Question

7. How come the Sony Play Station has succeeded where 3DO failed?
8. What drove Microsoft’s decision to enter the industry with its X-box offering?
9. What lessons can be learnt from the history of the home video game industry that have been used to help launch the Sony PlayStation II and Microsoft’s X-Box? Do Microsoft and Sony appear to have learnt and applied these lessons?

Answer 1

1. Why has Sony PlayStation succeeded 3DO failed?

o In fall 1995, Sony released PlayStation, with a 32-bit RISC microprocessor running at 33 MHz and a double-speed CD-ROM drive. To attract independent game developers, such as EA, Namco, and Acclaim Entertainment, the head of the company, Olaf Olafsson, promised low royalty rates. The standard royalty rate was $9; however, developers that signed on earlier were given a lower rate.

o Sony also set up a retail channel separate from its consumer sales force. The PlayStation was marketed as a hip and powerful alternative to Nintendo and Sega systems. Sony set up in-store displays to allow potential customers to try the equipment. Just before the release of the system, Sony had 12,000 retail outlets in the United States. The targeted demographic was 18-to 35-year-old males; this was evident in their games. Tomb Raider’s, the company’s big hit, main character Lara Croft combined sex appeal with savvy and held recruit an older generation to play.

o The PlayStation was priced at $299, with games selling for $60. Sony’s Tokyo-based executives pushed for a price of closer to $400, but Olafsson, pushed for the lower price.

o Sony’s prelaunch of the PlayStation was compensated with strong early sales. By January 1996, over 800,000 systems and over 4 million games were sold in the United States. By May 1996, with over a million PlayStations sold, Sony dropped the price to $199. Sega responded with a similar price cut; however, retailers reported that PlayStation sales were by 350% and 1,000% from the previous week. The momentum of the industry was clearly running in Sony’s favor.

2. What drove Microsoft’s decision to enter the industry with its Xbox offering?

o Microsoft entered the home video game industry in the fall of 2001 with the Xbox. It led the competition with its 128-bit computing power. It had a 733 megahertz Pentium III processor, a high-powered graphics chip from Nvidia Corp, a built-in broadband cable modem to allow online game playing and high-speed Internet browsing, 64 megabytes of memory, CD and DVD drive, and an internal hard disk drive. The OS was a simpler version of Windows optimized for graph-processing capabilities. Microsoft and Bill Gates claimed that the Xbox was based on the familiar PC technology, so it would be easier for developers to create games.

o Microsoft’s entry to the industry was a response to the threat of Sony. The company was worried that Internet-ready consoles, such as the PlayStation II, might take over the web-browsing function from personal computers. In Microsoft’s mind, it was logical to enter the market to keep Sony and other companies in check. Annual revenues were as much as $20 billion worldwide in the home video game industry, so it made sense for Microsoft to join and try to grow. However, by moving away from its core market in personal computers, Microsoft was still making a big risk.

3. What lessons can be learned from the history of the home video game industry that were used to help launch the Sony PlayStation II and Microsoft’s Xbox? Do Microsoft and Sony appear to have learned and applied these lessons?

• One of the major lessons that can be learnt is to use a razor and razor blade strategy. A company should price the hardware of a system at cost and make money on the software of the system, especially if the company can control the price of the hardware.
• Demand is compelled by high performance that bring better game play to consumers. Demand is also driven by fantastic games. Both must be present for a company to be successful.
• The quality of games must be good. Protecting intellectual property rights can do this. Ensure approved third-party game developers can create games. Make sure creating games is easy for third-party developers and provide them with proper software tools.
• Both companies learnt these lessons well and continue to build on their products. Both Microsoft and Sony followed these lessons when creating and introducing their products.