Video Game Piracy

VIDEO GAME PIRACY A CASE STUDY VENKATESH KBS

TOPICS FOR THE DAY CASE FACTS – PRESENT MARKET THE BIG THREE COMPETITIVE LANDSCAPE BUSINESS MODEL GAMING IN ASIA IMPORTANCE OF EAST ASIA PIRACY AND MODS STRATEGIES TO COMBAT PIRACY WTO

CASE FACTS- PRESENT MARKET Over the past decade, video game industry has grown into a global colossus worth more than $20 billion a year in revenues. The four largest markets for video games are the United states, Japan, Canada and United kingdom. Console and portable software sales: $6.2 billion, up 8% from 2003 Console and portable hardware and accessory sales: $3.7 billion, down 35% from 2003

GLOBAL GAMES MARKET

THE BIG THREE SONY

MICROSOFT

NITENDO

XBOX PS2

GAME CUBE

COMPETITIVE LANDSCAPE Market forces seem to dictate that there is only enough room in the games console market for three major players. in recent years Sega once a major player has been edged out of the hardware market by both Sony and Microsoft. Sony’s PlayStation2 was the most popular regular console in the 2003, the machine dominating all the major console markets across the world. Although only holding a comparatively small share of the console market, Microsoft’s X-box has enjoyed strong sales growth. The machine’s technicallyadvanced offering combined with a strengthening software library, which taps strongly into the online gaming community, has helped boost the popularity of the machine.

COMPETITIVE LANDSCAPE Nintendo, famous for being one of the original electronic games manufacturers, has enjoyed something of a renaissance since the release of its hand-held Game Boy Advanced. Although the market is expected to experience a slight contraction in 2005 as unit sales of aging systems decline, it is predicted that 2005 will experience strong growth with the release of Sony’s PlayStation 3 and Microsoft’s X-box 2 reinvigorating the market.

THE BUSINESS MODEL The razor and razor blades business model Here console {razor} is sold at a loss and profit is made on the sale of the game {razor blades} For example in the case of Microsoft Xbox, estimates suggests that company loses as much as $200 on each Xbox it sells. To make profits Microsoft collects royalties on the sale of games developed under license, in addition to producing and selling some games itself. Each game typically retails for about $50, so Microsoft has to sell 6 to 12 games to each Xbox user to recoup the initial $200 loss on the initial sale and start making a profit

GAMING IN ASIA The Asia-Pacific games consoles market has experienced fluctuating but ultimately negative growth in the 1999-2003 period. Industry estimates suggests that Asian gamers will spend some $7.6 billion on videogame software in 2005, much of it on low priced pirated games.

ASIA PACIFIC GAMES MARKET

QUESTION 1

HOW IMPORTANT IS EAST ASIA TO THE LONG TERM FUTURE OF THE VIDEO GAME COMPANIES, MICROSOFT,SONY AND NITENDO?

IMPORTANCE OF EAST ASIA •The Asian economic crisis is long over. Current growth in the region is unparalleled. Asia-Pacific's markets are getting bigger and more prosperous all the time. •According to PricewaterhouseCoopers' Global Entertainment and Media Outlook: 2005-2009, Improved economic conditions and an advertising upswing, combined with expanding online distribution of music, films, books and video games, will be key drivers triggering end-user spending in East Asia. •Overall, the video game market will expand at a 16.5 percent CAGR to $55 billion in 2009 driven by growth in Asia/Pacific, the largest market.

Industry estimates suggests that Asian gamers will spend some $7.6 billion on videogame software in 2005, much of it on low priced pirated games, compared to $7.4 billion in the U.S. Overall, the video game market will expand at a 16.5 percent CAGR to $55 billion in 2009 driven by growth in Asia/Pacific, the largest market.

In 2008 the Asia-Pacific games consoles market is forecast to have a value of $1.6 billion, an increase of 22.1% since 2003.

QUESTION 2

How big a threat are software piracy and mod-chips to the profitability of the video game business of these companies?

AHOY PIRATES HERE

The industry is threatened by rise in piracy, which cost the industry an estimated $2 billion dollars in 2001.

The piracy problem is particularly serious in East Asia, excluding Japan, where video games are routinely chipped – sold with modified chips called “mod-chips”.

LET’S TALK ABOUT MODS • Modchip stands for modification chip and is a device used to play import, backup, or homebrew games and/or circumvent the digital rights management of many popular game consoles, including the Xbox and play station. Video game consoles are routinely chipped with “mod-chips”, that overrides the console’s security system, allowing it to play illegally copied games and CDs.

Mod-chips allows users to play illegally copied games. Consoles with mod-chips installed offers a gaping gateway for software pirates. This directly threatens the profitability of console and game makers who follow razor and razor-blades model. For example if the users are purchasing pirated games and playing them on “chipped” X-box consoles, Microsoft collects nothing in royalties and may never reach breakeven.

In East Asia, some 70% of game software sold in the region may be pirated thanks to the popularity of the “chipped” consoles and low price of pirated games, which may sell for one-third of the price of the legal game.

QUESTION 3

What strategies or tactics might the companies pursue to stop piracy? How successful do you think these strategies might be?

TACTICS BEING USED TO CHECK PIRACY The big video game companies tried to deal with the piracy problem in East Asia by ignoring the market.

Sony launched its Play station 2 in East Asia two years after its Japanese launch, and Microsoft delayed its East Asian launch for a year after it launched elsewhere in the world. Questionable tactic

Another tactic is to regularly alter the hardware specifications of its consoles, rendering the existing mod-chips useless. Temporary solution

Third tactic was to push the local authorities to legally enforce existing intellectual property rights law that in theory outlaws the mod-chip practice

WINNING STRATEGIES The answer may be online gaming. Access to popular titles available only over the Internet is more controllable. The game code is harder to copy because it resides in a secure central "server" — a computer run by a trusted third-party such as an Internet service provider. "Whenever illegal access is detected, they can shut [unauthorized users] out."

INTELLECTUAL PROPERTY POLICY One of the key tools for battling piracy is the Digital Millennium Copyright Act (DMCA). It is used to protect intellectual property in the digital age. One side affect of the DMCA is that it empowers game companies to protect their property through a side door.. Not only the person making the software available but also, the ISP that he is using to facilitate the connection could potentially be held liable as a violator of copyright.

• Global Gaming Alliance: Between the 3 major players, ensuring regular checks, common encrypting software with the objective of collectively combating piracy, bring down costs of new game development

Question 4

What role might international institutions like WTO play in such particular problem?

The wto’s agreement on trade related aspects of intellectual property rights {trips} is an attempt to narrow the gaps in the way I.P rights are protected in the world and to bring them under common international rules. WTO helps by being a global policeman. It solves cases of disputes between member countries. It made sure that India recognizes the process patent. Similarly it can ask South Asian countries to raid game hackers and make strict rules and regulations against piracy.

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