One Console Future: Part I, History

November 5th, 2007 by DanB | Posted in Feature |

The concept of a single console video game market is very intriguing. While the positives and negatives of this hypothetical situation (which will be discussed in Part II) are very interesting, for now I would like to look at what the history of the video game industry and a knowledge of business and marketing can tell us about the possibility of a single console future.

First, a very, very brief introduction to video game history. Most consider the beginning of the home video game industry to be the late 1970s with introduction of the Magnavox Odyssey. Various other systems entered into the industry during this time with varying degrees of success. After two generations of consoles, the industry experienced a rapid downturn in 1983. This crash created doubt in the future of home video game systems. The crash of 1983 was precipitated largely by an influx of new competitors and questions of quality and competence. The third generation of consoles revived the industry, due largely to the success of the NES system. Since then, the industry has progressed technologically and socially to the point it is today.

The first thing that we can look at is where the video game industry is in its lifecycle. The industry lifecycle theory is a four stage cycle that can be used to describe most industries. While the exact stages vary depending on what source you refer to, the general concept can be found below:

1. Fragmentation
   During this stage, entrepreneurs begin to develop, innovate, and invent the foundations that will form the new industry. Required technology and the cognitive framework will be created at this point. Basic, unrefined products begin to enter the market. Monopoly and high profits are most likely at this point.

2. Shake-out
   The industry begins to grow as market demand is satisfied and more advanced products are demanded. Competition increases as many companies begin to enter the new market due to low barriers of entry and high growth potential. The end of this period is characterized by many companies exiting the industry due to the high degree of competition.

3. Maturity
   Consolidation of market power begins to occur as the most dominant business practices produce the greatest competitive advantage. Companies without a sustainable competitive advantage will exit the industry or be consumed during this stage. Oligopoly will be established by the largest companies.

4. Decline
   The industry begins to decline as businesses begin to lose competitive advantage due to market conditions as well as the rise of new substitute product. Companies will begin exit the industry as demand begins to decrease.

Based on this framework, it is clear that the video game industry has been following a very typical industry lifecycle. The most apparent aspect where the video game industry deviated from the lifecycle was during the shake-out stage. The crash of 1983 was very atypical for an industry in the early-middle portion of the shake-out stage. This early glut of companies exiting came very close to causing the entire industry to crash.

 

From this graph we see two peaks: one before the crash of 1983, and one during the end of the shake-out stage at the end of the 4^th generation. Taking out the crash of 1983, a clear trend appears of rapid industry growth followed by slow stabilization. What does all of this talk of industry lifecycles and the history of video games have to do with the prospect of a single console future?

The video game industry is in its maturity stage. In terms of companies in the industry, we have seen it grow to a peak during the 2^nd generation, a crash, a rebound to a smaller peak during the 5^th generation, and slow contraction during each successive generation. If these trends hold, it is likely the industry will continue to contract until it is at a minimum size necessary to satisfy demand (in terms of how many competing companies are demanded).

Would it be possible for the industry to contract to a single company making a single console? Or would consumer demand for choice always be high enough to support two or more companies? This will all be addressed in Part II. Stay tuned.