Evolution of the Xbox Supply Chain GS-49 p. 2

THE VIDEOGAME MARKET

In 2005, the global market for video games was approximately $27 billion, consisting of $6.7 billion in console sales, and $20 billion of software (games) (Exhibit 1). Sony dominated the market, with cumulative sales through December 2004 of 102.5 million PlayStation 1 (PS1) consoles and 87.5 million PlayStation 2 (PS2) consoles. Microsoft had sold 19.9 million Xbox consoles, slightly more than Nintendo had sold of its GameCube (Exhibit 2). Of the current

Evolution of the Xbox Supply Chain GS-49 p. 2

generation systems, which used 128-bit technology, (PS2, Xbox, and GameCube), Sony had 67 percent share, Microsoft had 17 percent, and Nintendo 16 percent.2

Several factors contributed to Sonyís dominance in late 2005. By the time the first Xbox was released, Sony had gained a substantial head start. Not only was the PS2 available 12 months before the Xbox in the U.S., the PS1 was also well established. As a result, there was a substantial number of games available for the Sony consoles, compared with those ready when the Xbox was released. In addition to confronting Sonyís substantial brand presence, the design of the Xbox had faced resistance in markets such as Japan, where users criticized it as unattractive and considered the game controller as too large.3 (The Xbox share in Japan was less than 1 percent, dramatically less than its share worldwide.)

Microsoft hoped to overcome these problems with the Xbox 360. After four years in the market, the company had established a presence, and was no longer a newcomer. Microsoft enlisted a number of top game design firms to develop games for the new product. It had used an outside design firm to create an attractive look for the product. Microsoft also expected that subscriptions to Xbox Live, a Web service in which users could download games and participate in online games, would be a highly profitable business, as many customers now had broadband Web connections. And, it was going to be the first to market with the next generation game consoleóperhaps by a substantial margin.