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9-713-424REV:MARCH3,2014________________________________________________________________________________________________________________ProfessorAndreiHagiuandAssociateDirectorKerryHerman,GlobalResearchGroup,preparedthiscase.TheauthorsaregratefultoResearchSupportAssistantChristineSnively,GlobalResearchGroup,andSeniorResearchAssociateLaurenBarleyfortheircontributions.Thiscasewasdevelopedfrompublishedsources.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2012,2013,2014PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto:CloudsontheHorizon?Thisisthelastmajorconsolecycle.Ifnotthisone,thendefinitelythenextone.—StevePerlman,founderofOnLive,acloud-gamingservice1Infourdecades,videogameshadgrownfromafringemarketlongassociatedwithteenageboystoamainstreamindustrythatwasclosinginonmoviesintotalrevenues($74billionversus$88.8billionfor2011)2andappealedtoeveryone,fromfive-year-oldstoQueenElizabethIIofEngland(afanofNintendo’sWiiconsole).TraditionalvideogameshadevolvedintofranchisessimilartoHollywoodblockbustermovies,withacomparablysteepinvestmentintimeandcosttodevelop.Forexample,RockstarGamesspentwellover$100millionandaboutfouryearsdevelopingthelatestinstallmentoftheGrandTheftAutofranchise.3CallofDuty:BlackOps,consideredthebest-sellingconsolegameofalltime,waspartofActivision’sCallofDutyseries,a$6billionfranchisein2011.4Atthesametime,videogameshadspreadfromdedicatedconsolestoawidearrayofdevices(PCs,tablets,smartphones,andsmarttelevisionsets),whichinturnspawnednewgamecategorieswithmuchlowerdevelopmentbudgets,butmuchbroaderappeal.Forinstance,socialgameslikeZynga’sFarmVilleandRovio’sAngryBirdscostlessthan$1milliontodevelop,butreachedtensofmillionsofusersandcouldgeneratehundredsofmillionsofdollarsinsalesofvirtualgoods.5Fromtheearly1990son,traditionalvideogameconsoleshadevolvedinfive-toseven-yeartechnologicalgenerations(seeExhibit1forthecharacteristicsofselectedconsoles).Atthebeginningofeachnewgeneration,thenewconsoleswerefarmorepowerfulthancontemporarypersonalcomputersandallowedforgameswithsignificantlysuperiorgraphicsandmorerealisticactionrelativetothepreviousgeneration.Butthetraditionalconsolegamingmodelwasunderincreasingpressureduetotworecenttrends.First,manymainstreamgamersseemedcontentplayingcasualgamesonsmartphonesandsocialnetworks,asopposedtosophisticated,immersivegamesonconsoles.Second,severalcompanieshademergedthatdevelopedinnovative,cloud-basedgamingplatforms.Thesecompaniesintendedtomakeitpossibleforuserstoplayeventhelatestandmostgraphics-intensivegameswithoutbuyingthelatestPCsorconsoles.Thegames’computingactiontookplaceonthecompanies’serversandcouldbestreamedtoandplayedonvirtuallyanydeviceviaabroadbandconnection.FortheexclusiveuseofX.Li,2015.ThisdocumentisauthorizedforuseonlybyXinjiangLiinMedia&EntertainmentBusiness2015-1taughtbyLawrenceEpstein,DREXELUNIVERSITYfromSeptember2015toMarch2016.713-424Videogames:CloudsontheHorizon?2EvolutionofConsoleGamingThefirsthomevideogameconsolewasMagnavox’sOdyssey.Launchedin1972,theOdysseywaspricedat$100(theequivalentof$532in2011dollars)aandcamebundledwith12games.6However,partlyduetosomeuninspiredmarketinganddistributiondecisions,theOdyssey’scommercialjourneywasshortlived.7ThefirsthomevideogameconsoletoachievecommercialsuccesswasAtari’sVideoComputerSystem(VCS)2600,introducedin1977.Asaresult,Atari’sfounderNolanBushnellisusuallyconsideredthefatherofthehomevideogameindustry.By1980,thanksinparttotheintroductionoftheSpaceInvadersgameforVCS,Ataricommandedan80%shareofthevideogamemarket.8Accordingtooneindustryobserver,“designershadunknowinglycreatedaconsolewhosehiddenpotentialwasquicklydiscoveredbyprogrammerswhocreatedgamesfaroutperformingwhattheconsolewasoriginallyconceivedtodo.”9TooMuchofaGoodThing—TheVideogameCrashThequickgrowthofthehomevideogamemarketendedabruptlyin1983.Afterreachingapeakin1982,theindustrylost97%ofitsannualsalesvolumeinthreeyears.Manyblamedtheindustry’scrashontheproliferationofcheapanduninspiredgamesoftware.10Independentsoftwarehousescollapsedintobankruptcylikedominoes,unloadingtheirunsoldgamecartridgeswithretailpricesaslowas$0.99,loweringdemandanddepressingpricesforallothergamesintheprocess.Accordingtoonesource,ofmorethan130significantvideogamesoftwarefirmsin1982,only5or6survivedthecrash.11Atari,theindustry’sleader,wasthebiggestcasualtyofthecrash.Withgamesthatweremeanttobepricedat$40sellingfor$4,12Atari’sconsoleunitsalesfellfrom5.1millionin1982to3millionin1983,ayearinwhichitrecordedanoperatinglossof$539million.In1984,AtariwassoldbyitsparentcompanyWarnerCommunicationsataloss.13NintendoTakesControlTheindustrywassingle-handedlyrevivedbyNinten