Essay About Japanese Video Game Publisher And Japanese Game Developers

Microsoft Xbox Case Study
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This mini-case was prepared by John Greco (T02–MBA Fellow, Center for Digital Strategies) of the Tuck
School of Business at Dartmouth under the supervision of Visiting Assistant Professor Melissa M. Appleyard. It
was written as a basis for class discussion and not to illustrate effective or ineffective management practices. The
authors gratefully acknowledge the support of the Glassmeyer/McNamee Center for Digital Strategies, which
funded the development of this case. CDS Case #02013. Version: March, 2002.
© 2001 Trustees of Dartmouth College. All rights reserved. For permission to reprint, contact the Center for
Digital Strategies at 603-646-0899.
Case #6-0011
Microsofts Xbox Gamble
The meeting between Microsoft and Capcom, a Japanese video game publisher, was
going poorly. One of the Japanese game developers at the table in Capcoms Tokyo
headquarters said, “We know the philosophy of Nintendo. Game is toy. We know the
philosophy of Sony. Game is entertainment. What is Microsofts philosophy?” Kevin
Bachus, who was then director of third-party relations for Microsofts Xbox console,
replied, “Game is art.”
–Red Herring “The Game of War” 1
In the fall of 2001, Microsoft found itself in the unusual position of being a late entrant in an
unfamiliar market as it prepared to release its Xbox console. Microsofts Xbox would
compete head to head with the latest generation offerings from Nintendo and Sony.
Questions abounded as the new console faced an uncertain economy and strong competition.
Would the market accept the new platform that offered higher performance but at a higher
price than the competition? Could Xbox attract enough well-known game titles to make
consumers choose it over the competition? Could the market support three players? How
would the gaming market evolve over time, and would it accommodate a broader strategy
that extended beyond video games? As Microsoft prepared to launch the box, the company
anticipated absorbing $2 billion in losses before attaining profitability.2 The market waited
eagerly to see the results of the battle that promised to shake up the video game industry and
possibly markets beyond.
Genesis of the Gaming Industry
Video games sprang from the imaginations of scientists in research labs in the late 1940s and
did not reach the mainstream until arcade games became popular in the early 1970s. After
1 Red Herring; The Game of War, Dean Takahashi, October 15, 2001
2 The Economist; Extending Its Tentacles, London, October 20, 2001; Vol 361 Issue 8244
Tuck School of Business at Dartmouth–Glassmeyer/McNamee Center for Digital Strategies 2
no. 6-0011
being rebuffed by larger arcade providers, a new start-up named Atari marketed its first
video game, a simple table tennis game known as Pong, to restaurants and bars. By 1972
people wanted to play these games at home and Magnavox began selling the Odyssey, a
system that included several hardwired games and had no provisions for expandability.
Although cumbersome to use, as it required screen overlays to play the game, nonetheless
Magnavox sold 100,000 units in Odysseys first year on the market.
A number of firms, including Atari, Bally, Coleco, and Fairchild Camera & Instrument
quickly rushed to compete with Magnavox by offering their own games that attached to the
television set. This early stage of the TV-based video game industry, with single-game
product offerings that were at best clumsy consoles with rudimentary two-dimensional
effects, was characterized by a fragmented industry structure.
In 1977, however, Atari again unleashed a new era in the industry. Atari introduced the first
programmable home video game, the Video Computer System–later known as the Atari
2600. (See Exhibit 1 for a complete timeline of the industry.) The concept of
programmability meant that the home video market could capitalize on the growing craze in
arcade games by packaging them for home use. Users purchased cartridges with the game
program burned into memory and inserted them into a slot on the console. The console was
no longer constrained to playing only the games provided at the time of console purchase. It
could adapt to gamers tastes and play the home versions of the latest arcade games.
Atari Gains Market Power
Once programmability became the established model, the home video game market took
flight and the field of competitors narrowed considerably. By 1981 Atari held 67% of the
4.55 million unit video game market reaching $3 billion in annual sales.3 Atari owed much
of its success to its knack for licensing popular arcade titles such as “Space Invaders” and
porting them to the 2600 unit. As evidence of the popularity of “Space Invaders” in the