In Online Gaming

Group 12
Karan Kohli (PGP/23/210)
Raunak Kochar (PGP/23/211)
Mudit Yagnik (PGP/23/216)
Shubham Manuja (PGP/23/233)
Swati Sachdeva (PGP/23/239)
Taher Lokhandwala (PGP/23/240)
Agenda

 Case Introduction
 Is Microsoft’s investment in Xbox justified ?
 Why do video-game platform providers sell their consoles at break-even or
even at a loss ?
 Will console-based gaming emerge as a mass-market phenomenon ?
 What are the advantages and disadvantages of the approaches followed by
Microsoft and Sony ?
 How important is EA to Microsoft’s success ? How important is Microsoft to
EA’s success ?
 What terms should close the dispute between Microsoft and EA ?
Case Introduction
Year 2004

EA has announced in May 2003, that it would online-enable its games only for
1 Sony’s PS2. Microsoft and EA had been at odds over this issue for 2 years

EA’s market share in in console software sales was almost double that of its
2 closest rival, Nintendo.

EA had moved aggressively into online gaming through EA.com where visitors
3 could play, chat with other gamers and access premium titles.

Mass-market adoption of subscription-based online gaming depended on the

4 penetration of broadband Internet connections. There was evidence of synergy
between gaming and high speed internet access.

There are 4 types of gaming online games and services: PC CD-based, MMOGs,
5 PC Web-based, Console-based

Video Gaming Industry structure consists of multiple players: Console makers,

6 Content providers, Software developers, software publishers, Retailers. Emerging
players: broadband Internet access providers and middleware providers
Is Microsoft’s Investment in XBOX justfied?

Cumulative
Cumulative Losses
Investment in New Market Potential
from XBOX
XBOX
Adoption Rate XBOX Live
$3 Bn $3.5 Bn 60%
55%
• Incremental revenues
through sales of gaming
50% software
50% 48%
45% • Network Effects play a
significant role in increase
40% the usage, adoption and
36%
sales of gaming software
31%
30% • Subscription revenue
Following the Blade and Razor Model 25% • Planned incremental
revenue from other media
20% and entertainment
• Hardware (console) is • Market Leaders have
provided at the lowest attained manufacturing 10%
possible efficiencies – and thus
• Profits are earned are able to generate 0%
through the profit on console sales 2000 2001 2002 2003 2004 2005 2006
incremental sales of • Sony wasn’t making
software profits in its previous  
gen console Adoption Rate =

Thus considering the future prospects of XBOX ecosystem, the investment in XBOX console is justified
The Razor-Razorblade model of Gaming consoles

Microsoft, Sony, and Nintendo sell(and should continue selling) the consoles at a breakeven price because
they intend to earn the cash flow from the sales of games.

Lifetime Profit per user calculations for PS2 Lifetime Profit/user of PS2  $150
Year 2003
PS2 installed base 60 million
Cross sided network effects encourages
Tie ratio* 12.8 units
lower priced consoles
Total games instances installed 768 million units
• Higher sales of consoles will lead to higher purchases
Revenue from the sales of the Games Using Exhibit 3 and Exhibit 8 of game instances.
Total Units Games Sold 5700000 units • These game instances would in turn generate
revenues for Microsoft, Sony.
Lifetime Profit 90781864 dollars • They should continue to sell the consoles at
Profit per unit sold(without console royalty) 25.93 dollars breakeven or even at a small loss as higher console
Console royalty 10 dollars sales could translate in higher profitability through
Weighted average profit** 11.59 Dollars game sales.
• In this case and other cases as well, platform adoption
Total lifetime profit from the users 8903.1662 million dollars is important as that helps in generating continuing
* Tie ratio at the end of the console life on 2005-06 profitability.
** Assuming that 5% of the games produced inhouse in Sony and remaining produced by other • A platform with larger userbase can orchestrate the
companies viz. EA. ecosystem of all the players in the respective market
and in this case, the Gaming market
Console based online gaming as a Mass Market phenomenon
The Console based online gaming is likely to become a mass market phenomenon with the evolution of video
games as a mainstream entertainment medium. It will be extremely benefited by the network effects
associated with the platforms based business models.

 The US online console gaming households is witnessing a steep upward trend, rising ~80% from
2005 to 2006

 ~75% of the Consoles are used by frequent gamers with age <35, ~38% under the age of 18, will Network effects are instrumental
continue to play games in the later years in this case as the value of the
network is dependent upon the
 The penetration of broadband Internet connections will lead to increased adoption of online gaming. number of players which can
Console makers had formed marketing and technology partnerships with broadband access play simultaneously through a
providers network of servers. A larger
online user base will improve the
 Synergy between gaming & high-speed internet access,55 mn broadband-enabled households customer’s willingness to pay
projected in 2007 and participate in the network
ultimately increasing the
 In 2002, U.S. Sales of console hardware was $3.4 bn, Sony and Microsoft were actively pursuing the
customer adoption rate for
market
consoles. The entire model will
complement each other with
 Microsoft had 500,000 Xbox Live subscribers in 2004, expected to rise to 10 mn following launch of
subscriptions providing
Xbox 2 in 2005, Sony had 1.5 mn active users, huge potential for customer adoption of Xbox
expected incremental revenue through
video game lifetime economics
 Video games were enjoyed by over 50% of Americans, spending average of 7-8 hours per week once a console is bought.
Managing Relationships with Third Parties
Microsoft
Advantages
• Closed model with clear division of
responsibilities
• Ensured consistent gaming experience
• Smaller developers could avoid investing in
online infra, middleware, and billing systems
• Allowed developers to easily incorporate
standard services like matchmaking
Disadvantages
• Rigidity caused controversy
• Heavy reliance of game developers on
Microsoft’s turnkey system
• Heavy reliance curtailed developer’s flexibility
• Developers forced to use Windows-based
development kits and application program
interfaces- this meant in many cases using
unfamiliar tools and omitting features that were
not supported by Microsoft
Flaw:
High rigidity leading to lack of customization
Sony
Advantages
• Open strategy that allowed developers to
create their own gaming networks
• Platform free for customers, sony earning only
through adopters
• Only requirement that games perform well
Disadvantages
• Customer relationships remained firmly in the
hands of game makers
• Game makers forced to assume the
substantial costs of bringing a game online,
including buying or renting servers, licensing
middleware and acquiring development tools.
• Small developers less likely to take above
stated risks.
• Customers had to create multiple login ids for
different games.
Flaw
Small game developers would incorporate huge
costs – servers, middlewares and other tools
How important is EA to Microsoft’s success?

High Importance

Network Effect Market Share

Exhibit 6: EA’s North American Market Share by Platform

EA’s Share in Microsoft's Xbox Games

18

EA was extremely important to Microsoft due to network effect. Presence/Absence of EA would have a significant
effect on number of users of Xbox

EA was the second largest player on Microsoft’s Xbox platform with 18% of the market share
How important is Microsoft to EA’s success?

Medium Importance

High Revenue Contribution Fast-paced growth in revenue contribution

Exhibit 5: Sales by Platform/Product Line

FY 2003 FY 2003 share FY 2002 FY 2002 share
Microsoft Xbox US$ 219.4 mn 8.8% US$ 78.4 mn 4.5%
Total Revenues US$ 2,482.2 mn 100% US$ 1,724.7 mn 100%

Microsoft proved to be the third largest revenue platform for EA, with revenue of US$ 219.4 mn in FY2003

Further, the revenue contribution of Microsoft was growing rapidly, nearly doubling on YoY basis to 8.8% in FY2003
What terms should close the dispute between Microsoft and EA ?

EA, being world’s largest video-game publishers, should not sign up for Xbox Live in its current form

Only if the below mentioned terms are met, EA should sign a contract with Microsoft and open-up its online
play for Xbox gamers

Revenue Use of Servers

• Microsoft should provide a portion of
revenues generated from Xbox Live to EA.
• This revenue-sharing arrangement is critical
for EA as it would incorporate additional
developmental costs associated with
Microsoft’s proprietary platform
• EA would be developing and maintaining
servers in-house due to Playstation
requirements.
• Microsoft should allow EA to utilize its own
servers
• EA would incorporate Microsoft’s gamertags
to provide consistent gameplay to players

Marketing Additional Revenue Streams

• The contract should have a clause of data-
sharing arrangement between Microsoft and
EA.
• This would allow EA to better adapt its
marketing efforts to lure gamers
• Microsoft would allow EA to utilize Xbox’s
platform to sell additional levels, character
models, character skins to gain additional
revenue which should be divided accordingly
between the two
Thank You