Global Business Environment: Video Game Industry in the UK - Example

Global Business Environment: Video Game Industry in UK Executive Summary Over the past one decade, video games have become a significant part of the contemporary media and entertainment. Video games have evolved from devoted, single-game units to extensively multiplayer online role-player games with many players. The video games industry manufactures, publishes, develops, distributes and sells electronic gaming software, accessories and devices. United Kingdom’s video gaming industry is one of the best performing industry, having experienced growth for the past few years. It is estimated that almost everyone spends eleven hours per week on video games. The major players in the industry include Tiga and ELSPA. Some of the primary video game franchises developed in United Kingdom includes Tomb Raider, Grand Theft Auto, Wipeout, Dirt, and the Little Big Planet. In 2009, consumers spend more on video games than on films. A study carried out by the UK’s Daily Telegraph revealed that consumption of video games had preceded that of films, including both films on DVD and visits to the movie theatres (Wallop, 2009). Notably, an approximation of 1.74 billion pounds was spent on video games. Without any doubts, video games are a niche in United Kingdom. This report will show that, over the period between 2007 and 2012, the video gaming industry in United Kingdom experienced an upsurge. This report will also detail some of the major factors that contributed to the expansion and development of the industry within this period. The report will show that improved technologies, government regulation and demographics contributed to the trends observed in the video game industry. Trends in the Industry The video game industry is divided to two primary markets, the upstream and downstream markets. The upstream market is predominated by the development of software and manufacture of hardware. The hardware manufacturing involves four primary vendors: online, mobile, PC’s and Consoles. Within a period of 3 years from 2007, the market shares of online and mobile had grown to 26% and 24% while that of console dropped to 40%. Over the five year period, the console market was predominated by Sony, Nintendo and Microsoft (ESA, 2008). In 2007, Microsoft’s xbox360 was the industry’s leader with a high sales volume of 18 million units. Nintendo’s Wii was second with 17.8 million units sold and Sony’s PS3 with 10 million units (Pricewaterhouse Coopers, 2011). Software in the market is developed by independent developers and In-House developers. The downstream market involves the distribution of the software and hardware components. Publishers organize the distribution of software to retailers. Microsoft is one of the companies that had an in-house publisher by 2007 (Wallop, 2009). By the end of 2007, it was still the only company that incorporated hardware manufacture, software development and publishing. However, by 2009, the number of organizations that incorporated the three functions increased to five within United Kingdom. Some of the largest independent publishers within United Kingdom include Vivendi, Take-Two, and Ubisoft (Rosenberg, 2009). In 2009, the number of games consoles used in United Kingdom doubled to 25 million. In reference to Wallop (2009), this was an indication that the gaming industry had come of age and changed to a mainstream form of entertainment for millions of families rather than a niche for teenage boys. In 2007, the revenue obtained from the video gaming industry was 1.5 billion Britain pounds. This was higher than that of 2006 by 5%. This increased by 16% in 2009 to 1.74 billion pounds. The industry continued to perform well from 2009, competing with the film industry. This has made the industry the best performing in United Kingdom. In 2010, the video games industry was valued at 2.8 billion pounds. Though, in 2009, the video games industry performed well, there was a drop in the head count at video games studios by 4% while 15% of the video game development and publishing firms went out of business (Wallop, 2009). Initially, the gaming industry was a niche market that targeted the teenage boys and young men. From 2007 to 2012, the industry expanded to encompass children, parents, women, men and senior citizens who like to play mind and educational games. The major players in the industry in United Kingdom include Tesco, Morrisons, Play, Sainsbury’s, HMV, Asda, Apple, Microsoft, Sony, EA, Activision Blizzard, Nintendo, DeNA, Nexon, GAME, Disney and Konami (Richmond, 2009). By 2012, Amazon was the leading the video game company in United Kingdom. It had a market share of 23.4%, followed by Tesco with 13.2%, Apple with 11.3%, Asda with 10%, HMV with 8.3%, Sainsbury’s with 8.2%, GAME with 4%, Morrisons with 3.7%, play with 2.6% and the rest with 14.3%. Between 2011 and 2012, some of these companies experienced a decrease in their market shares and profits while others experienced an increase. For instance, HMV experienced a significant decrease in its market share when the number of consumers reduced by almost a half. By 2010, HMV was the second in market share with almost 16.8%, second to Amazon. This was a considerable drop that led to the closure of numerous HMV outlets and stores within the country. On the other hand, Amazon experienced considerable increase in its market share over the same period. In 2009, Amazon had a market share of 19%. Sainsbury’s is also another company that benefitted from the failures of HMV. Sainsbury’s benefitted from the closure of the many outlets and stores of HMV. During this same period, Play.com and Morrison’s also experienced decreases in their market shares. Play.com experienced a drop of 1.05% in its market share while Morrison’s experienced 0.7%. Another major change within this period was the establishment of the TIGA. TIGA was established to represent the country’s video games industry. The TIGA offers an extensive approach to the primary factors affecting the industry (Kingsley, 2012). The video game industry also underwent technological changes in two forms, through radical offerings, whereby new features were invented; and incremental offerings; whereby the existing features were enhanced. This changes occurred as companies were trying to compete with each other (ITU, 2011: 12). The primary factors that brought these trends within the industry were the developments in technologies, changes in demographics, increase in potential of consumers, and government regulations. Technology The advent of advanced technologies, such as the 3D polygon imagery, the use of the internet and display devices facilitated the growth of the video games industry. The expansion of the internet during this period considerably brought about growth to the sector on dedicated PCs and video game consoles. Additionally, mobile broadband and a developing penetration of smartphones brought further growth to the industry (ITU, 2011:16). This assisted many of the small start-up organizations to compete in the market and have access to a huge audience. Additionally, the development of social networks with platforms that support video games changed the video game industry. The lines of games produced by the numerous companies have considerably changed over the past few years with input devices, networking capabilities and graphic capabilities in order to enhance the gaming experience. Additionally, the mobile gaming developed in 2007 established a predominant section of the video gaming culture during this period. This commenced with single player games installed in basic mobile phones, and developed to games on feature phones bought through an SMS and later to the installation of games on smart phones (Haley, 2008: 34). The new smart phones have suitable graphics that can support almost any video game. Additionally, due to access to the internet, smart phone users can play video games online. By the beginning of 2011, mobile cellular subscriptions in United Kingdom stood at 20 million (Mitchell, 2012). By 2012, Apple and Nintendo revealed the gaming capable mp3 players, tablets, iPod touch, iPad and iPhone. In United Kingdom, Ofcom established that, by 2010 almost half of teenagers and a quarter of adults in UK owned a smart phone. On the other hand, almost a half of the homes in United Kingdom own a console (Mitchell, 2012). Technology has also assisted in digital distribution of video games. This is seen through the apple’s app store. This app allows people to purchase video game applications. This played a part in the increased subscriptions of video games in 2012 (Mitchell, 2012). Technology also played a part through the HTML5. HTML5 includes new multimedia and graphic attributes to the hypertext markup language that makes up the web. This offered a new paradigm to the video gaming industry. The HTML5 runs on any device that can support a web browser. In 2010, Google generated an HTML5 replica of Pac-man. Mafia Wars were also designed on the HTML5 platform. This new version of HTML influenced the way video games in the web appeared. From January 2010 to February 2011, the number of video games compatible to HTML5 propagated from 10 to 64% (ITU, 2011: 22). The advent of cloud computing was a great boost to the video game industry. Primarily, the huge triumph of video games played on the web particularly in the social networks necessitates the service providers to expand and control their computing power. In most cases, this was attained by the service providers during this period through a combination of cloud computing and data centers. Cloud computing brought a change to the way people played video games. Instead of purchasing DVD’s, cloud computing made it easy for users to subscribe to game-based service (Kingsley, 2012). The year 2010 brought a change to the video gaming industry through the advent of 3D displays. This was pioneered by the success of blockbuster movies such as the “Avatar” and “Tron: Legacy”. 3D allowed images to be represented separately to the left and right eye of the people. 3D has been integrated in smartphones, tablets and consoles. Nintendo launched its 3D console in 2011 with a 3.5 inch stereoscopic spectacle (ITU, 2011: 24). Social Factors Because of the huge technological developments within the video game industry and the rise of the use of the internet, the players are from distinct ages and geographical backgrounds. Notably, this has boosted the participation of female gamers. This is why half of the homesteads in United Kingdom own a console. The video games industry serves a broadening demographic. Though many have perceived video games as targeting young men and teenage boys, numerous researches have established that the average age of video game players has considerably increased. In 2010, the mean age of people playing video games was 36 years (Nielson, 2008). This increased from 29 in 2007. It is indisputable that the gamers in this industry are getting older. However, though the average age of gamers has gone up, this does not imply that the industry has lost or failed to capture its young gamers. Figures show that the industry has still continuously attracted and retained the young generation and attracted older people (Nielson, 2008). By 2012, there was no generation gap between the game players and the non-gamers. This gap had existed earlier where the video gaming industry had failed to attract the different age groups. By 2012, 49% of the game players were between the age of 18 and 49 while 25% were under 18 years of age while 26% of the gamers were above 50 years and above. A report by the Interactive Software Federation of Europe established that the gaming hours between the generations were almost similar with minimal disparities (ITU, 2011: 19). Additionally, the number of women gamers has increased over the years. Though the markets have skewed towards males; the number of women has considerably increased. In 2007, 39% of gamers were female while 61% were male. In 2008, the ratio of women increased to 42% and that of men was 58% (Lewis, 2012). The ratio of female players in the age of 18 is high. Studies have indicated that there are more women aged 35 years than men involved in playing video games. It is assumed that the number of adult women has increased over time since most of them want to break away from their daily routine and simultaneously gain mental simulation. The most common games played by adult women include matching games and puzzle games. Video gaming is also common among teenage girls who like to discover their future life through role-playing (Reddy, 2012). By role playing in the video games, the young girls can recognize the world around them and make them feel independent. Dress-up games, pet caring games and cooking games are some of the popular games among teenage girl gamers. Female players like to share their creativity with others and like linking with other females in order to show their colleagues that they have made it. In reference to ESA (2008), studies show that the ratio of female players to male players playing less than 5 hours in a week is 68% to 51% respectively. . The graph indicates that the number of female players has increased considerably and has been one of the factors that attributed to the increased use of video games. Female players have immensely contributed towards the growth of the video game industry. This is seen in the numerous studies that have been carried out on the consumers of video game industry in UK. On the other hand, the number of aged gamers is high. This is one of the aspects that facilitated the augmented growth of the industry, particularly in 2009 and 2010 (Curtis, 2013). One of the factors that have facilitated the increased growth of increased women in video games industry is the increased number of smart phones within the country. From 2009, the number of smart phones over the three years increased considerably, therefore, increasing the access to online video games. Economic Factors United Kingdom’s government has created a relatively stable macro environment where video games organizations and businesses can grow and prosper. In order to promote the video games industry, the government imposed a Games Tax Relief. The games relief tax was established under the film tax relief that was introduced in 2009. This tax relief is calculated and applied where a development firm will be eligible for an added deduction in calculating their taxable profits equivalent to the United Kingdom’s costs sustained in developing a game (HM Revenue and Customs, 2010). The development firm would also be eligible for a tax credit aggregated on the amount of the reduction, which would either be set off against the revenue from the game (Henderson, 2012). The games tax relief has three levels of advantages: first, 20% of primary costs for budgets over £6, 000, 000, 25% for budgets above £3,000, 000 but below £6, 000, 000, and 30% for budgets above £100, 000 but less than £3,000, 000. The three tax benefits were tailored to replicate average production budgets of video games on distinct video games platforms and congruently distinct firm sizes. However, for a firm to be eligible for tax relief, its video games required to pass a cultural test, grading against the European heritage, languages, narrative, innovation and the location of development (Henderson, 2012). Initially, other overseas governments supported video games development in their nations, and this created an uneven business environment which made it challenging for United Kingdom’s game developers to compete. Some of the primary competitors such as France, Canada, South Africa, Korea, China and Australia receive state tax breaks for development of games. For instance, Canada offers a 5 year income tax holidays for overseas experts and pay 37.5% of game firm’s salaries for five years. This had made it difficult for the UK video game developers to compete internationally and grow. Additionally, this led to the establishment of TIGA, a trade association for video games industry, which agitated for a fair trading environment for video game firms. However, the Games Tax relief allowed the video game firms and developers within UK to compete through making the playing ground even (Henderson, 2012). Though, in 2009, the video games industry performed well, there was a drop in the head count at video games studios by 4% while 15% of the video game development and publishing firms went out of business (Kingsley, 2012). With the introduction of the games relief tax, there was an improved business environment and numerous companies came to the operation in 2010 and also reduced brain drain, where experts had opted to go work in foreign companies. Additionally, the high corporation tax imposed on UK businesses contributed to the low growth in 2007 and the exit of 44 video game firms. This also reduced direct foreign investments in the video games industry as compared to Canada that attracted a 20% expansion in its video game industry from foreign direct investments (Kingsley, 2012). In United Kingdom, the total value of the revenue attained from PC and console was 39.6 billion pounds; from online were 37.6 billion pounds, and 11.8 billion from smart phone games. Additionally, numerous companies experienced decreased sales and profits due to the economic recession that took place on 2009. This resulted to a decrease in the purchasing power of the consumers thus reducing the sales made by the companies. This accounts for the decrease in the profits made by HMV, Play.com and Morrison’s. This resulted to the decrease in the market shares of the companies in the video games industry within the country. This is seen in the point shown by the reduction in market share of Play.com by 1.05% and Morrison’s by 0.7%. Conclusion Video gaming is an international phenomenon, a fast developing multibillion dollar sector that cuts across all gender and age groups. Over the years, the video game industry in United Kingdom has experienced numerous changes and developments. The most notable change to the industry was in 2009 when the industry attained high sales that surpassed the film industry. This growth was as a result of the increase in the age groups using video games and increase in female users, and development of new technologies. Video games can be played on a smart phone and online and; therefore, a person does not need a console to play a video game. However, the industry also experienced exit of some firms due to the high corporate tax and lack of games tax relief. The government imposed a tax relief that saw an increase in investments in video games industry and its growth in 2009 and 2010. Technology also was an imperative aspect in the changes that took place in the industry. Notably, the progressive development of technology resulted to the development of social networks that have assisted people to connect. Facebook is the most active social network that has continued to reinvent with new services and applications. Furthermore, the development of smartphones and mobile phones that can support internet made Facebook and other social networks accessible. Facebook opened up a platform to external developers of games that can be played in social media. By 2009, gaming in social network became popular and fashionable, and approximately 25 percent of people in United Kingdom played a game in the social media that year (ITU, 2011:18). Conversely, the internet eased the development of massively multiplayer online games. These games support hundreds of players that can play simultaneously. The games can be played on the internet while the users use their mobile phones, PC’s and consoles. The multiplayer online games allow players from distinct parts of the nation to compete and connect. The video games industry is anticipated to expand in the 5 years preceding 2012. References Curtis, S. (2013, November 25). Women gamers aged over 35 outnumber men - Telegraph. Retrieved March 19, 2014, from http://www.telegraph.co.uk/technology/video-games/10472696/Women-gamers-aged-over-35-outnumber-men.html ESA. (2008). Essential Facts About The Computer and Video Game Industry 2008. 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