The announcement of the =ii ? by the end of 2 %2 has thus surprised /intendos competitors, !ho are currently rushing to "eep up the pace set by Marios creators. Temporary clusters also provide plenty of occasions for first face;to; face interactions, potentially resulting in a future partnership bet!een the interlocutors. For example, the :' gathers the main actors of the !orld!ide video game industry every year in 0os 6ngeles. Throughout the event, participants introduce their future products and try each others novelties. It is also a great opportunity for graphic firms to present the latest engine that may be used by the developers in their next games. Finally, temporary proximity enables face;to;face opportunities !ith the existing partner, consolidating the relation through topics that could not be discussed on the phone or by emails. 4onse,uently, if geographical proximity remains essential for "no!ledge transfer, temporary proximity !ould be sufficient because it occurs at the crucial stages of the communication process.

In summary, !e have revie!ed the hypotheses developed by Schumpeter on innovation on the first part. These hypotheses have been applied to the video game industry, bringing us to the conclusion that Schumpeters theories do not suffice to explain innovation in video games. In the second part, !e have explored the mar"eting concepts of mar"et pulls and technology pushes as applied to the video game industry and concluded that the combination of both !as necessary to generate innovation. Finally, !e have investigated the notion of clusters, and suggested that temporary clusters are an acceptable alternative to permanent geographical proximity, even though cultural clusters remain a po!erful !ay to promote the products and locations. Feographical proximity has enabled the video game companies to collect information on their competitors !hile promoting their production around the !orld!ide mar"ets. These insights have been used by manufacturers to generate combinations of mar"et pulls and technology pushes, leading to innovation. The Schumpeterian approach revie!ed suggests that innovation is a ma<or factor of transformation for the economy and leads to its development. 4onse,uently, the continuous innovations underta"en by the video game industry have contributed to its gro!th and its success. #o!ever, the constant succession of changes provo"ed by the intense competition has also accelerated the pace of innovation on the !orld!ide mar"et. Several observers have already forecast the end of video game consoles after the next generation $Bu"ta, 2 %2K IF/, 2 %2). Innovations initiated by the biggest competitors of the mar"et have eventually led to their do!nfall.

onclusion

Re&erences

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