Video games production networks: value capture, power ... - CiteSeerX

Journal of Economic Geography Advance Access published June 22, 2005 Journal of Economic Geography (2005) Page 1 of 30

doi:10.1093/jeg/lbi001

Video games production networks: value capture, power relations and embeddedness Jennifer Johns*

Abstract This paper has two main aims. Firstly to conceptualize the production networks of the video games industry through an examination of its evolution into a multi-million dollar industry. Secondly, to use the video games industry to demonstrate the utility of Global Production Network approaches to understanding the geographically uneven impacts of globalization processes. In particular, three key notions of value, power and embeddedness are used to reveal the most powerful actors in the production network, how they maintain and exercise their power, and how the organization of production is manipulated as a result. It is argued that while hardware production is organized by console manufacturers using truly global sourcing strategies, the production of software is far more complex. In fact, software production networks are bounded within three major economic regions: Western Europe, North America and Asia Pacific. This paper seeks to explain how and why this has occurred. Keywords: video games, global production networks, value, power, embeddedness JEL classifications: L14, L23, L82 Date submitted: 4 October 2004 Date accepted: 12 April 2005

1. Introduction The video games industry1 was born during the early 1960s and has rapidly, and almost continuously, grown in size and scope ever since. It is estimated that the industry was worth around $23.2 billion in 2003, and is predicted to reach $33.4 billion in 2008 (DFC Intelligence, 2004). Despite now being comparable in size to the global film industry, and having a pervasive impact upon popular culture, the video games industry has received relatively little attention from social scientists. With the exception of a few studies, such as Aoyama and Izushi’s (2003) discussion of the cultural foundations of the Japanese video games industry and Tobin’s (2004) examination of the Poke´mon2

* Geography, School of Environment and Development, University of Manchester, Oxford Road, Manchester M13 9PL, UK. email 1 Throughout this paper, the term ‘video games’ will be used to describe games played using a console linked to a television or on a hand-held device, rather than PC games (played on a personal computer). 2 Poke´mon began life as a Nintendo Game Boy game, but between 1996 and 2001 came to dominate children’s entertainment consumption across the globe. Poke´mon is the most successful computer game ever made, leading to the production of a range of inter-related products such as trading-cards, television programmes and films.

# The Author (2005). Published by Oxford University Press. All rights reserved. For Permissions, please email: [email protected]

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phenomenon, research into the video games industry has tended to focus upon the psychological impacts of games (see Bensley and Van Eenwyk, 2001 for a review), concerned with debating whether video games encourage aggressive behaviour. Other publications include more journalistic chronologies of the industry (such as Sheff, 1993; Poole, 2000; Kent, 2001; King, 2002; Demaria and Wilson, 2004), which reflect the growing influence of this particular form of cultural product, and widespread frustration at the lack of academic examination of the industry. Poole (2000, 24) states that: ‘videogames are not going to go away. You can’t hide under the stairs. Resistance is futile. Any industry with such a vast amount of money sloshing around in it is by that token alone worthy of investigation’. Poole’s statement alludes to the prevailing and widely-held view of video games as a niche industry, developing products for a minority group of ‘computer geeks’, denying both the size and cultural impact of the industry. Indeed, there is little academic attention paid to the organizational structure of the video games industry, or its geographies. While some studies have been conducted on particular video game markets or products (see e.g. Cornford et al., 2000; Williams, 2002; Herz, 1997; Takahashi, 2002), the interconnections between the firms within and across particular markets that constitute the industry have not been observed or conceptualized. However, research into other cultural industries by social scientists have increased over recent years (e.g. Basset et al., 2002; Bathelt, 2002; Coe, 2000; Coe and Johns, 2004; Grabher, 2001; Leyshon, 2001, 2003; Scott, 2000a). Indeed, Pratt (1997) has developed the concept of a cultural industries production system, arguing that the high degree of interconnection between these industries demands a broader systematic approach to their study and conceptualization. While this paper seeks to examine specifically the structure and nature of the video games industry, it is important to place such observations within the broader context of cultural production. Theoretical claims of a new era, or ‘network society’ (Castells, 1996) have been made in which economic organization is increasingly dependent upon flows of knowledge and ‘cultural industries’ are often heralded as emblematic of the resulting changes in the organization of production and working practices. Inherently connected to this argument are the claims by some commentators that new media will create a ‘new economy’ with new rules of business practice and economic rationale (Kelly, 1998). As a result, discussion of cultural industries have tended to be framed within the suggestion that such industries are drivers of broader economic and technological changes, and therefore themselves are different in their organizational structure and geographies. For example, economists have developed the notion of ‘weightless economies’ (Cairncross, 1998; Coyle, 1998; Quah, 1999) in which they point to the possibilities of the cost-free reproduction and distribution of e-goods such as software. In these ‘weightless economies’ the importance of geography is greatly diminished, as the role of physical location is no longer relevant. Indeed, all actors in the production of such goods, including producers and consumers, are freed from limits of location. However, Pratt (2000, 427) has argued that the weightless economy is in fact embedded in the ‘world of atoms and people’. This is supported by the work of Scott (1997, 1999, 2000a, 2000b, 2001) on several cultural industries, who claims that there is a symbiotic relationship between place, culture and economy. For him, cultural industries are inherently place-based in their nature, resulting in the agglomeration of production in cities. Indeed, the majority of work by social scientists on cultural industries is empirically conducted in localized centres of production, which runs the danger of over-privileging

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the importance of local institutional and organizational network relations. This paper aims to find a balance between this territorial dichotomy by questioning the claim of ‘placeless’ production and distribution of new media through the example of video games. In today’s increasingly interconnected global economy, conceptualizing the organization of economic activity involves the consideration of many actors operating in ever more complex environments. Social scientists, and economic geographers in particular, have sought to develop frameworks allowing the nature and extent of ‘globalization’ to be measured and understood, with a focus on the rapidly increasing size and territorial extent of transnational corporations, their networks, and their impact on local and regional development across the globe. The 1990s witnessed a range of conceptualizations of the organization of production using chains or networks, including the ‘value chain’ (Porter, 1990), the ‘production chain’ (Dicken, 1990), the ‘global commodity chain’ (Gereffi, 1994, 1996) and ‘actor-network theory’ (Callon, 1991, 1992; Latour, 1999; Law, 1999). Drawing upon this work, the ‘global production network’ approach (Henderson et al., 2002; Coe et al., 2004) aims to understand the connections between ‘globalizing’ processes, as embodied in the production networks of transnational corporations and regional development in specific territorial formations. For Coe et al. (2004, 468) such a framework is required to bridge the gap between current work on regional development (emphasizing local institutional structures and their capacity to ‘hold down’ the global) and work on inter-firm networks, highlighting the significance of the organizational structures of global firms’ production systems. They define global production networks as ‘the globally organized nexus of interconnected functions and operations by firms and non-firm institutions through which goods and services are produced and distributed’ (Coe et al., 2004, 471). The GPN framework has three key elements: how value is created, enhanced and captured, how power is created and maintained within the production network, and how agents and structures are embedded in particular territories. These form the central tenets of the empirical examination of particular production networks, facilitating understanding of their structure, nature and form. This article argues that the GPN approach can be used to examine the video games industry, allowing its production network to be conceptualized and important observations about its evolution to be revealed. The article begins with an outline of the research methodology used in this research, before the section on the video games industry which provides a conceptualization of the video games production network, arguing that hardware and software production are interconnected but benefit from separate empirical examination. Section 4 discusses hardware production, using empirical observations to examine the global sourcing strategies of the console manufacturers and the shifting geographies of this production. Section 5 of this paper examines the production of video games software using the three key conceptual elements of the GPN approach; examining how and where value is captured in the production network, the exercising of power and temporal and geographical unevenness of actors, and the embeddedness of the video games production network. It is argued that while hardware production is conducted at the global scale, software production tends to operate within three supra-regional contexts. Finally, section 6 will examine the current, and potential, impacts of changes in technology that are enabling online distribution of games, with an outline of how this will influence the evolution of the video games production network.

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2. Researching video games production: the methodological approach This article aims to examine the structure and dynamics of the video games industry, drawing upon both secondary data and in-depth interviews conducted with company executives in Europe and Asia. This research was conducted as part of a larger ESRCfunded research programme ‘Making the connections: Global Production Networks in Europe and East Asia’, which explored connections within and between Europe and East Asia in three sectors: auto components, telecommunications and retailing. The project methodology used the technique of theoretical sampling to identify several key players in each sector, forming points of entry to different production networks. The video games industry came to be examined through the selection of a console manufacturer as a target firm in the telecommunications sector. The primary research into the video games industry began with interviews with the console manufacturer, allowing its production network to be followed through identifying its major suppliers. In order to conceptualize the video games production network, the objective of the interviews was to explore the qualitative nature of intra-, inter- and extra-firm network relations across each stage of the production process. As the supply chain of the selected console manufacturer was followed, the research naturally extended to consideration of other hardware manufacturers and software producers. This primary data collection was enriched with substantial secondary information collected from sector-specific publications, and firm-specific data obtained from company reports, publications and websites. Table 1 details the sixteen interviews conducted during 2002. The exact location of interviews has been included, but is not truly representative of the geographical coverage of the research as all interviews were conducted with senior executives in firms operating at the European, Asian or global scale. Each interview lasted between 1 and 2 hours, covering a range of semi-structured interview topics including the nature of the firm’s operations, its supply network and relationship with other actors and more general observations on the nature of video games industry. All interviews were tape recorded and subsequently transcribed to allow qualitative analysis. This rich interview data was then combined with secondary information to allow the video games production network to be conceptualized and subsequent discussion of value, power and embeddedness facilitated. The quotations used in this paper are intended as illustrations of a particular moment in the history of the video games production network. Each quotation has been fully anonymised according to the confidentiality agreement reached with interviewees during this research.

3. Evolution of the video games industry: towards a conceptualization The history of the video games industry begins in 1961 with the creation of the first interactive computer game, Spacewar by MIT student Steve Russell. The game performed a diagnostic function and was used to demonstrate the ability and accessibility of computers. By the 1970s games had become established as ‘traditional’ and legitimate programs (Haddon, 1999). Since then, two trends have emerged. First, the video games industry is highly dependent upon technological innovation, both from within

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Table 1. In-depth interviews by production stage, location and date Firm production stage* Console manufacturer Hardware (OEM) manufacturer Hardware (OEM) manufacturer

Interviewee position

European Planning Manager Managing Director Plant Manager, Purchasing Manager, Quality Manager Hardware components manufacturer President Hardware components manufacturer President Hardware components manufacturer President Publisher and developer Head of Games Development Publisher and developer Director of Strategic Planning Publisher and developer Commercial Director—Eastern Europe Publisher and developer Sales Director Publisher and developer Managing Director Publisher and developer Corporate Development Director Publisher and developer Product Manager Publisher and developer Marketing Director Publisher and developer Director Publisher Operations Manager Developer Managing Director Developer Managing Director

Location

Date

UK February 2002 Malaysia April 2002 Czech Republic May 2002 Japan Taiwan Japan UK UK UK

February 2002 February 2002 February 2002 February 2002 March 2002 March 2002

UK UK UK Czech Republic Poland Poland UK UK Japan

May 2002 September 2002 September 2002 May 2002 July 2002 July 2002 March 2002 June 2002 June 2002

*Where firms are operating in more than one production stage, all are listed, i.e. ‘publisher and developer’. However, when quotes from these interviews are cited later in the paper, the activity to which they are referring is used as the prime description of the firm, i.e. ‘developer’.

and outside the industry. There is a strong relationship between the video games and electronics industries, with the latter traditionally driving innovation and change in the former.3 From 1975 onwards, semiconductor companies (e.g. Fairchild and National Semi-Conductor) looked to games machines as an ideal application for their new technology, which had a profound effect upon the production organization of video games. ‘Programmable machines, or consoles, created a flexible division between hardware and software. Thus, a distinct software industry could emerge once video games cartridge manufacturers could sell games separately from the hardware they were played on. Games machines were now potentially “software players” like hi-fis and other home-based “delivery systems”. Games software could be bought, collected and compared in the same way as records’ (Haddon, 1999, 310). The creation of an interconnected, but autonomous, software industry would eventually allow firms to enter the video games production system concentrating upon one particular function, such as game developing or publishing. However, during its earlier stages the industry was not big enough to support vertical disintegration. The late 1970s and early 1980s saw a high turnover of firms entering markets across the globe, attempting to dominate hardware production. But competition was intense and many firms went bankrupt. Nevertheless, hardware and software sales remained at high enough levels to support the fewer companies still operating in the market (Haddon, 1999),

3

Over recent years, the video games industry has been driving innovation in product design and production through demand for higher performance and lower costs.




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50 45

Atari Systems

40

8-bit (Nintendo NES, Sega Master System)

Units (millions)

35

16-bit (Sega Megadrive/Genesis, Nintendo SNES, Panasonic 3DO)

30 25

32/64-bit (Sony PlayStation, Nintendo 64, Sega Saturn)

20 15

128-bit (Sony PlayStation2, Microsoft Xbox, Nintendo Gamecube, Sega Dreamcast

10 5

19

19

80 82

19 84 19 86 19 88 19 90 19 92 19 94 19 96 19 98 20 00 20 02 20 04 20 06

0

Year

Figure 1.

Unit sales of game console by type, 1980–2006.

Source: The Economist (2002: Figure 2).

and the predicted failure of gaming did not occur. Since this time, technological developments, particularly those in the semiconductor industry, have driven the evolution of the video games industry. As a result, the games business goes through a cycle every 5–6 years, as one generation of consoles succeeds another (see Figure 1). As Figure 1 shows, as a new generation of consoles emerges, a boom in sales results during which intense competition takes place between the hardware manufacturers, with one producer dominating sales after a relatively short time. In the first cycle, the dominant hardware manufacturer was Atari, with 80% of its home US market (Haddon, 1999), later followed by Nintendo’s success during the late 1980s and early 1990s. Of crucial importance to the hardware manufacturers is the supply of software, which is now provided by developers and publishers. These developers tend to take a couple of years to develop new generation software which, when released, intensifies the boom in hardware sales. The decline of Atari4 is often blamed on too much poorquality software being available, which resulted in Nintendo taking tight control over the publishing of software for both the Nintendo Entertainment System (NES) and Super Nintendo Entertainment System (SNES). Nintendo, and later their main rival Sega, both used cartridge technology to prevent copying, as developers were forced to pay the hardware producers to manufacture their cartridges. This practice was seen as

4

The Atari brand still exists and was recently acquired by Infogrames.

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Table 2. Total estimated console sales by region, 2004 (millions) Console PlayStation 2 (PS2) GameCube (GC) Xbox (XBX) Total Hand-held Console GameBoy Advance GameBoy Advance SP Total Consoles

Europe/PAL*

Japan

N. America

Total

19.40 1.95 2.20 23.55

14.17 2.47 0.40 17.04

19.00 4.60 5.80 29.40

52.57 9.02 8.40 69.99

7.92 0.46 31.93

9.24 0.82 27.10

14.54 2.30 46.24

31.70 3.58 105.27

*The PAL territories are defined as Europe, the Middle East, Africa, Oceania and parts of Latin America.

unfair by the software developers,5 but Nintendo and Sega were effectively seeking to retain control over the production of software for their consoles, and crucially, to take a proportion of revenue generated by its sale. Booms in the sales of both hardware and software are subsequently followed by lulls, as consumers anticipate the launch of the next generation machines. In the mid 1990s these were the Sony PlayStation, Nintendo 64 and Sega Saturn, offering 32- or 64-bit consoles, and in the case of Sony and Sega using CD-ROM storage. These consoles required new levels of investment, and as a result, higher risk. The intense competition between manufacturers is decided by the consumer based on a number of factors: the price of the console, the availability and quality of software, the quality of graphics and game-play, and marketing and peer review. In addition, enormous competitive advantage seems to be gained by being the first of the next generation of console to launch, which has been the case with both the Sony PlayStation and PlayStation2. As with many other cultural industries, demand in the video games industry is difficult to estimate and the highly competitive, volatile and risky environment results which directly impacts upon the structure and evolution of GPNs. The video games industry has a history which accelerates from small firms, maybe even individuals programming software in their bedrooms, producing for a highly niche market, to an industry dominated by multinational hardware producers. Table 2 shows that over 100 million 128-bit consoles and hand-held gaming devices have been sold across the world to date. Video game GPNs have evolved greatly during this time, producing shifting geographies and changing power relationships between actors. In order to understand how these relations are structured and organized over space, it is first necessary to conceptualize the video games production network. Here it is argued that a holistic perspective must be taken of the study of particular industries to counter undue focus upon the production stage per se. Here, therefore, the video games industry is divided into seven key stages of production, beginning with financing and ending with consumption (see Figure 2). This conceptualization should not be viewed in isolation as a great number of other production networks are intimately connected to that of video games production. These include inputs

5

This practice was investigated by the Monopolies and Mergers Commission in the UK (1995), which concluded that neither firm was acting against the public interest.

Figure 2.

SOFTWARE

Specification sheets

Genres

Budgets

Markets

Design

Planning

DEVELOPMENT

R&D

Sound

Graphics (3D)

Artwork (2D)

Music

Component assembly

Programming

Testing & debugging

PRODUCTION

Peripherals

Processing units: CPU Sound Graphics Input/Output

PUBLISHING

TIME

Localisation

Final version

The seven stages and inputs of the video games production network.

FINANCING

HARDWARE

Components

Design

DVD/CD ROM

DISTRIBUTION

Online

Specialist outlets

Supermarkets

RETAILING

CONSUMPTION




Concept

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from the music industry (in the form of tracks on games), the film industry (concept and script development, voice-overs, and visual effects), and the advertising and marketing industries following the completion of both hardware and software production. Indeed, the cultural industries are becoming further interconnected as media conglomerates seek to deliver concepts via an increasing number of forms of content delivery. Therefore, while video games are an important and growing industry, it is gaining greater significance through its connections to other cultural sectors. The video games production network can be divided into two interrelated parts, hardware and software production and, although these are complementary, each has distinct organizational structures and geographies. As suggested in Figure 2, hardware production is conducted by console manufacturers who coordinate concept and research development, console production and distribution to the consumer. However, the degree to which these manufacturers complete these tasks in-house and, indeed, the relative importance of video games to their overall operations varies greatly between firms. At the time of this research, the current console manufacturers were Sony (PlayStation 2), Nintendo (GameCube) and Microsoft (Xbox), each with different global production networks. The high degree of competition between the three hardware manufacturers has impacted upon the industry, and the production network, in a number of ways. First, the ‘race’ to launch more technologically advanced hardware has intensified and accelerated the RandD efforts of the three firms. Larger amounts of financing and human capital are required internally, and strong relationships with suppliers throughout the supply chain are required, both during development (with hardware component suppliers and software developers) and during the launch (with distributors and retailers, in particular). Both these factors represent significant barriers to new entrants to the market, and also serve to shorten the product life cycle of the hardware. Secondly, the competition between the three platforms has resulted in a price war that has seen the cost of consoles being cut to increase sales. For example, Sony dropped the UK PS2 price from £269 to £199 in September 2001, the same month that Microsoft launched the X-box in the UK for £299. Five months later Microsoft were forced to cut the price to £199 due to poor sales. Thirdly, the three console manufacturers have also responded to strong competition by attempting to differentiate their product from that of their rivals. As a result, different meanings and values are attached to each system, with Nintendo GameCube being marketed as the ‘gamers machine’, and Sony endeavouring to sell the consumer a complete home entertainment system, thereby targeting a slightly older audience and using rather different marketing techniques. Fourthly, the 128-bit generation of hardware witnessed a divide in choice of game format as Nintendo retained use of the games cartridge (offering greater security from piracy, but greater production costs) and Sony opting for the CD (less secure, but cheaper and easier to produce). As a result of Sony’s success in the marketplace, the CD has become the preferred method of games data storage, reflected by Microsoft’s use of this format as it entered the market. This demonstrates the high degree of interconnection between the hardware and software components of the video games industry.

4. The global sourcing strategies of console hardware producers While hardware and software production are inherently interconnected, the production of console hardware takes particular organizational forms and geographies compared

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with that of software. This section examines the hardware production system of the three console manufacturers, revealing the sourcing strategies and geographies of each. As it is claimed that the ultimate objective of a global sourcing strategy is for the company to exploit both its own and its suppliers’ competitive advantage and the comparative locational advantages of various countries in global competition (Kotabe and Murray, 2004), it would be logical to assume that Microsoft, Nintendo and Sony are each using global sourcing to reduce the costs of console manufacture. Indeed, there is a qualitative difference between international purchasing (which involves a commercial purchase transaction between a buyer and supplier rather than a domestic purchase) and global sourcing (which differs in scope and complexity as it involves the integration and coordination of items, materials, processes and suppliers across worldwide locations) (Trent and Monczka, 2003). This section will argue that each console manufacturer has developed global sourcing strategies, but that each is organizationally sensitive to the diversity of local environments across which they operate. Figure 3 shows the production networks of the Xbox (Microsoft), GameCube (Nintendo) and PlayStation2 (Sony). It must be noted that not all components are listed for reasons of practicality, for example Microsoft’s Xbox contains 29 integrated circuits and 1,248 other components. The console manufacturers outsource the assembly of hardware to third party manufacturers, but each varies in the degree to which they manufacture their own components, negotiate with particular suppliers or from where they source components. It is clear that each console manufacturer adopts a different organizational strategy based upon divergent corporate histories and cultures. For example, Microsoft has outsourced all console assembly to firstly Flextronics, and more latterly to Wistron, while Sony and Nintendo both conduct considerable assembly in-house (45% and 66%, respectively). In addition, Nintendo uses only one assembler, while Sony and Microsoft use two, claiming that this offers greater flexibility and responsiveness to demand. Sony uses Foxconn for 60% of its outsourced production, and Asustek for 40%, both located in Taiwan. Conversely, when production of the Xbox began, Flextronics was manufacturing all Microsoft’s consoles in Gudalajara, Mexico (to serve the North American market) and two locations in Hungary (to serve the European and Asian Pacific markets). However, in 2002 Flextronics relocated from Hungary to Doumen, China, claiming that this was more cost effective, as many components were being produced in China and labour was cheaper. At this point, Microsoft called upon long-standing OEM partner Acer, and began using their manufacturing arm, Wistron, which produced approximately 1.5 million Xboxes in 2003 (around 20% of total production). Therefore, the introduction of a second console assembler was based upon geographical and temporal contingencies not anticipated by Microsoft. Indeed, the production network shown in Figure 3 is not fixed, as both the network of suppliers shifts and the quantities of production change over time. The degree to which the console manufacturers negotiate with individual suppliers depends upon their relationship and agreement with the assembly firm(s). For example, Flextronics handles inventory issues with suppliers, while Microsoft handles the overall management of around 40 strategic suppliers, including suppliers of microprocessors, flash memory, power supplies, disk drives and graphics chips. Flextronics deals with the sourcing of low cost items such as resistors, capacitors and some semiconductors. This division of responsibility surprised many in the industry as Microsoft previously had little

(Singapore)

Key:

production location

Firm (Firm source) component

Taiwan

Macronix (Taiwan) semiconductors

unknown

Matshushita (Japan) Optical ROM disk

unknown

Taiwan

(Hon Hai; Taiwan)

Foxconn

60%

Source: Company reports and industry sources.

Ohita, Japan

Sony (Japan) 'Emotion Engine'

Taiwan

(Taiwan)

Asustek

23% of total production

Taiwan

Cirrus Logic (US) Stereo D/A convertor

China

ON Semi (US) Voltage regulator

Taiwan & China

Mitsumi (Japan) Regulators

unknown

Texas Instruments (US) Voltage regulator

unknown

Sanyo (Japan) DVD controller & driver

China

Fairchild Semi (US) Multichip

unknown

LSI Logic (US) Input/Output unit

Nagasaki, Japan

SCE Semiconductors (Japan); Graphics chips

40%

Hardware production networks for Microsoft’s Xbox, Nintendo’s Gamecube and Sony’s PlayStation2.

unknown

STMicroelectronics (Switerland); Flash 1B

Japan

Rohm (Japan) E² PROM

unknown

ICS (US) Quad PLL; Ethernet controller

Edingburgh, UK

Wolfson Micro (UK) stereo codec

unknown

(Netherlands) operational amplifier

Philips Semiconductors

New Mexico, US

MoSys (US) Memory Chips

unknown

ATI (Canada) Graphics chips

unknown

IBM (US) Gekko Processor

Japan

NEC (Japan) Graphics engine ('Flipper')

Q-run is a subsidiary of Hon Hai (trades under Foxconn)

33% of total production

Joint venture with Toshiba




Figure 3.

outsourced to TSMC (Taiwan)

Nvidia (US) graphics processor, media comms

Intel (US) Pentium III processor

outsourced to 3rd party wafer foundaries

Semtech (US) DC controller, power management

unknown

Zhonshan, China

Taiwan

Q-Run (Foxconn; Taiwan)

Wistron

34%

(manufacturing arm of Acer, US)

Samsung (Korea) SDRAM

Gudalajara, Mexico & Doumen, China

20%

66% in-house

0% in-house

Flextronics

80%

SONY 45% in-house

NINTENDO

MICROSOFT

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manufacturing experience, and subsequently found it hard to establish good relationships with their suppliers. In comparison, Sony’s hardware production network is more complex as they supply some of their own components and have developed strong relationships with suppliers, many of whom supplied components for the PlayStation. Indeed, as these production networks have only been operational in these particular forms since 1999 at the earliest, it has not been possible to observe significant supplier changes (which are closely guarded by the console manufacturers). In addition, these production networks are not necessarily constantly operational as they are highly dependent upon the sale of consoles produced. Both the Xbox and GameCube sold in significantly smaller volumes than predicted and this had an impact upon production. With an inventory clogged with millions of unwanted GameCubes, Nintendo was forced to suspend production for the first nine months of 2003. The impact on production of the Xbox was less significant and became disguised in the more high-profile shift of production from Hungary to China. The hardware production networks outlined in Figure 3 are, by their very nature, temporary as console manufacturers begin to look to the next generation of console, requiring technological advancement, which may or may not require inputs from existing suppliers. The geographical distribution of suppliers and their production locations shown in Figure 3 demonstrates that each console manufacturer operates global sourcing strategies, although Microsoft tends to use more North American suppliers. In addition, it is clear that China and Taiwan are important locations for the production of a large number of console components, particularly lower cost items such as voltage regulators and semiconductors. More complex components, such as NEC’s graphics engine and Sony’s ‘emotion engine’6 are manufactured in Japan, and Intel’s Pentium III processor in the US. Over recent years, Taiwan has emerged as the leading site of console assembly, and it is estimated that Taiwanese companies made 55% of games consoles sold worldwide in 2003, up from 40% in 2002 (ITIS, 2004). In addition to this console assembly, Taiwan is an increasingly important location for component manufacturing, and a plethora of firms producing console peripherals have emerged both in Taiwan and Shenzhen, China. As the console manufacturers are operating at a loss to produce hardware, they are keen to find cost savings, leading to global searches for the best value suppliers. These global sourcing strategies have led the top three console manufacturers to Taiwan and China for lower cost components and assembly, while higher value inputs and research and development are retained in home markets. However, while the production of hardware operates globally, a uniform product is not produced.7 In fact, each console has to be tailored to the region to which it is to be sold, based on the different television screen standards (PAL or NTSC) adopted across the world. This specific technological issue is easily overcome by the use of a specific chip in the console which designates the machine before it leaves the factory. North America and parts of Asia (particularly Japan) use NTSC, while Europe, Africa, Oceania and parts of Latin America all use PAL. This technological divide has resulted in the division of the global video games

6 7

The term adopted by Sony and Toshiba for their jointly developed 128-bit processor chip. Nor is the hardware distributed evenly across the globe. Rather, its launch tends to be regionally staggered. For example, Sony’s PS2 was launched in Japan on March 4th 2000, North America on October 26th 2000 and in Europe on November 24th 2000.

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market into three distinct supra-regional sections: North America, centred on the USA; Europe, focused on the UK and France; and Asia-Pacific, led by Japan; which are reflected in the organization of all three main console manufacturers. For example, Sony’s video games division (Sony Computer Entertainment) is divided into Sony Computer Entertainment Japan (SCEJ), Sony Computer Entertainment Europe (SCEE) and Sony Computer Entertainment America (SCEA). While this issue of territory may not have a particularly significant impact upon the production of games hardware, it does have an effect on the organization and geographies of software production.

5. The organization of creative production: video games software networks While hardware production networks are based on the supply and assembly of tangible components, software development requires the coordination of tangible and intangible inputs. As greater levels of creativity are required, software production networks are organized differently, each with their own specific geographies. Figure 4 shows the major connections between the key actors in the video games software production network, and distinguishes between the exchange of tangible and intangible goods (such as the transfer of completed code, supplier agreements or knowledge) and finance. 5.1. Capturing value: accessing finance and distribution Figure 4 demonstrates that financing for developers is provided by publishers, either from console manufacturers’ in-house facilities or from independent publishers. In exchange, the publisher usually retains the intellectual property rights (IPR) to the game, and equally significantly, keeps decision-making powers over the game until it reaches the consumer. Following negotiation, the developer is usually granted a fixed fee or a fixed percentage of sales revenue. Retailers and distributors capture value following the sale of games and again this is negotiated with the publisher (in the case of the retailer, either directly or conducted by the distributor). Finally, the console manufacturer is able to capture a significant proportion of the value of a game through their exclusive manufacture of the game. As discussed above, the console manufacturers realized early in the evolution of the games industry that the sale of software would be far more profitable than that of hardware. Today, games CDs are manufactured by the console manufacturer, enabling a degree of quality control, monitoring of the industry and, most significantly, a percentage of all revenue from games sold for their particular console. ‘The bulk of the risk of financing projects is carried by us, the publishers. They don’t manufacture the game until we have paid them and their only other costs are their own internal costs. The actual material cost of producing a game is probably less than d2, so if they are charging us anywhere between d7 and d10, that is really where they are making their money’ (Publisher, March 2002). Empirical evidence suggests that the manufacturer is able to capture 20% of the total retail value of a console game; developer and publisher (combined), 40%; distributor, 10% and retailer, 30%. These figures are estimates and represent an average distribution of value across the production network as negotiations between actors will vary between games. This approximation of the relative values of each stage of the production process is supported by industry data. For example, in 2001 the UK retail market

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Figure 4.




Johns

Interconnections between actors in the video games software production network.

(£356 million) was significantly larger than that of distribution, the UK publishing market totalled £337 million, and developing £456 million (DTI, 2002, 20). However, these figures include the UK PC software market in which retailers gain approximately 30% of retail value, distributors, 10% and developers and publishers (combined), 60%. This latter figure is higher than for console games as the console manufacturers are not present in the production network and therefore collect no royalty. However, despite

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the higher percentage of revenue that can be generated from producing PC games, many publishers and developers prefer to focus their attention on console game production. ‘We do make PC games, and they are cheaper to produce because you don’t have to pay a royalty to the third party, like Sony or Nintendo. But there are no companies spending money marketing PC sales, like the console manufacturers do, so with the consoles there is better and easier markets to target. Producing console games is more of a lifestyle than with PCs’ (Publisher, March 2002). Console markets are preferred by publishers as they have the complex task of estimating the revenue that will be generated by a particular game before it is completed, and before they are willing to invest vast sums of money into its development. ‘The games industry has become like the Hollywood film industry. You are talking budgets of upwards of 5 to maybe 7 million Euros to produce a title. There is a huge, huge expectation on the development team because you have a set of benchmarks, saying that x amount of time, x amount of revenue on this game, so it should generate at least 500,000 sales, and if it doesn’t then you are screwed’ (Console Manufacturer, February 2002). The relationship between developers and publishers is the most opaque in the video games production network. Combined, the proportion of retail revenue collected by developers and publishers is 40%, although individual figures are very difficult to estimate as specific deals between these actors are rarely publicized. However, the nature of this interaction between the often more creatively concerned developers and the revenue driven publishers reveals a key tension apparent in the video games industry. ‘We are in this industry because we love making games. . . . our ideas with our people. We don’t want to sell out to some big publisher. We only deal with them because we have to. I know we have to make money to survive, but we want to develop a successful title for other reasons. . . . it means that people share our love of a concept and like our work’ (Developer, June 2002). Just as value is spread unequally across the software production network, it is highly spatially uneven, with several key nations and cities dominating various stages of the production network. The global market in ‘leisure software’ (which includes PC games), is dominated by three large markets, with the USA forming the largest with £4.5 billion in 2000, followed by the European (£4.1 billion) and the Japanese (£2.4 billion) (DTI, 2002, 10). These markets are served by key centres of production located across the USA, Europe and Japan, following the technological division of the globe into three regions. As Table 3 shows, the 14 largest publishers of console software originate from either the USA, Japan or France. This highly uneven distribution of firms also occurs within the development stage of production, although to a lesser degree. The causes of this concentration of activity are related to a number of factors, including the evolution of the industry, the unequal distribution of global capital and more complex notions of cultural embeddedness. These large games companies have evolved rapidly over time, with a wave of industry consolidation beginning in the early 1990s that had a profound impact upon the industry and saw a dramatic increase in the rate of internationalization across the production stages. This began as a result of the rapid increase in the size of the industry as the Sony PlayStation and Nintendo 64 were launched in Japan in 1994 and 1996 respectively (see Figure 1). Again, the search for economies of scale encouraged developers and publishers to merge with, or acquire, competitors, as average production budgets soared beyond £1 million. Table 4 shows details of selected mergers and acquisitions from 1993 onwards, revealing both the scale of consolidation in this period and an

16 of 30 Table 3.




Johns

Global top 15 video game publishers by earnings (d millions)

Rank

Company

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Sony* Nintendo* Microsoft* Electronic Arts Sega Activision Atari (Infogrames) Square Soft Take Two Interactive Konami Vivendi Universal Publishing THQ Inc Capcom Ubi Soft Eidos

Country Japan Japan US US Japan US France Japan US Japan France US Japan France UK

2000

2001

Growth

6574.6 5325.8 1759.7 1536.8 1869.8 619.3 521.6 732.3 393.9 615.2 361.0 375.5 359.0 186.5 313.3

5610.3 3926.1 2181.5 1476.4 982.6 692.5 674.3 641.2 503.7 502.3 444.0 423.2 269.3 259.8 226.1

1% 13% 20% 7% 38% 8% 29% 4% 24% 3% 23% 9% 11% 39% 26%

*Figures for earning generated by publishing cannot be separated from game console production earnings. Microsoft’s revenues also include the group’s Internet activities, the production of computer accessories and publication of educational software. Source: Michaud (2002, 5–6).

industry-wide trend towards vertical integration. These data show that the industry consolidation has been dominated by publishers acquiring developers and other publishers in the search for increased power through greater size. Indeed, publishers once tended to operate within national boundaries, but through the acquisition of publishers in other markets, they have expanded in size and in the extent of their operations. As the cost of development has increased, publishers wish to increase the proportion of value that they are able to capture by owning more stages of the production process. Over recent years the numbers of independent developers worldwide has decreased as more development studios are acquired by the console manufacturers or publishers. Indeed, in 2001 independent development in the UK was worth £219 million, compared with in-house development of £238 million (Screen Digest, 2001). In addition, several independent developers have been acquired since this time. If this trend of consolidation in the industry is placed within the context of the broader hardware cycle, it is apparent that the mergers and acquisitions outlined in Table 4 occurred during the industry’s peak. 5.2. Uneven power relations: identifying the key actors driving change Discussion of how and why particular actors are able to capture a certain proportion of the revenue generated from console games sales requires further investigation into the nature of the relationships between actors and how these relations shape the evolution of the production network. How particular firms are able to manipulate the production network to increase their percentage of revenue is a function of their positionality within the network, and an outcome of the power negotiations between themselves and other actors. In the case of the video games industry, clear differences between

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Table 4. Selected mergers and acquisitions with the video games industry 1993–2004 Year

Acquired

Location

Activity

Acquirer

Location

Activity

Stake

1993 1995 1995 1995 1996 1996 1996 1996 1996 1997 1997 1997 1997 1997 1997 1997 1997 1997 1998 1998 1998 1998 1998 1998 1998 1998 1998 1999 1999 1999 1999 1999 1999 1999 1999 1999 2000 2000 2000 2000 2000 2000 2000 2000 2000 2001 2002 2002 2002 2002 2002 2002

Psygnosis Rare Bullfrog Domark Core Design Ocean Software Probe Iguana Atari Games DMA Mainstream Interactive Spidersoft Digital Interaction Millenium Maxis Centresoft NBG Distribution Raven Software CD Contact Data Head Game Crystal Dynamics Rare Reflections Westwood Studios1 Virgin Studio Atari Corp. Microprose Elisnore Multimedia Expert Software Neversoft Ent. Accolade Gremlin Interactive GT Interactive Ozisoft Beam Software Talonsoft Dreamworks Interactive Hasbro Interactive Paradigm Ent. Bungie Software Verant Interactive Volition Sinister Games Grolier Interactive Red Storm Ent. Treyarch Invention Rare Luxoflux Corp. Gray Matter Shaba Games Z-Axis Eden Studios

UK UK UK UK UK UK UK UK US UK AU UK UK UK US UK Germany US Belgium US US UK UK US US US US US US US US UK US AU AU US US US US US US US US UK US US UK US US US US France

PD PD PD PD PD PD PD PD PD D PD D D D D DR D D DR PD D PD D D D PD D D PD D PD PD PD DR D D D PD D D D D D D PD PD PD D D D D D

Sony Corp. Nintendo Electronic Arts Eidos Eidos Infogrames Acclaim Acclaim Midway Games Gremlin Gremlin Take 2 Interactive Titus Interactive SCEE Electronic Arts Activision Activision Activision Activision Activision Eidos Nintendo GT Interactive Electronic Arts Electronic Arts Hasbro Hasbro Activision Activision Activision Infogrames Infogrames Infogrames Infogrames Infogrames Take 2 Interactive Electronic Arts Infogrames2 Infogrames2 Microsoft Sony Corp. THQ Ubisoft Ubisoft Ubisoft Activision Microsoft Activision Activision Activision Activision Infogrames

Japan Japan US UK UK France US US US UK UK US France UK (JP) US US US US US US UK Japan US US US US US US US US France France France France France US US France France France Japan US France France France US US US US US US France

HW, HW, PD PD PD PD PD PD PD PD PD PD PD PD PD PD PD PD PD PD PD HW, PD PD PD PD PD PD PD PD PD PD PD PD PD PD PD PD PD HW, HW, PD PD PD PD PD HW, PD PD PD PD PD

100% 25% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 25% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 62.5% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

PD PD

PD

PD PD

PD

Continued

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Johns

Table 4. (continued) Year

Acquired

2002 2002 2003 2004

Shiny Ent. Massive Ent. TDK Mediactive Tiwak

Location US Sweden US France

Activity

Acquirer

D D PD D

Infogrames Vivendi Universal Take 2 Interactive Ubisoft

Location

Activity

Stake

France France US France

PD PD PD PD

100% 100% 100% 100%

1

Westwood Studios closed in March 2003—all willing staff were absorbed into EA’s LA studio. Infogrames Inc. renamed Atari Inc. in 2003. Key: HW ¼ Hardware; D ¼ Developer; DR ¼ Distributor; PD ¼ Publisher-Developer. Source: Adapted from Cornford and Naylor (2001; Table 2) and original research. 2

actors’ power in each production stage can be observed that are dramatically altering the structure and geography of the production network over time. As shown in Figure 4, the console manufacturer performs a number of different functions of the production network in-house, such as publishing and developing its own games. However, all console manufacturers outsource a proportion of their games development, which is handled by a division separate from their own development. ‘Essentially, internally we have to make games. That is what makes money. We don’t necessarily make that much money on hardware. If you produce software yourself, the money goes straight into your pocket and the first party software generates the most revenue’ (Console Manufacturer, February 2002). Each console manufacturer is keen to have successful titles produced for their consoles and seek to obtain such titles from reputable third-party publishers. As discussed above, the console manufacturers are able to capture up to a third of the retail value of a game, generating significant profits. However, the console manufacturers use this licensing process to perform quality control, and if they wish are able to reject games. This represents the source of the console manufacturer’s direct power over publishers, as they use only approved publishers that have been formally vetted, creating an inner circle of preferred suppliers. ‘Our contact with the console manufacturers tends to be about technical issues . . . but Microsoft have to give concept approval as well, which is unusual. The relationship is a bit dictatorial, even though we are part of the club . . . . because we are registered publishers we are invited to conferences to tell you how they are doing, the changes they are making, procedures, stuff like that. The formal relationship associated with getting a game out starts with pre-submission of the code which is an informal look at what we are doing and where we might be going wrong, etc. Then you go to formal submission, and if the code passes, it goes straight to the manufacturer, and we don’t see it again and are not allowed to interfere with it between submission and manufacture’ (Publisher, March 2002). Through the control of manufacturing games, the console manufacturers are able to maintain a powerful grip on the activities of firms in the development and publishing stages of the production network. As the console manufacturers have a vested interest in producing high quality games for their products, they are often willing to offer generous funding to developers with promising concepts. As a result, developers are often keen to work directly with console manufacturers rather than independent publishers, but due to high competition for financial backing, most developers are unable to

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select the publisher they work with. In essence, developers are charged with the creative development of a game code, which is then passed over to the publisher who oversees the rest of the production network. As Figure 4 suggests, developers are relatively isolated in terms of network connectivity, occupying a more peripheral position than the console manufacturers and publishers. Consequently, they are often in a weak negotiating position and are unable to capture extra value. In addition, the publisher often retains the intellectual property rights to games, despite the initial concept and creative input originating with the developer. ‘We do this because we love it . . . not necessarily for financial reward. That rarely happens . . . . if anyone is going to make money it is the publishers. And to make matters worse, they keep the rights to our ideas. It’s not right but we can’t do anything about it’ (Developer, July 2002). However, while developers are often the weaker partner in negotiation with publishers and developers, this is not always the case. Two factors can greatly increase the power of developers; the reputation or history of the firms, or individuals employed by the firm, and the temporal position of negotiations within the broader cycle of the console market (shown in Figure 1). Console manufacturers have a preferred list of developers to supply game code, based upon the track record of the development team. Here, factors such as the creative reputation of certain individuals for conceiving and developing popular titles, the genre of games produced and the particular concept being presented all play a role in the console manufacturer’s selection process. In essence, the developer is attempting to trade their unique creative skills which are, by their very nature, unquantifiable. The potential of a particular concept is an unknown until it is produced and reaches the consumer. As the publisher assumes the majority of the risk by financing the development of an idea, they have to negotiate the best deal in order to gain maximum revenue from successful titles. Therefore, publishers often seek developers with strong reputations for success and, as a result, these particular firms are placed in a more powerful position as trust and confidence assume extra significance in negotiating financing deals. ‘Because we’ve established a strong reputation for producing successfully games, we can negotiate better deals with the publishers. We have good relations with one publisher in particular, and we know that they aren’t going to screw us. Publishers are desperate for good games and we are confident about providing them’ (Developer, June 2002). In addition, publishers are increasingly purchasing the licenses to produce game versions of other cultural products such as films or sports, or financing sequels to successful games, as the perceived risk on the investment is lower. Therefore, developers that have produced one successful title have greater negotiating power, especially if a publisher commissions them to develop a sequel to that game (although the publisher retains the intellectual property rights in the majority of cases). 5.3. The temporal and spatial unevenness of power and actor positionality When examining the power relations in the production network, it is essential to consider broader temporal dimensions, given the cyclical nature of the industry. As Figure 5 shows, the bargaining power of games developers varies greatly depending on the position of the console manufacturer, and as suggested above, upon the particular developer’s reputation. The empirical data for this paper were collected in 2001 and 2002, during which time Sony’s PlayStation2 (PS2) had obtained a significant competitive advantage from launching before its competitors. The PS2 sold rapidly,

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Figure 5.




Johns

The variable bargaining power of games developers.

Source: Datamonitor (2003, Figure 5).

due in part to the availability of 17 games at launch (of which 13 were third-party titles). At the end of July 2003 the number of software titles had reached 629 (of which 547 were third-party titles). Publishers and developers were encouraged to produce for the PS2 as the hardware installation figures grew, equating to potentially higher revenues. This also serves to highlight the interdependence between hardware and software production, as hardware sales increased in turn as more games were available. ‘At the moment, the easiest and safest one to publish on is PlayStation2 as it has been out a bit longer than its competitors, so those are a bit of an unknown quantity. Last year we lead mainly on the PS2, but if we know we have a successful title we will do it on all the formats. We use PS2 to test the water’ (Publisher, June 2002). ‘Sony have traditionally done well because they haven’t made a fuss about what sorts of games they produce, they have let anyone develop games for their systems, as long as you pass the technical requirements, you can do what you like and sell what you like. That is why there is such a proliferation of PlayStation titles which you can also play on the PS2. That has been a really clever decision by them’ (Publisher, March 2002). ‘It is a lot more investment to work for Nintendo. There is less return on Nintendo games for the GameBoy Colour and GameBoy Advance. We earn about £1 or £2 on every one we sell. But you have to manufacture in excess of 80,000 units to break even

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and because they are on cartridges not discs, there is a lot of stock to hang on to and if you don’t think you can sell that many it is an enormous risk. Development costs for the handheld games are less, but it is so difficult to break even with so much stock. It just isn’t worthwhile’ (Publisher, March 2002). In comparison, as Table 3 shows, rival console manufacturers Microsoft and Nintendo have struggled to come close to rivalling Sony’s installation base. Consequently, these hardware producers find it more difficult to attract publishers and developers as they offer smaller markets. The success of console manufacturers and publishers depends upon their ability to reach the consumers, hence the significant proportion (roughly 30%) of revenue captured by retailers. The relationship between publishers and retailers is often contested, and is the result of negotiations between these actors at the local, national and increasingly multinational scale. ‘We work with games distribution companies to distribute games. Sometimes in other countries they may be the distribution arms of larger publishers, such as Codemasters, which can sometimes cause a conflict of interest if they are also releasing the game. Often we will outsource the PR and marketing to the distributors as they have as much interest in selling the games as we do, and they have more local knowledge. The fact that they are taking a cut of revenue generated can cause us difficulties. Larger publishers, such as Electronic Arts, have offices in every single country and don’t have to hand out a margin to other people’ (Publisher, March 2002). ‘We have a really good relationship with most of the major retailers. . . . they help us reach our consumers and we give them the big titles they want. As some of the supermarkets have come into other markets we have been able to do bigger multinational deals with them which saves us time, and certainly money’ (Publisher, March 2002). However, as the retailers are aware of their importance to the video games industry, they are able to counter the dominance publishers hold in other stages of the production network. In this highly competitive industry, the retailers are in a strong position and are able to negotiate favourable agreements. While the power relationships between actors in the software production network are uneven, they are also greatly affected by their spatial dimensions. Indeed, the relationships outlined in Figure 4 must be placed within their geographical context. Primarily, these relations are conducted within the boundaries of the three major economic regions: North America, Europe and Asia Pacific. The prime reason for this bounding of activity is the organizational structures of the console manufacturers, through which they are able to gain a greater degree of control than would be possible in a truly global system. Publishers are required to submit code to the console manufacturer’s base in the region in which they are located. For example, a UK-based publisher wishing to publish a game on PlayStation2 has to submit code to Sony Computer Entertainment Europe (SCEE). If accepted, SCEE will publish the game and manufacture games suitable for PAL territories. If the publisher wishes to sell the game in the USA, they are required to begin the whole submission process again with Sony Computer Entertainment America (SCEA), but this is only possible if they have registered offices in North America. ‘The console manufacturers have European publishers and American publishers. The bigger companies have publishing houses on both sides of the Atlantic, so it is not a problem for them. We are only a European publisher and if we wanted to register as an American publisher, we would need to set up a small office out there and any games we published in North America would have to be put through that office and submitted through SCEA or Nintendo US’ (Publisher, September 2002).

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Johns

Through this organizational structure, the console manufacturers have greater control over the release of software in each region, and maintain the tri-regional structure. It is also much easier for them to organize global releases of games than it is for thirdparty publishers. However, if actors are able to find ways to overcome this imposed divide, their power within the production network can be greatly increased. Firms’ strategies to achieve this include increasing in size to gain greater economies of scale, particularly in relation to distribution, increasing access to finance and distribution (either through vertical integration or exclusive agreements), and increasing the geographical extent of operations. In particular publishers are highly connected and have developed a range of strategies to attempt to capture maximum value and thereby increase their power. The increased size and scope, both vertically and horizontally, of actors in the production network has resulted in the rapid internationalization of software production and distribution. While it can be argued that the production of console hardware is global, software production is organized around the tri-region structure created by the console manufacturers. While this technicality could easily be overcome (conversion chips8 are freely, but unofficially, available in most nations) these supra-regional divides are maintained by games developers and consumers alike. In fact, the geographical unevenness of video games production and consumption is further complicated by strong cultural differences between markets.

5.4. The embeddedness of games as a cultural product The development of the video games industry worldwide has varied widely in different national contexts, playing a significant role in determining the degree to which firms located in particular localities are connected to video production networks, and the nature of such linkages. For example, as Table 3 shows, despite being the world’s third largest market for console games, the UK’s largest publisher ranks only 15 globally. Instead, the UK has become a significant site of games development, with 15.3% of the global market share (by volume), compared to USA (44.1%), Japan (35.3%), Germany (2.1%), France (1.7%) and Canada (1.5%) (DTI, 2002, 18). This share is disproportionate to the size of the UK, and is commonly explained by the dramatic success of affordable home computers such as the Commodore 64 in the 1980s. Anyone could programme their own games at home and it developed on a large scale as a hobby (Lange, 2002). While the digital entertainment industry evolved in the USA alongside developments in microcomputer technologies, the UK developers were able to capitalize upon their cultural proximity to the USA to gain support for their projects, both in terms of knowledge transfer and financing. This close relationship between USA and UK actors in the video games industry continues today, and is reflected in the strong presence of

8

9

Conversion chips, sometimes called ‘mod chips’ are black-market add-ons that, once soldered to a console’s main circuit board, defeat security systems and enable the machine to run legally and illegally copied discs, import games and homemade software. Where firms are operating in more than one production stage, all are listed, i.e. ‘publishing and developing’. However, when quotes from these interviews are cited later in the paper, the activity to which they are referring is used as the prime description of the firm, i.e. ‘developer’.

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USA publishing firms in the UK, and the high level of USA acquisitions of UK firms (for examples, see Table 4). The Japanese games industry is based upon different origins from that of Europe and North America. Technical capability and expertise in consumer electronics have served as a critical foundation for the early development of platforms in Japan (Aoyama and Izushi, 2003), and continue to offer competitive advantages for Japanese hardware producers. In contrast, the Japanese software industry draws upon the manga (the Japanese word for comic book—see Kinsella, 2000 for a discussion of the cultural importance of manga) and animations films industry to provide creative and innovative inputs. Aoyama and Izushi (2003) suggest that a common labour pool is shared by these industries, facilitated by the importance of manga in Japanese popular culture. A distinct form of game with strong narratives has developed, such as role playing games featuring characters from manga and animation films. Indeed, many of the largest firms operating in the Japanese video games industry have their origins in the toy industry (for example, Nintendo and Bandai), or in arcade games (such as Capcom and Namco). As the video games industry has increasingly internationalized, the North American and European markets have become closer, with publishers operating in both regions. It is clear, however, that the demands of video game consumers are not homogenizing, as cultural differences remain important considerations for publishers and developers. Despite relatively close cultural proximity, even some UK- and USA-produced games require localization before they are suitable for consumers. Indeed, there are distinct cultural differences between the demand for cultural products within and between the three software ‘regions’, reflecting the fact that video games, despite their hightechnology image, are cultural goods that are read in specific ways depending upon the locality in which they are produced. The greatest differences in the nature of video games occur between Japan and the other two core markets. ‘There are different mentalities about games in Europe and Japan. There is a lad here that buys a lot of Japanese games, but rarely does he come in with a Japanese game that he thinks anyone is going to like. Nintendo Europe, and include us in that collective, we know our market. Japanese people know their market. There are huge cultural differences so there isn’t really any reason why games should have anything in common’ (Publisher, September 2002). Indeed, even the sale of hardware reflects cultural biases as there is a tendency for consoles to sell best in their home regions, for example, in 2003 Xbox gained 20% of the USA market, but only 9% of Europe and 2% in Japan. In Japan, the PlayStation2 sells more in an average week than the Xbox has sold to date. This cultural specificity is more notably reflected in games software, and Table 5 shows recent figures on the top 10 games on sale in each of the three core markets. It is clear that the UK has the most diverse range of games, from predominately USA publishers, but also from Japanese and UK firms. Surprisingly, half the top 10 games selling in the USA are produced and published in Japan. In contrast, all the games sold in Japan are provided by Japanese publishers, with only one game produced from outside the country. This highlights the degree to which the Japanese video games market is isolated from the other two key geographical markets. Despite Japan’s domination of hardware production in the consumer electronics industry, cultural content production is relatively less important. Japanese ambitions to redress this imbalance have been limited by broader structural concerns. Morley and Robins (1995, 13) identify three activities of global media corporations: producing

US US Japan Japan Japan US Japan US Japan US

Japan Japan Japan Japan Japan Japan Japan Japan Japan Japan

US US US UK UK (Japan) UK (Japan) Japan US US US

Pub origin

EA Big Electronic Arts Team Ninja Genius Sonority Sonic Team EA Canada Square Enix Bungie Studios Nintendo Electronic Arts

Banpresto Sammy Rockstar Treasure Gust Nintendo Asmik Ace Ent. Taito Nintendo Success

Electronic Arts EA Sports Electronic Arts Io Interactive Polyphony Digital Ent. Genius Sonority Konami Electronic Arts Midway EA Canada

Developer

US US Japan Japan Japan Canada Japan US Japan US

Japan Japan UK Japan Japan Japan Japan Japan Japan Japan

US US US UK/Denmark Japan Japan Japan US US Canada

Dev origin




US Top 10 (Jan to March 2004) Source: Adapted from NDP Group figures cited in www.gamesinfo.com 1 PS2 NFL Street EA Big 2 PS2/XBX/PC Need for Speed: Underground Electronic Arts 3 XBX Ninja Gaiden Temco 4 GC Pokemon Colosseum Nintendo America 5 GC Sonic Heros Sega of America 6 PS2/GC/XBX MVP Baseball 2004 EA Sports 7 GC Final Fantasy Crystal Chronicles Nintendo America 8 XBX Halo Microsoft 9 GC Mario Kart: Double Dash Nintendo America 10 PS2/GBA/XBX/GC James Bond 007: Everything or Nothing Electronic Arts

Banpresto Sammy Capcom Japan Nintendo Gust Nintendo Asmik Ace Ent. Taito Nintendo Success

Publisher

Japan Top 10 (Week ending 5/6/04) Source: Adapted from ELSPA 1 PS2 Super Robot Battle MX 2 PS2 Pachinko Slot! Fist of the North Star 3 PS2/PC Grand Theft Auto: Vice City 4 GC Wario World 5 PS2 Atelier Iris—Enternal Mana 6 GBA Metroid Zero Mission 7 PS2 Tensyo Gakuen Gensouroku 8 PS2 Gensha do GO! FINAL 9 GC Pikmin 2 10 PS2 Pachinko Slot Tokondensho: Inoki Festival

Title

Electronic Arts EA Sports Electronic Arts Eidos SCEE Nintendo Europe Konami Electronic Arts Midway EA Sports

Platform

UK Top 10 (Week ending 5/6/04) Source: Adapted from ELSPA 1 PC/GC/PS2/GBA/XBX Harry Potter—Prisoner of Azkaban 2 PS2/PC/XBX UEFA Euro 2004 Portugal 3 PS2 Need for Speed: Underground 4 PS2/PC/XBX Hitman: Contracts 5 PS2 Grand Turismo 4: Prologue 6 GC Poke´mon Colosseum 7 PC/PS2 Pro Evolution Soccer 3 8 GC/PS2/XBX/GBA The Sims 9 GC/XBX/PS2 The Suffering 10 XBX/PS2 Fight Night 2004

Rank

Table 5. Top 10 games by region, 2004

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cultural products; distributing these products; and owning the hardware that delivers these products. They suggests that to penetrate multiple markets at least two of the above three activities are required. While Japanese video games firms are producing a specific cultural form, their isolation within their own supra-regional boundary during the internationalization of North American and European activities, has reduced their access to international distribution. As Iwabuchi (2004, 65) claims, Japanese cultural industries and Japanese media products cannot compete globally without Western partners. For example, the global distribution of Poke´mon: The First Movie was handled by Warner Brothers, and Nintendo of America (who are relatively autonomous from the Kyoto headquarters and locally staffed) was responsible for international marketing of Poke´mon, except in Nintendo’s home market of Asia. Therefore, despite Nintendo’s development of a hit global cultural product, originally a GameBoy game, neither Nintendo nor other Japanese firms were able to capitalize upon that success, as valuable functions such as distribution had to be passed to larger, more geographically extensive media conglomerates. The video games industry is positioned within broader cultural flows that are dominated by large media conglomerates creating an environment in which access to finance and distribution are increasingly important.

6. Current developments and future changes in the video games industry The central aim of this paper has been to conceptualize the video games production network, addressing the production systems of hardware and software, and their interaction. This has revealed the nature of the network as it exists (in the main) today, allowing a point of reference from which to monitor future changes. In particular, the influence of the Internet is already being felt in the industry, justifying a section outlining the key developments to date. As Figure 2 shows, the Internet provides an additional retailing avenue, as console manufacturers, publishers and online gaming sites offering physical games for sale (without dramatic success to-date). It is in the distribution stage where the Internet makes the greatest (initial) impact upon the production network. The emergence of new technologies enabling the informational content of games to be compressed into formats suitable for distribution over the Internet is opening a potentially huge market for online distribution. In his examination of the current and potential impacts of online distribution on the film industry, Currah (2003) observes that such technologies enable small producers to produce from further afield than is usual currently, thereby radically altering the geographies of production. In the case of games, independent producers are able to sell direct to consumers, enabling the publishing oligopoly to be bypassed. Including all its varying forms, it is estimated that the online games industry in 2003 was worth $1.9 billion, with forecasts for 2009 reaching $9.8 billion (DFC Intelligence, 2004). First, during the 1990s, online and mobile technologies enabled the development of ‘Massive Multi-Player Online Games’ (MMOGs), which are graphical online virtual worlds that support many players at one time. Today, over half a million people play MMOGs such as Everquest, Dark Age of Camelot, Anarchy Online and others. Sony’s Everquest is estimated to have the largest population of players, with over 430,000 subscribers across the world, and up to 100,000 simultaneous players at peak times

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(http://sonyonline.com). This MMOG is hosted by Sony, transforming the console manufacturer into developer, publisher, distributor and retailer. In addition, many players use PCs rather than PS2s with modems, allowing Sony to capture part of the growing PC gaming market. Secondly, the use of peer-to-peer (P2P) file sharing programmes opens new distribution opportunities for games developers and publishers. For Leyshon (2003, 32), peer-to-peer networks are ‘contingent technological assemblages, made up of human and non-human agents. . . . formed through the temporary connections forged between the machines running the peer-to-peer programme at any same time’. For games publishers, these networks can be used to implement low cost distribution of titles to a wider audience, and ensures their continued role in the evolving video games production network. The impacts of such Internet technologies on the video games industry are potentially profound as the structure of production and access to finance and distribution are radically altered. The suggested reduction in physical game production and distribution alludes to a future ‘weightless economy’ in which consumers download games directly from a variety of sources; playing in real-time through MMOGs, via peer-to-peer networks driven by publishers and even developers, or through console manufacturers’ websites. In such a scenario, the console industry merges with that of PC gaming, as consumers choose their hardware. The console manufacturer loses the profits generated through their monopoly on CD production, and therefore their control over game content and production weakens dramatically. In turn, this affects their ability to sell consoles at a loss, and more significantly, reduces the revenues available for investment in R&D. Finally, the geography of the industry will change in unclear ways. The online distribution of games will have an impact on the console manufacturers’ sequential release windows across the three regional territories, essentially ‘flattening’ the global market, and rendering the PAL/NTSC distinction redundant. Crucially, the technological divide is set to widen as online distribution and console internet connection are dependent upon broadband connection which is highly geographically uneven. Indeed, this ‘weightless’ scenario is by no means certain as technological change is influenced by social and economic forces. The uneven availability of high speed Internet access globally is creating a divide between gaming in Western Europe, North America and Japan, and the rest of the world. In fact, the 32-bit PlayStation One (PSOne) recently hit the 100 million units shipped mark, continuing to be popular, particularly in less wealthy regions of the globe. Additionally, multiple distribution points/portal services do not guarantee access to the consumer, as competition for screen space grows more fierce than that for shelf space. In conclusion, while technological changes drive the evolution of the video games production network, the impact upon actors in the system will vary as value and power are captured in shifting positions and the embeddedness of gaming continues to be influenced by the cultural and economic specificities of place.

7. Conclusions This article has aimed to examine the video games industry by using a GPN framework to understand how the industry operates and how it is driven. Traditional views of video games paint a picture of the archetypal global industry, facilitating the easy flow of culture between localities. However, while the production of console hardware

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operates at the global scale, seeking the most cost-effective suppliers and cheap production sites, the production of software should be considered international rather than global. By conceptualizing the video games production network, it has been possible to examine how and by whom value is captured at each stage in the production network, to investigate the nature of relationships within and between these production stages, and to understand the resulting geographies of production. The powerful role of publishers has been revealed, as has their strategy of merger and acquisition firstly within national boundaries, then within supra-regional contexts to expand their operations and power within the production network. The implications of the internationalization of publishing firms, and consolidation within three key centres of production: North America, Western Europe and Asia Pacific, are of concern to developers worldwide struggling to gain ever increasing budgets to make games. As in many other cultural industries, the global domination of media conglomerates limits the ability of smaller firms to gain access to finance and distribution. Indeed, current research into other cultural industries is highly relevant to the study of video games, highlighting the similarities and interconnection between these different forms of cultural production. This is particularly relevant to discussions of the impact of new technologies, such as those discussed in Section 5, upon the evolution of cultural industry production networks. Indeed, while the video games industry is placed within broader debates surrounding the supposed emergence of a ‘new economy’, this article argues that investigation of such industries often reveals more complex processes of globalization and technological change occurring, with different territories (both physical and virtual) acting as sites of interaction and drivers of evolution. This research demonstrates that rather than fading in significance, the importance of such sites are growing as the video games production network becomes increasingly geographically uneven. When placed within the broader context of global flows of culture, the high degree of interconnection between the video games industry and other cultural industries is especially apparent. Therefore, while this article calls for more research into the video games industry, particularly in relation to understanding the nature, form and exercise of power in its production network, and with regard to its evolution in response to technological changes, understandings of the video games industry should be integrated into broader observations of the structural and organizational changes occurring in the cultural economy more generally. Finally, given the current interest of national and regional governments in high-tech industries as drivers of economic development, this interconnection between cultural production must be highlighted, and the dichotomy that currently exists between examinations of global flows of production and localized centres of production overcome. The next ten years mark a crucial point in the evolution of the video games production network as it is accelerated by the impact of next-generation technology and online gaming, demanding close attention from economists and geographers alike.

Acknowledgements The research on which this paper is based was funded by ERSC Research Project R000238535: Making the Connections: Global Production Networks in Europe and East Asia. Comments were gratefully received from Neil Coe, Peter Dicken, Andrew Leyshon, Henry Yeung and three anonymous referees.

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