Video Console Supply Chain
Console
Hardware
Marketing
Software
Retail and Distribution
Chain Diagram
Sale Figures by Origin
For all of its maturity, Japanese companies have
dominated the video console industry. The Big Three
console producers are Sony #1, Nintendo #2 and Sega
#3, and without a doubt, these three companies are
the main drivers of the industry. All the power is
located here, as they have the resources and capital
to license software developers, launch expensive marketing
campaigns and hire third party manufacturers to create
their line of products under their name. 
The locus of control for console
development is in Japan
Console Hardware
Sony, Nintendo and Sega have all contracted with
outside manufacturers, sometimes Japanese and sometimes
from other countries, to product parts for their consoles.
When Microsoft enters the market, there will be a
shift in the supply chain away from Japan and towards
the US. However, the significance of this shift may
depend on the success of the X-Box itself, as some
indicate that it will be difficult to have 4 successful
consoles in one market.
The main parts of the video console are the CPU,
the processing chip, memory, the graphics chip, storage
media, and peripherals (modem, ethernet, controllers,
etc.) For example, Sony is designing their 128-bit
CPU in conjunction with Toshiba. The Sega Dreamcast
CPU was developed with Hitachi, and its GPU is produced
by NEC's VideoLogic. One of Dreamcast's operating
system, Windows CE, is developed by--interesting enough--Microsoft.
VideoLogic's PowerVR2
technology is the graphics chipset powering Sega's
Dreamcast and is a testament to the industry's increasingly
modular character
They are also building fabrication facilities (called
fabs) to make their 300-Mhz MIPS processing chip.
On one hand, Sega has hired Imagination Technology
PLC to produce their PowerVR chipset for the Dreamcast;
Nintendo, on the other hand, has a customized 400-MHz
PowerPC processing chip that is being supplied IBM
Corp. The new Microsoft X-Box console will feature
a 600-MHz Intel Pentium II chip.
Microsoft has also hired Nvidia to produce a graphics
chip called NV25, which can transform 300 million
micropolygons per second. Nintendo Dolphin will feature
a graphic chip made by NEC Corp., who have built a
new facility on Kyushu (a southern Japanese island)
for the production of this chip. It will also feature
a 200-Mhz DRAM embedded graphic chip by ArtX Inc.,
and 1-transistor SRAM technology by Mosys Inc.
nVidia will be providing the guts
to the Microsoft X-Box
Nintendo has hired Matsushita Electric Industrial
Co. Ltd. To provide DVD technology for their Dolphin
console. Microsoft will collaborate on their DVD-ROM
drive with Dolby Digital and DirectX. All of the other
consoles of this generation of video games, whether
they feature CD-ROM or cartridge storage media, have
also contracted outside manufacturing and development
companies.
The trend in the manufacturing and development process
is to hire big name companies to source the major
parts of the console, companies with experience and
reliability. Defective consoles that feature bugs
will be slaughtered by the media.
Marketing
On a related note, the one segment of the supply
chain that can rival technological development is
marketing. Marketing is the force that creates markets
and creates demand for the consoles, and there is
a direct correlation between the strength of the marketing
push and the total sales. All of the major players
in the console industry feature their own expansive
marketing departments.
Software
The video console industry is closely tied to the
software industry, who are contracted to develop games
for the individual console companies. They follow
two separate supply chains which will finally be consumed
simultaneously by the final customer.
Zelda 64, widely heralded by critics
as the best game of the millenium
The standard business model is to control the manufacturing
of software titles for the respective video consoles,
which means license fees and licensing agreements
for software developers. Some of the more successful
software developers have been Midway Games, Acclaim
Entertainment, Electronic Arts (EA Sports) and id
Software. In the case of Nintendo, however, they also
are a leading maker of game software such as the bestsellers
Super Mario Brothers and The Legend of Zelda.
As soon as a game's concepts have been mapped in
the form of a design manual, a development team is
assembled and the specific parts of the game's creation
allocated to different specialized workers. Along
the way, an extensive marketing effort may be launched
and in some cases, there can be feedback during the
developmental stages.
d
Computer graphic
intensive games such as Final Fantasy 8 for the Playstation
feature movie-like budgets; Final Fantasy 8 costed
over $20 million to develop
Video games can take anywhere between 18 months to
develop a typical game to 3 years for massive undertakings
like SquareSoft's Final Fantasy VII. Funding will
be provided either by internal resources or from the
publishers or distributors of the game. Since the
software developer does not handle manufacturing or
distribution, it receives a percentage royalty on
the wholesale price of sales (usually 20%-30%).
Publishers are responsible for the manufacturing
and distribution of the software titles, and some
maintain distribution departments or companies that
will handle distribution internally.
Retail and Distribution
Generally, the distribution channel for the video
games industry includes retail chains like malls and
department stores, specialty stores, mail order, discount
stores (especially for software) and the Internet.
Oftentimes, the battle for limited shelf-space is
what keeps prices competitive.
Retailers such as Electronics Boutique,
a national chain,
are pursuing an online
and "bricks and mortar" strategy
Online distribution of games and consoles allow companies
to bypass the retailer and distributor, so that they
can lower selling prices of their products and increase
their margins. An automated ordering process allows
both cost-savings through lower overheads and efficiency
enhancements by stripping out manual processing, which
in turn can lead to more competitive pricing and a
better quality of service. Therefore, as long as retailers
are not involved in the content or creation process
of software or consoles, their role within the supply
chain will continue to diminish.
Chain Diagram
Sale Figures by Origin
Because none of the console hardware marketed and
sold in the United States is actually produced domestically,
it may be of interest to note the breakdown the originating
nations of import hardware sales figures (from the
International Trade Commission website).
|
Country
|
1992
|
1994
|
1996
|
1998
|
1999
|
|
In
1,000 Dollars
|
|
Japan
|
780,890
|
873,963
|
350,580
|
786,835
|
523,797
|
|
China
|
17,769
|
82,548
|
77,200
|
294,191
|
206,672
|
|
United
Kingdom
|
1,791
|
2,378
|
12,307
|
36,421
|
38,272
|
|
Korea
|
1,790
|
1,455
|
731
|
22,831
|
31,469
|
|
Taiwan
|
32,765
|
29,802
|
13,082
|
7,661
|
11,379
|
|
Mexico
|
7
|
6,385
|
83,538
|
11,896
|
7,693
|
|
Hong
Kong
|
17,030
|
5,990
|
3,745
|
6,041
|
3,445
|
| Sub
Total |
852,042
|
1,002,521
|
541,183
|
1,165,876
|
822,727
|
| All
Others |
1,270
|
12,970
|
23,906
|
5,813
|
7,621
|
| Total |
853,312
|
1,015,491
|
565,089
|
1,171,689
|
830,349
|
As evinced from the above, Japan is consistently
the top assemblor of console hardware (console parts
are manufactured all over the world) although China
and Korea have exhibited aggressive growth the past
few years. To
view exports from Japan from 1994-1995 as a chart,
click here.
Even though Japan is the center of hardware development,
it is clear from the above chart that the biggest
markets lay not in Japan but in the U.S. followed
by Europe.
