Welcome to platform wars the video game management flight simulator.

platform wars is an
interactive flight simulator experience in which you are going to take the role of the maker of a video
game console PS3, Xbox ,Wi and make decisions that will enable you we hope to win the market and
maximize your profits.

it's a lot of fun what we're going to do in this very short video is show you how to access the
simulation and then how to play. let's get started, so very quickly I'm going to tell you how to access
the simulation through the MIT Sloan teaching innovation resources website and then we'll get right
into the background for the case and the simulator.

Simulator deals with platform competition and of course this is very common it's not restricted just
to video games. There are a number of important examples listed here. Many of which arise in the
personal electronics and Internet space VCRs for example;

 Competition between the Betamax format from Sony and the Matsuhisa VHS format.
 The competition between the IBM win tell platform in the Macintosh and personal
computers
 The browser wars.
 competition between mobile phone carriers.
 High def DVD players
 Social networks - Myspace vs Facebook.
 Current battles over smartphones - the iPhone OS versus Google's Droid.

 Platform wars are not restricted to the Internet world of course an important example that's
playing out now is the competition to become the new standard for automobiles, where we
have the dominant platform of ICE internal combustion engine powered by gasoline or fossil
fuel that is being challenged by a variety of new contenders including plug-in electric
vehicles, plug-in hybrid electric vehicles, hydrogen fuel cell vehicles, biofuel powered
vehicles and so forth.

There are many other examples so the lessons that you can learn in the video game platform where
simulator are applicable to a wide range of other markets. Here though we're going to focus on
video games going back to ancient videogame history. The first really successful game was ‘pong’
both in the arcade and home versions offered by ‘Atari ‘. Many people of my generation spent a lot
of hours bouncing that little white dot back and forth between the paddles in our palm games pretty
primitive but incredibly successful Atari sales rose from about 100 million dollars a year to over 2
billion a year in just a few years. largely on the strength of their market dominance for this platform.
The case study around which the platform war simulator is built is more recent. it concerns the
competition between Sony, Microsoft and Nintendo around the introduction of the PlayStation 3,
Xbox 360 and the Wii.

The case study is available for free to you online and covers the strategic considerations that Sony
faced around the launch of PlayStation 3, including issues around pricing of the hardware, royalties,
in other relationships including potential subsidies for game development with the game providers,
the producers of the content for these game platforms etc.

The competition in platform markets is somewhat different from traditional competition because
product attractiveness depends not only on price, functionality, product quality features and so
on, but on the size of the network of users and the availability of complementary resources,
content or apps. Typically, the larger the installed base of your platform, the number of consoles
that you sold, for example the more attractive your platform becomes.

This creates a variety of reinforcing or positive feedback loops. The two positive or reinforcing
feedbacks that are most important in platform settings are known as the direct and indirect network
externalities.

The direct network externality arises whenever the utility of the product to a user increases with the
size of the network of other users. the classic example is the fax machine the indirect network
externality arises when the utility of the product to a user increases with the number and variety of
complementary products that are available to be used on that platform a good example here is the
number of apps available for the Apple iOS versus the number of apps available for googles Droid
system here's a simple causal loop diagram showing the feedback structure of the market and these
two effects here you see the stock of consoles for your platform or more generally the installed base
of any particular platform that stock is increased by sales of that platform and of course there's also
the possibility of obsolescence that outflow is not shown for simplicity ask the size of your installed
base increases the attractiveness of your platform 2 users from the size of the network increases the
more people who have fax machines the more attractive a fax machine is and as the attractiveness
of your platform increases both your market share should increase and industry demand should
increase because a more attractive product increases the size of the addressable market perhaps
through price reductions but also through increases in the size of the network etc as market share an
industry demand rise of course the sales of your platform increase further increasing your installed
base and further boosting the attractiveness of your platform leading to still more growth in your
installed base now that's the direct network externality the indirect network externality is similar but
operates through the production of complementary goods so here as the installed base of your
platform grows the size of the expected market compliment producers people who produce apps or
content or video games in our case the size of the market they can look forward to if they write
content for your platform increases and so therefore will the expected profits they can achieve by
writing for your platform as they do so production of complements compatible with your platform
will increase adding to the stock of complementary products compatible with your platform and as
that stock grows both the scope the variety of those products and the number of them that are out
there the attractiveness of your platform from that source from complementary products will grow
and then as your product platform attractiveness grows both your market share and industry
demand should grow increasing sales of your platform and leading to a still further increase in your
installed base now whether those reinforcing feedback loops lead to your winning the market or not
depends of course on how strong those feedbacks are and on the behavior of the competitors and
on how much it costs to produce those compliments and whether those complementary products
can be easily and quickly migrated at low cost from one platform to another there are of course
many other such reinforcing feedback loops including feedbacks around word of mouth and brand
equity that boost awareness of your product cost reductions and functionality improvement through
our D process improvement learning by doing scale economies growing market power over your
suppliers and workers as we become large improvements in other capabilities necessary for success
such as boosting the size and scale of your direct sales force improving your product development
process learning how to acquire and integrate other firms that you may buy into your operations in
my textbook business dynamics identify nearly three dozen such reinforcing feedbacks firms can use
to create sustained competitive advantage and we consider what the limitations of those feedbacks
might be as a result of for example knowledge spillovers product migration competition and so forth
typically however these reinforcing feedbacks create the possibility locking in the market to a
dominant platform leading to the potential for winner take all dynamics here's one of the classic
examples the VCR market so on this slide you see an early ad for the Sony betamax home
videocassette recorder Sony pioneered this category of home electronics and introduced the home
VCR before anybody else did they used their proprietary format for the video tape called betamax
but they weren't the only player within a year or two a rival platform was introduced called VHS
introduced by matsushita and you then had a platform war between these two incompatible formats
here's what happened even though Sony was the early entrant to the market the VHS platform soon
took off and gained a decisive lead the top graph shows total sales of VCR's the United States very
rapid growth of the market period of market saturation and sales decline followed by slower growth
as a result of replacement sales and growth in the number of households an increase in the average
number of VCR's per household as their prices fell betamax was withdrawn from a home VCR market
by the mid 1980s as the market tipped completely towards VHS Sony began to produce VHS
machines in the bottom graph you see the sales of pre recorded videotapes now this market didn't
develop initially at the very beginning of the industry from 1975 for about several years there were
not many prerecorded tapes available the primary use of VCR's was timeshifting people would
record content off the air and in view it later and of course trade that content with their friends and
family that of course is a reflection of the direct network externality the more people who have the
format compatible with yours the more people you can trade tapes with once the prerecorded tape
market starts to take off you can see that the VHS format dominated the largest share of
prerecorded tapes that were available in video stores and libraries were compatible only with the
VHS format and the share for beta steadily fell off until by about 1987 nobody was pretty soon
betamax prerecorded tapes any longer come back to video games what determines the strength of
those positive or reinforcing feedbacks in the video game market well we know that video gaming is
a very social activity kids here playing on a we but love to play with their friends be able to go over
to their friends homes and play the same games that they're familiar with in their home and here
you see some of the marketing impact what we have here are NFL pro players Warren moon and
Marshall faulk playing the Madden NFL 2007 game on the day that it was released playing on an
Xbox 360 the day that the new Madden games are released is of course now known as mad nolidae
and here there playing in Madden Mississippi population 74 towards the end of 2006 so gaming is of
course highly social and of course it is today an online activity here's the Call of Duty first person
shooter which is available both in a single player version and an online multiplayer version as are
many of the more popular games these days so this illustrates the role of the indirect network
externality both the number of people who have the format of the game console and game that's
compatible with the one that you play that improves the attractiveness for you and the number of
games that are available so we'll go right into the simulator some quick facts for you to keep in mind
you're going to play the role of a videogame hardware manufacturer like Sony or Microsoft or
Nintendo you'll be playing against one other competitor simulated by the computer you're going to
set the price that you saw your console at the royalty that the game makers pay you for the right to
produce games for your platform and whether or not you're going to subsidized the production of
the first few games to kick start your installed base of complementary goods your goal is to
maximize cumulative profit or the net present value of your cumulative profit we provide both too in
the simulation over a 10 year horizon and very importantly there's no balance sheet now obviously
in the real world there as a balance sheet there are constraints on how much money you can spend
to try to win the market but in this game we omit the balance sheet you can fund any cash flow
requirement that you have fully so if you fail if you fail to win the market or if you win the market
but have lost billions and billions of dollars you cannot blame this on the simulated capital markets
who didn't have enough confidence in your strategy it will be entirely on you you may be playing as
an individual in which case you'll be able to set parameters governing the strengths of the feedback
effects and the behavior of the competitor and complementors or you may be playing as part of the
class that your instructor has set up if you're playing as part of a class your instructor will set these
parameters and may show you what those values are or may give you the more realistic situation in
which you don't know the strategy of your competitors and the preferences of your customers will
go through what those settings might be in a minute but for right now let's play so to access the
simulation open up a browser and you're going to go to the MIT sloan.mit.edu/demster MST our
website MIT Sloan teaching innovation resources on this site you're going to find a variety of
interesting content there are case studies in a variety of areas currently strategic management
innovation system dynamics leadership entrepreneurship sustainability and the global economy all
the case studies here are freely available to access the simulations click on system dynamics and
you'll see the list that are currently available right now there are four there are more in the pipeline
so check back and see what new ones are coming out I'll quickly describe these simulations but feel
free to play with them they are all available to you for free saltcellar is an interactive multiplayer
pricing simulation built around competition in the salt industry classic commodity industry eclipsing
the competition is a simulation of the solar photovoltaic industry in which you play the role of senior
managers at SunPower a leading any facture of solar PV panels headquartered here in the United
States this is a case about strategy in the presence of learning curves and the possibility of
knowledge spillovers and new entrance with radical new technologies fish banks is an exciting
multiplayer simulation for the management of renewable resources in this case fish but it applies to
any common pool resource where the different players have Open Access and can draw the
resource as often as they like we're going to play platform were so click here and will access the
simulation the home page for the simulation here has the videos that are available to you you're
watching the student video right now your faculty will have access to a more detailed instructional
video to access the simulation just click here and you'll come to the welcome page now you can play
as an individual or as part of a class if you play as part of a class you'll click here you'll enter a login ID
which is typically your email and perhaps a password if your instructor has established a password
and then you'll log in for this demonstration let's play as an individual to do so choose a screen ID all
choose video kit and then log in now whether you're playing as an individual or as part of the class
what you're going to see is the same and you have here the dashboard view and you can then drill
down in more detail and see the income statement complementary goods industry data data on the
installed base and the game settings well let's quickly take a look at the settings when you're playing
as an individual you get to choose these settings I'm going to let you go through them on your own
in the simulation if you so choose when you're playing as part of a class your instructor will choose
those settings so that everyone playing in that class will face the same situation and then you'll be
able to view those settings if your instructor allows that functionality for you back here at the
dashboard we've got an overview of the market when we begin you and your competitor have
entered simultaneously both both launched your new video game console at about the same time
initial price here is $250 a console but you can change that to be anything you like I'll leave it at the
default value also you get to decide what royalty the game makers will pay you for the privilege of
writing content for your platform the default was 30% but you can set it anywhere you like between
0 meaning your game makers get all the revenue from selling games and you only get revenue from
consoles all the way up to 100% in which you get all the revenue from the sales of games and they
get nothing you can think of that as having a captive game producer in-house I'll put it back at the
default here of 30% your last decision is whether and how many games you would like to subsidise
at the beginning of the game so at anytime but probably more at the beginning you may choose to
subsidise the production of some games the initial value here is 10 and that's going to cost you 162
million dollars a year quite a lot of money you may not want to spend that much if you don't want to
subsidise the production of initial games just enter a 0 here and that will update showing that that
will of course cost you 0 if you want to subsidise five games that will cost you any $1,000,000 a year
I'll leave it at 10 And that'll cost 162 million dollars a year now the dashboard shows you a graph of
console prices market share and net income there's nothing to see yet because we haven't actually
played a year but when we begin the market is evenly split between you and the competitor 50%
market share for each equal flat level playing field in terms of console prices unit costs and all other
parameters of course your competitor may diverge from that to follow whatever strategy they are
playing as determined by the settings now if we go to the income statement you'll have graphs of
revenues from consoles and royalties cumulative profit and so forth but I think we're ready for this
demonstration to enter our decisions so we can enter decisions one year at a time two years five
years or go all the way to the end of the decade if we like we recommend of course that you enter
your decisions one year at a time because your competitor is going to react to your decisions and
you're going to want to have the opportunity to revise your strategy as you go so let's advance one
year and see what happens alright so now we've got a years worth of results we can see the what
our competitor did is lower the price of consoles a little bit below us we're at 2:50 there at 2:40 and
that gives them somewhat of an advantage in market share so our market share is 44% and they
have the rest as you can see right here they're making a little bit of money we're just about breaking
even and you can Scroll down here and see what's happening in some detail so here's our revenue
it's pretty similar between us in the competition royalty revenue very similar total revenue very
similar but they're making money and we're not now let's find out why to do so let's go look at the
income statement well here we are total revenue 397 million for us 418 million for them industry
total 850 million console revenue is quite comprable between ourselves in the competitor royalty
revenue is fairly similar as well so gross profit is quite close so what's the difference while the
differences in the cost of subsidies where subsidizing the production of 10 new video game titles
which costs us on our $62,000,000 and there apparently subsidizing far fewer games and so their
subsidy cost is much less as a result there total costs are less and they're making a $5,000,000 this
year while we lost $65,000,000 well you can scroll through and see some of the other data that's
going to be useful to you to help you make wise decisions here we see your console price here you
see the unit cost of your console and that number will drop overtime as a result of learning curve
scale economies and other developments here's your gross margin your return on sales the number
of shipments of consoles in units per year the number of games sold in dollars per year and the
royalty fraction which is about the same at 30% for each of you going up to the complementary
goods tab we see a graph showing the royalty rates which are equal for both you and the competitor
at 30 percent so far the number of game titles available Haven't yet reached the market but they will
be coming along and then here we see the number of games that have been sold nearly equal
between the two of you and the share of the installed base of games compatible with each format
again nearly equal Scroll down you get all that data in spreadsheet form up at the top of the industry
tab we see total industry revenue from console sales total industry revenue from royalties total
industry shipments of consoles and total shipments of games and those data are available here
along with the average price of consoles in the marketplace and the total subsidies for game
production between you and the competitor you can also see what the dynamics of the installed
base are on the installed base tab we have total console shipments for you in the competitor the
installed base of those consoles and the share of the installed base compatible with each format you
currently have about 50% of that but it's trending to favor your competitor and as we discussed you
can examine the settings armed with that information when you're ready you can make your next
decisions change them any way you like advance see how the competitor reacts and implement your
strategy to win the market and maximize your profits since strategy is up to you will let you take
over at this point enjoy it and good luck