4. compared to the average costs of all

4.
Industry Analysis

The main industry in which ATVI operates is the video
games software industry. This section starts with a description of the volume
and growth of the industry. Afterwards, the cost structure is explored followed
by a summary of the main players and trends in the industry.

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4.1
Market Sizes

By taking advantage of the technological evolution and
greater accessibility to internet and mobile devices, the video games software
industry has been growing at an impressive 12% compound annual growth rate
(CAGR) from 2010 to 2016 and a positive trend until 2021 is expected, reaching
total sales of $135 billion, worldwide (see Figure 2).

Additionally, from the amount of revenues attributed
to each platform, most of the growth in the U.S. is derived from mobile games
(see Figure 3).

Sales of mobile games have experienced dramatic growth
over the last years. While growth in mobile gaming will drive much of the new
market space, continued growth in the sale of console games is expected due to
the continued release of new consoles every six or seven years.

 

4.2
Cost Structure

This industry has a particular cost structure when
compared to the average costs of all industries. Figure 4 shows the video games
software industry costs (left) and the average costs of all industries (right)
as a percentage of revenues for 2016.

As can be seen in Figure 4, 46% of the costs are
allocated to “Other”. This category includes product development and marketing
expenses. In this industry, innovation and game development are crucial factors
for growth. Another group that stands out is wages, accounting for 27,7% of
revenues. This is because the industry is an intellect-intensive one. The
outcome of product development investments is highly dependent on the quality
of the employees. Therefore, companies offer better rewards to the best
employees

4.3
Market Share

The top five companies have a combined market share of
23% worldwide.1
Figure 5 shows the regional market share in 2016.

ATVI has the leading position in most regional
markets. Therefore, it ranks first worldwide with a market share of 8%,
followed by Electronic Arts with 7%.2

4.4
Industry Trends

4.4.1 “Blockbuster” Games

Similarly to the film industry, companies in the video
games industry are employing a “blockbuster” business model in their games.
These games, often called “AAA” games, have high development and marketing
budgets and are aimed at larger audiences. Most of ATVI’s franchises are
considered “AAA” games. Additionally, the concentration of revenues among key
titles is evident. The top ten brands account for a combined market share of
17% worldwide (see Table 1).

ATVI’s CoD, WoW and Candy Crush Saga are part of the
top rankings in most regions in terms of market share. Since ATVI has
significant experience in producing successful “blockbuster” gamers, it
benefits from a loyal customer base of hardcore players and distinct value
proposition which positions their products among the best.

 

4.4.2 Shifting to Online Increases
Profitability

As previously mentioned, the emergence of digital
delivery channels will increase the profitability of the firms in this
industry. Not only are the manufacturing and production costs reduced but
capital can be allocated to more adventurous projects, potentially increasing
revenues. Also, this creates new revenue opportunities. Instead of just selling
a full-game, companies are able to upsell additional in-game content, such as
map packs and in-game consumables.

In the U.S., the sale of digital games is expected to
reach $18 billion in 2021, accounting for 71% of the total industry, while the
sale of physical games is projected to reach $7 billion by 2021.3
Figure 6 shows revenue growth by distribution channel.

1 Source: 2017 Video Games Report,
Euromonitor.

2
Source: 2017 Video Games Report, Euromonitor.

3 Source: 2017 Video Games Report, Euromonitor.

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