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With the introduction of Broadband internet access in 2001, many consumers were able to enjoy online gaming which was never heard of before because of a lack of infrastructure, technology and also being very expensive.
With the advances in technology, broadband internet was made available to the general public and this enabled streaming of media and games online relatively easy. Microsoft took this opportunity to introduce a groundbreaking technology service of online gaming themed, ‘Xbox Live' which facilitated gamers to connect to each other via the internet and engage in online multiplayer sessions. This in turn allowed for the ‘spin off' of the piracy industry to form within the reigns of what Microsoft created.
Within the last decade, the piracy industry has grown leaps and bounds relentlessly and has become a billion dollar industry itself, threatening the market share that Microsoft has also.
A market was available for the piracy industry because it offered a cheaper alternative to what Microsoft was selling, which was a copy or duplicate of the product.
This has caused Microsoft to change their marketing strategies and try to regain a competitive advantage in the industry.
The researcher intends to investigate the factors that are responsible for the rise in the piracy industry. The researcher will also scrutinize Microsoft to find out what effect the piracy industry has had on their sales.
The researcher will attempt to examine the various factors that may have contributed to the incarnation of the piracy industry globally. The researcher also plans to investigate the effects of this rise on Microsoft's sales.
It can be assumed that from the lapse in laws and restraints from governments has allowed the piracy industry to become a successful alternative in the gaming industry.
1.3 PRIMARY AIM
The researcher intends to investigate the factors which are responsible for the rise of the piracy industry and its impact on Microsoft.
1.4 RESEARCH OBJECTIVES
1. To examine Microsoft's strategies with regards to competition in the growing gaming industry.
2. To Analyze how entering the video game industry fits with Microsoft's strategy.
3. To investigate if the video game piracy industry has grown in the last 12 years.
4. To investigate the impact of recent Government Legislations against Piracy in the Entertainment Industry.
1.5 PURPOSE OF STUDY
To investigate whether the piracy industry has had an effect on the sales of Microsoft and its implications on Microsoft.
1.6 THE INDUSTRY
The gaming industry is a highly competitive market with Microsoft battling the piracy industry for the market share. The piracy industry holds an estimated 41% of video games sales globally. Growth has also been evident by gigantic torrent streams on the internet.
1.7 BACKGROUND TO COMPANY
Microsoft is a software innovative company. Founded in 1975, Microsoft (Nasdaq “MSFT”) is the worldwide leader in software, services and solutions that help people and businesses realize their full potential. www.microsoft.com
Microsoft is a multinational computer technology corporation that develops, manufactures, licenses and also provides support for a vast range of software products for computers. Its headquarters is based in Redmond, Washington, USA and its most successful and profitable products are the Microsoft Windows operating system and also the Microsoft Office software bundle.
Microsoft's dominance began in the 1980's with its MS-DOS operating system in the home computer market. They followed it up with the Windows operating system which proved to be very successful.
1.8 HISTORY OF COMPANY
In the midst of $32 billion annually, Microsoft Corporation is arguably the greatest software company in the world. It can be dubbed a cultural phenomenon if so desired. The company's core business is targeted within licensing, manufacturing and developing software products. With founder and owner, Bill Gates at the helm, the company has succeeded at having at least one of its products on every personal computer in the world defining the benchmark in the industry relentlessly.
This critical literature review will attempt to form the cornerstone upon which this research is constructed. This literature review will attempt to provide statistics and information within the paradigm of the topic at hand. The subsequent section includes the views of various authors on the matter of competitive advantage, growth and strategic choices and the generic methods implemented.
According to Gill and Johnson, it is claimed that a critical literature review ‘should provide the reader with a statement of the state of the art and major questions and issues in the field under consideration.' (Gill and Johnson, 1991, p.21) .Hussey and Collis also cosigns this by stating that a literature review is to be ‘an interpretation and synthesis of published research'. (Hussey and Collis, 2003, p. 109).
Hussey and Collis further states that there is a purpose underlying the activity which ‘involves locating, reading and evaluating reports of research as well as reports of casual observation and opinion' (Borg and Gall, 1989, p.114).
Hussey and Collis goes on to state that the review ‘helps guide and inform the research'
This review should provide an accurately scoped analytical literature on supplementary views on growth and strategic choices and competitive advantage then contrasted and compared along with the literature of published authors to form a detailed critical literature study.
GROWTH IN THE ECONOMY
Porter described the industry life cycle as ‘the grandfather of concepts for predicting industry evolution'. ( Lynch, 2003, p.94). According to Lynch, ‘the nature of corporate strategy will change as industries move along the life cycle.' (Lynch, 2003, p94).
This is further supported by Porter and a later definition which states that ‘economic growth could be the positive change in the production of goods and services by a country over a certain period of time'. Source: http://www.investorwords.com/5540/economic_growth.html
ECONOMIC GROWTH THEORIES
Smith (1790) was the progenitor of the ‘laissez-faire' and international trade that we know of today. Within the school of thought, there are three predominant theories.
The first theory involves a relationship between an economy's GDP gap and realistic unemployment rate which is called Okun's Law.
The second theory analyses a class of microeconomics where in the short term scale, the growth of the economy is relevant to a succession of shocks to the economy.
This theory though, unlike others, sees recessions and periods of economic growth as the only exogenous reactions in the actual economic environment.
The final consideration is the Keynesian economic theory. This theory states that the growth of an economy alters accordingly to changes in aggregate demand hence creating a distortion in supply and demand and goods for sale.
The most applicable theory to this study would be that of the Keynesian economic theory with regard to the gaming industry. The gaming industry boasts annual sales of up to $21.33 billion USD a year according to http://latimesblogs.latimes.com/technology/2009/01/video-game-sale.html
This high demand for video games has led to an increase in piracy as a black market interception within the industry. The rise of the piracy industry and the major limiting factor against the original software games was that of price.
The pirates offered the games at a significantly reduced price which appealed to the millions of teenagers who were basically jobless and enticed by the attractable pricing.
The most successful game at the last quarter of 2009-first quarter 2010 has been Activision's Call of Duty-Modern Warfare 2 which has sold a walloping 1.3 billion in its first month.
‘According to estimates, Modern Warfare 2 - which launched back in November - has not only sold more than $1 billion USD at retail, but in its first five days it sold $550 million USD worldwide.
$550 million USD in five days is nothing to sniff at. Apparently, that beats the five-day box office grosses for Avatar, Harry Potter and the Half Blood Prince, and The Dark Knight.' Source- http://www.incgamers.com/News/20469/modern-warfare-2-sales-pass-1-billion-usd
This has resulted in this game alone being pirated 5.1 million times according to www.geek.com.
A company that enjoys an advantage with lowered costs than its rivals is said to have a competitive advantage. “Competitive strategy is described as being different. It means purposely choosing to perform activities differently or to perform different activities than rivals to deliver a unique blend of valve.” Porter (1985)
Companies that contend with each other in the same market by offering the same type of products, is an industry. A company that is more profitable legally within the same industry is usually exploiting a competitive advantage. Competitive advantage is determined by a company's profitability which is measured by the margins and returns as well as the state of the economy. The company is required to possess some type of sustainable competitive advantage in order to maintain market share and dominance.
There is the possibility for companies to enjoy profits above the cost of capital for a short period of time despite not having sustainable competitive advantage. This profit can also draw new threats or entrants which in turn can downgrade economic rent.
Consequently, sustainable competitive advantage can therefore be upheld for a significant period of time in a competitive market. Sustainable competitive advantage is when a company has leverage in the market relative to other companies.
The basis of the advantage can be initiated by the company being radical and unusual which is also core competency. A company's strategy should strive to influence customers into thinking that the product is of superior quality.
A product on the market can be attributed as a good product at a lower price or a better product worth paying more to acquire.
Porter (1985), “described the low-cost producer in its industry… [who] must find and exploit all sources of cost advantage.”
This was also cosigned by Hamel and Prahalad (1990) who stated “that is was important to know the one or two key things that your company does better than the competition.”
We can therefore draw that in the entertainment industry, the pirated games would be a good product at a lower price.
In a competitive business environment, the need to be sustainable requires a firm to be:-
1. Proprietary know how.
2. Installed customer base.
Porter (1985) pinpointed two cornerstones of competitive advantage.
* Differentiation advantage
* Cost advantage
Differentiation and Cost advantages are considered as positional advantages due to the fact of identifying the company's position in the market and industry as leader in either differentiation or cost.
The resource based view accentuates the company's exploits as its resources and capabilities to develop a competitive advantage that adds value to the final product.
FIG 1 ILLUSTRATION OF COMPETITIVE ADVANTAGE
Staying in line with the resource based view, in order to construct a competitive advantage the company must have resources and capabilities that are superior to those of their competitors.
The building blocks of a firm are its resources. The resources are used to create a cost or differentiation advantage that is unique to the firm which would also be difficult for competitors to replicate.
The piracy industry lacks many resources such as:
* Trademarks and Patents
· Reputation. The CEO of Microsoft stated in a press release that “software piracy in China has undercut sales of the real thing, keeping Microsoft from meeting revenue growth targets.” Source: http://www.usatoday.com/tech/news/2008-10-26-microsoft_N.htm
Capabilities represent the company's fortitude to implement its resources profitably. A simple example is the ability of a company to supply the market with a product before the competition.
In the video game entertainment industry, new games can be supplied via illegal distribution and access and streamed through underground operations to reach the consumer before official release dates by the manufacturers. This also creates a major loss for the manufacturers as they lose pre-hyped sales and first week mammoth sales on highly anticipated titles.
The capabilities and resources of a company therefore create a product of distinctive capabilities. This end product can then be used to influence a differentiation or cost advantage.
A low cost differentiation strategy
These appeal to a wide spectrum of customers based on the fact of being the low cost provider of a service or product.
A broad differentiation strategy
This involves identifying the company's product from that of their rivals.
A best cost provider strategy
This comprises of placing emphasis on low cost or no frills products whilst maintaining upscale differentiation. The aim is to create a market for products that appeal to the cautious buyer looking for a bit of quality yet good prices.
A focused or market niche strategy
This market is solely based on differentiation, focusing on a fixed narrow buyer market share. This is accomplished by offering a customized product to the market at high end prices which usually is for the upscale members of society.
Figure 2 illustrates Porter's generic competitive approaches.
The piracy industry fits the criteria of a low cost leadership strategy and a best cost provider strategy.
BOWMAN'S COMPETITIVE STRATEGY
The strategic clock is based upon the work of Bowman (1996). According to Whittington, Scholes and Johnson (2008), “the ‘strategic clock' represents different positions in a market where customers (or potential customers) have different ‘requirements' in terms of value for money”.
Figure 3 illustrates Bowman's Clock
There are six core strategic options:
* Low price/ low added value
* Low price
* Focused Differentiation
* Increased price/ standard
* Increased price/ low value
* Low value/ standard price
Porter proposed three different ‘generic' strategies by which an organization could achieve competitive advantage. ‘overall cost leadership', ‘differentiation', and ‘focus'. Whittington et al (2008).
Bowman's strategies are based on the basis that companies achieve competitive advantage by giving customers access to products which they (customers) deem as better value for money relative to competitors. According to Whittington et al (2008), “ Building on this proposition, the strategy clock enshrines Porter's categories of differentiation and focus alongside price.”
LOW COST PROVIDER STRATEGIES
Bourgeois (1998) claims that, “Firms with costs lower than that of their competitors are likely to enjoy a competitive advantage in the market place, if they can maintain this cost advantage over time.”
“The competitive strategy a corporation chooses to pursue indentifies the manner by which the management decides to compete diligently in its product markets and provide superior value to customers.” Thompson and Strickland (1996).
Thompson and Strickland (1998) “ A low cost leader has two options for achieving superior profit performance. Option one is to use the lower cost edge to under price competitors and attract price sensitive buyers in great numbers to increase total profits. Options two is to refrain from price cutting altogether, to be content with the present market share and use the lower cost edge to earn a higher profit margin on each unit sold, ultimately raising firm's total profits and overall return on investment.”
Porter (1985) claims that “to achieve a cost advantage a firm's cumulative costs across its value change must be lower than competitor's cumulative costs”
Ansari and Bell (1997) supports this view by stating that, “the link between a firm's competitive strategy and use of TC exists primarily because TC provides the means for achieving the firm's goals of satisfying market demands at an acceptable level of profitability.”
Porter also stated two ways to accomplish cost advantage were to:
* Develop better and more efficient ways of doing internal value chain activities and managing the factors that drive costs of value chain down.
* Overhaul the firm's value chain to allow some cost producing activities to be detoured.
The idea of the value chain interrelated by Kay to be, “Adding value is the central purpose of business activities.” Kay (1993)
Influenced heavily by Porter and Hamel, Kay (1993) claims that “ the role of strategic management is to choose the core competencies and then assemble a collection of assets that increases value added and provides a competitive advantage.”
He also claimed that there are three forms of capabilities that enable this, organizational structure, reputation and innovation.
This hasn't been shared by everyone, one in particular Barney (1992), claims that “internal company resources” were the pieces that mattered.
He identified strategy as the marriage of resources which included, suppliers and human technology fused together to create a sustainable advantage.
COMPETITIVE MARKETS: BCG MATRIX
When a company has identified its primary strategies that is to be targeted and the strategies to be employed, there should be consideration on whether what role is to be determined in its current and potential markets.
Whittington et al (2008), described the BCG matrix as “one of the most common and long-standing ways of conceiving of the balance of a portfolio of businesses is the Boston Consulting Group (BCG) matrix.”
The Growth Share Matrix developed by the BCG is a better known technique to assist companies with evaluating current business activities in the grand scheme of:
* Market share and the rate of growth within a market relative to the competitors.
* The Company's cash flow expectancy.
According to Whittington et al (2008), “the BCG matrix has several advantages. It provides a good way of visualizing the different needs and potential of all the diverse businesses within the corporate portfolio.”
The BCG matrix provides an insight into the current activities as well as forecasting future developments of the firm's product(s). Company strategies can thus be developed and implemented using this analytical tool.
Figure 4 illustrates the BCG Matrix Model
According to Lynch (2003), “the BCG portfolio analysis is undertaken using only two variables: relative market share and market growth. It is clearly a weakness that other variables are not included.”
CONTROLLING THE COST DRIVERS
The cost position of a firm can be attributed to the behavior of costs in the activities in the value chain.
Porter (1985) identified ten (10) cost drivers related to the value chain activities.
* Economies of scale.
* Capacity utilization.
* Linkages among activities.
* Interrelationships among business units.
* Degree of vertical integration.
* Timing of market entry.
* Firm's policy of cost or differentiation.
* Geographic location.
* Institutional factors (regulation, union activity, taxes, etc.)
The piracy industry fits into some of these cost drivers. They are as follow:
ECONOMIES OF SCALE
Economies of scale occur when industrial activities can be implemented at a lower cost and larger volumes than a lesser volume.
The piracy industry applies this by generating copies of games on a cheaper format via the internet compared to original games being shipped on digital video discs which ultimately results in the title or game taking a longer amount of time to get to the retail store which then has to provide to the customer.
This form of mass producing at a lower price enables the piracy industry to fit the category of economies of scale.
The experience curve suggests that significant reductions in costs are achieved as companies and the whole industry produces more products. The cost reductions related to the cumulative production ever achieved, not just in one year.
“Experience can be a key source of cost efficiency and there is evidence it may provide competitive advantage in particular in terms of the relationship between the cumulative experience gained by an organization and its unit costs.” Whittington et al (2008)
Fig 5 illustrates the Experience curve.
Mintzberg (1996) “the conception of a novel strategy is a creative process (of synthesis), to which there are no formal techniques (analysis)'.
He also added, “strategy had to be conceived informally before it could be programmed formally”.
This view wasn't shared by Gould (1996). Rumelt (1996) went on to say that, “ …but my own experience is that coherent strategy based upon analyses and understandings of these forces is much more often imputed than actually observed.”
The Profit Impact of Market Strategy study relating to the 1970's era focused on size, growth and portfolio theory. The decision led to the view that a firm with a greater market share would generate greater profits return. The high market share enables volume and economies of scale. The higher market share also provides experience and learning curve advantages, which leads to an increased profit.
The accuracy of this has been renounced by Tellis, Golder (2002).
The piracy industry has been lurking ever since as they usually are comprised of hackers and programmers who know the ins and outs of the industry. The piracy industry is basically a black market industry that has accumulated knowledge and implemented distribution via the internet to penetrate markets quicker than retailers.
A firm's cost drivers are relative to decisions by the executives. Some of these which are applicable to the piracy industry are as follows:
* Decreasing the variety of products offered. The industry pirates usually focus on games.
* After service to customers, there is no warranty from the piracy industry.
* Lower wages to employees as operations are usually not governed by employee unions or laws because of illegal nature.
* Adopting a no frills type of distribution approach, where product is sold to customer with no questions asked.
* Reducing the length of time the product takes to reach the customer. Product is usually downloaded from internet which reduces costs and delivery time, but is illegal.
Thompson and Strickland (1998) claimed that, “managers not only have to use their knowledge to reduce costs for every activity where cost savings can be indentified but they have to do so with enough ingenuity and commitment that the company ends up with a sustainable cost advantage over rivals.”
Evidence also pointed to the fact that a low market share strategy could also be very profitable which is applicable to the piracy industry. This theory was also backed by Traverso (2002) and Levenson (1984).
This theory led to the belief that companies within the high and low market shares were successful whereas those caught in the middle were less fortunate.
Porter (1985) considered this to be the “hole in the middle” problem.
THE VALUE CHAIN
According to Porter (1985), “Dramatic cost advantages can emerge from finding innovative ways to restructure processes and tasks, cut frills and provide the basics more economically.” Porter also claims that companies can reconfigure their value chain activities to increase cost advantages.
These four occur in the piracy industry:
* Non-frill product; marketing and advertising doesn't exist in the piracy industry hence less costs incurred.
* Shift to a simpler, less capital-incentive, or more streamlined technological process.
* Focus on limited product/service that meets special needs of target segment.
* Implementing electronic communication technologies.
BEST COST PROVIDER STRATEGY
This strategy emphasizes on providing customers with the best value for money. It implements a strategic importance on low cost relative to the minimal acceptance of performance, features and quality.
This can be theoretically termed a best-cost provider strategy due to the fact that the firm has the lowest cost compared to the other firms on the market with similar products.
This strategy is evident in the piracy industry in the form direct downloads from the internet verses purchasing a Digital Video Drive (DVD) disc at a retail store for much more money.
The literature encompassed in this chapter has emphasized various aspects in accordance to the topic and objectives at hand in the areas of strategic management, growth and competitive advantage.
According to Bell (1993) the methodology is “how the problem was investigated and why particular methods and techniques were used.”
Silverman (1994) also states “like theories, methodologies cannot be true or false, only more or less useful.”
3.1 Research Design
In order to accomplish the objectives of this particular research it was imperative to conjure and maintain a research design. Vogt (1993) claims, “the science and art of planning procedures for conducting studies so as to get the most valid findings.”
The traits of the positivistic and phenomenological paradigms allow for each to be used in conjunction with each other to complete the methodology for this research. According to Hussey and Collis (2009), “this allows you to take a broader, and often complimentary, view of the research problem or issue.”
Hussey and Collis (2009) states that, “the positivistic approach seeks the facts or causes of social phenomena with little regard to the subjective state of the individual.” This gives the researcher the opportunity to impartially conduct the study.
With regards to the phenomenological paradigm, Hussey and Collis (2000) states that, “is concerned with understanding human behaviour from the participants own frame of reference.” Hussey and Collis (2009), states that “a more phenomenological or qualitative approach is becoming more acceptable and, arguably, is more appropriate for many business research studies.”
This study revolves around the Gaming industry's leading players which include Microsoft and the Piracy Industry's decisions on competition in the Gaming industry.
3.1.2 Types of Research
This is the conduct into a research problem where there are no earlier studies to which information can be referred to. According to Hussey and Collis (2009), “the aim of this type of study is to look for patterns, ideas or hypotheses, rather than testing or confirming a hypothesis.”
Qualitative and Quantitative Research
The qualitative approach was undertaken for a greater analytical investigation of the research topic at hand. Some sources of the qualitative date were Case studies, documents and texts. Qualitative is better suited as it gives insight into the industry by which a subjective view can be considered. Some quantitative data was required in order to deduce and decipher the qualitative research. According to Hussey and Collis (2009), “the use of different research approaches, methods and techniques in the same study is known as triangulation and can overcome the potential bias and sterility of a single-method approach.”
The case studies aided the phenomenological research. Eisenhardt (1989), “refers to the case study as a research study which focuses on understanding the dynamics present within single setting.”
Bonoma (1985) notes that it must be “constructed to be sensitive to the context in which management behavior takes place.”
According to Scapens (1990), there are other types of research where case studies can be applied. One such approach is ‘explanatory' which Scapens (1990) claims is “where existing theory is used to understand and explain what is happening.”
This allows the researcher to analyze the data in the relevant case studies and cast judgment on the data researched.
3.2 Research Methods
Research consisting of secondary data was undertaken.
3.2.1 Secondary Data
Secondary data is data that already exists, these include books, documents (published statistics, annual reports and accounts of companies, and internal records kept by organizations such as personnel records) and films.
Secondary data was collected from:
* Microsoft's website and various websites containing information about the industry and companies involved with the research.
* Strategic Management and Marketing text books.
* Bill Gates autobiography.
These sources emphasizes on the research topic: ‘To examine Microsoft's strategies with competition in the growing gaming industry.'
These data sources are time saving, easily accessible, cost efficient and covers a wide area of information.
3.2.2 Data Collection Methods
A methodological phenomenological paradigm provides the necessary objectivity and scope to conduct a detailed analysis of the effectiveness of the Gaming industry.
According to Hussey and Collis (2009), “Qualitative data provides a more ‘real' basis for analysis and interpretation.”
A case study is an extensive examination of a single instance of a phenomenon of interest and is an example of a phenomenological methodology. Rather than using samples and following a strict protocol to examine limited number of variables, case study methods involve an in-depth, longitudinal examination of a single instance or event: a case.
Lamnek (2005) “The case study is a research approach, situated between concrete data taking techniques and methodological paradigms.”
One of the key advantages of using the case studies in this research was that it allowed the researcher to gather data which was both qualitative and quantitative.
The illustrative case studies unlike the explanatory case studies do not allow the researcher to access present and existing theories within the framework to address the specific boundaries of the research.
3.3 Data Analysis Methods
The collected case studies were cross-case analysed and the results were represented in graphs and tables in a pictorial form to describe the information more vividly and easier to interpret. This would enable the secondary data to be compared and analysed with other data as needed.
There were several issues that arose in the collection of data during the research. The allotted time frame was insufficient for the literature project undertaken as well as the volume of data that was needed to be scrutinized.
The researcher also faced many trials and tribulations due to the fact that the company was that of a multi-national entity which made efforts of face to face meetings and interviews impossible as the headquarters of said company was based in another country.
In addition to this, the researcher was also very inexperienced with data collection which led to delays. There was also less than substantial information regarding the topic presented which also contributed to more delays.
The lack of any contributing primary data made the methodology difficult to develop which caused the researcher to adopt a more phenomenological approach.
The methods chosen were selected due to the scope of the literature allowing for basically secondary data to be implemented. The methods were also sufficient and proved to be vivid enough in analyzing the topic at hand.
Notwithstanding that there were problems encountered, the researcher believes that the relevant information was collected and analyzed.
FINDINGS AND ANALYSIS
The results that were collected will be analyzed in this chapter. The results would be represented in graphs, charts and tables. The data and information presented will seek to scrutinize the numerous factors which attributed to the rise of the piracy industry. There will also be visual data to confirm whether there has been an increase in the piracy industry worldwide and if the piracy industry has affected the sales and restructuring of Microsoft's marketing strategies.
This chapter will also undertake the hypothesis of whether, “would government taxes regulate the gaming industry with respect to piracy?”
It can be noted that at the moment, the piracy industry is thriving with lack of enforcement of laws by relevant authorities.
ECONOMIC GROWTH FIGURES
As was mentioned in the literature review chapter, the direct growth of the economy is predominantly responsible for the increased rise in the piracy industry. The gaming economy is basically worldwide, so figures and sales would be sampled from some of the bigger markets.
Economic Growth is an increase in the real GDP (Gross Domestic Product) per capita of a nation. The Economic growth of a nation helps to determine whether or not the country's population enjoys a certain standard of living.
The following figures show the GDP of the United States of America over the century, highlighting the eras when technology went through its evolution into what it is today.
GDP OF THE UNITED STATES OF AMERICA 1947-2009
As can be noticed from the above illustration, the GDP of the United States of America has been rising steadily over the years. There could be several reasons attributing this growth.
1. One main factor is that of investment. It is accurate to say that investment has an influence on the rate of growth. The GDP in the United States expanded at an annual rate of 5.90 percent in the last quarter. The United States Gross Domestic Product is worth 14204 billion dollars or 22.91% of the world economy, according to the World Bank. The economy of the United States is the largest in the world. The United States is a market-oriented economy where private individuals and business firms make most of the decisions. The federal and state governments buy needed goods and services predominantly in the private marketplace.
2. Population structure. The age, sex and geographic distribution of a population all have significant implications for economic growth. A population growing in age would tend to hinder economic growth since older people would tend to be more traditional and less inclined to take risks in a business world.
From the graphs above it can be seen that with the world population increasing exponentially, the growth of markets will rapidly explode also. The two major electronic markets being the United States of America and China both has the majority of their population within the 15-64 age groups. This exemplifies that both countries populations are not aging.
According to the U.S. Bureau of Census, the population of the USA is estimated to be 308,848,051 million people as of March 2010. It is estimated that there is 1 birth every 7 seconds, 1 death every 11 seconds and 1 international migrant every 17 seconds.
The growth rate is estimated at 8.0%, which has been steadily rising within the last 30 years when technology has been advancing. The 15-64 age group has been primarily responsible for patronizing the gaming industry. The middle class group has been the dominant flourishing group and has been the main customers of the gaming industry markets within recent years.
With the growth of the population and in essence the middle class group, the potential for market growth within the gaming industry is high as parents would be the ones financing their kids consoles and games hence enabling a profitable large market.
According to www.nytimes.com/2008/09/06/business/economy, the U.S. jobless rate rose to 6%, its highest since 2003. The labour market offers a large percentage of highly skilled and experienced workers while the education level of the population is highly regarded in the world.
The graph indicates a startling rise in the unemployment rate within the last 4 years. This was mainly due to the recession of the world which affected the larger countries more drastically and filtered down to other dependant countries and markets as such.
With so many jobs being cut, it is inevitable that the recession has caused sales for the gaming industry to suffer.
3. Education and training. The success and wealth of a nation is often associated to the skill level of the citizens residing in said country. With this in consideration, the education, training and general attitude of a country's population are indicative of determining the rate of growth of the nation.
The U.S as of 2007 had 39% of American students aged 24-34 with tertiary credentials. While that level has remained roughly constant for many years, there seems to be evidence which shows that it is on a decline. At least 10 countries have exceeded the U.S.'s current attainment levels. Moreover, the U.S. now ranks second in the world for the percentage of students who begin a tertiary education program but fail to complete it.
What does this increase in GDP mean?
People are avaricious and would like to obtain materialistic goods, leisure and entertainment. All of these acquisitions are attained by the economic growth of the nation. Henceforth, an increase in the economic growth has been responsible for the growth of the gaming industry. From evidence in the previous chapter, the GDP of the larger markets in the world especially the U.S., suggest that citizens within the 15-64 group willingly support the gaming industry albeit it parents buying systems and games for children or working adults purchasing it themselves.
From the previous text, it is understood that growth permits citizens to take pleasure in an enhanced standard of living. There is however no correlation between the standard of living and the GDP per capita. The GDP per capita figures can be deceptive especially when economic and social organizations of the nation are considered.
Number of game titles sold for the month of February 2010
The month of February 2010 totaled an amount of US$ 1.26 billion dollars in sales of consoles and games according to the NPD Group.
The top 10 selling games for the month of February 2010 were:
Source: NPD Group.
The above data distinguishes the sales of the various consoles in the year 2008. It can be noticed that sales were the highest during the months of November and December. This could be due to the fact of this being the Christmas holiday season. Game developers usually push sales during the Holiday season, so strong sales during the Christmas seem to suggest a successful period for Microsoft with the “Xbox 360” sales.
Source: NPD Group
“Activision's “Call of Duty: Modern Warfare 2” had another strong month with sales of 567,100 units, giving it third place. It has now become the third-best selling video game of all time”, said NPD, with lifetime sales of almost 10 million units.
“Revenue from U.S. retail video game and console sales increased 4% annually to $5.53 billion in December 2010, but video game sales disappointed as the industry registered growth in the year's final month,” according to research firm NPD Group.
For the year, the U.S. videogame industry generated revenue of $19.66 billion, down about 8% a year ago as can be seen in the illustrations above.
This decrease in sales and revenue can be explained from information gained from an article on http://online.wsj.com/article “U.S. Videogames, Console Revenue Rose 4%”
Gallagher (2010), CEO of Entertainment Software Association claimed that, “last year (2009) was a tough year for consumers and national economy”. He also went on to say that he expects the industry to recover in 2010 after the recession subsides and the economy regains its structure.
The recession has also caused a slowdown in the economic growth of the world which also affected the gaming industry as an entirety. U.S. President Obama called for new models of economic growth to help avoid a repeat of the debt driven expansion of the past.
In an article featured on http://recession.org/news/stimulus-jobs-temporary, President Obama gave an insight on the state of the economy.
He said that there was an anticipation of a continuation of future job losses in the weeks and months to come as the economy recovers. Obama (2010), said that “there is always a lag of several months between businesses starting to make profits again and investing again and them actually rehiring again”. He also stated that “having moved the economy on the right track.. there's no reason why we're not going to be able to not only create jobs, but the kind of sustainable economic growth that everybody's looking for.”
The White House has highlighted quite a few pointers of economic stabilization over the last quarter of 2009. The Administration have argued that the Democrats controversial $787 billion economic stimulus program helped stave off a depression and spark a 3.5% growth in the third quarter. The program has created 640,000 jobs in the early part of 2010 in the U.S. according to www.Briefing.com.
The video game industry is the fastest growing sector of the entertainment industry in Canada, and one of the most vibrant, fastest growing industries in the world. Canadian video game companies are renowned for producing high quality games, and are behind some of the world's most successful titles. 20% of the top selling titles in North America and Europe in 2008 were developed by Canadian developers and Canada recently overtook the United Kingdom to become the third most successful producer in the world.
With increasing popularity, comes increasing instances of illicit activities, specifically piracy of video game software and circumvention of digital locks (called technological protections measures or TPMs) that are built into consoles and handhelds that prevent illegally copied games from being played.
In an article from www.straight.com/article-248821, “According to Industry research, some 34% of Canadian gamers have acquired pirated games (compared to only 17% in the United States), while 22% of gamers have modified their video game consoles or handhelds to play pirated games.”
Internet piracy of video-game software in Canada has undergone explosive growth, and there has been an astonishing 300% in the downloading of illegal games via Canadian ISPs between 2007 and 2008.
It costs approximately about $10 and $30 million to develop a high end video game, and not many games normally sell marginally to reach profitability which is inevitable in the industry to sustain a competitive advantage. With the pedigree of the substantial investment needed and the difficult degree of risk related with the large scale assembly and production of entertainment software, piracy essentially lowers the industry's ability to recover its investment, resulting in fewer games as well as loss revenue and employment opportunities.
Predominantly in this economic climate, where jobs are an especially precious commodity, it is critical that the government play its part in adequately protecting the gaming industry from piracy. Specifically new copyright legislation must provide legal protection for TPMs, prohibit trafficking in “mod chips” and other circumvention devices and services specifically designed to facilitate piracy by defeating TPMs, and implement criminal and civil remedies against those who provide such services and tools-those who are profiting from piracy at the expense of legitimate businesses.
For the video-game industry, TPMs are not only used to prevent piracy and cheating (e.g. “modding” game code to give an unfair advantage over other players); they also enable access to a greater range of features and options that would otherwise be unavailable. Things like parental controls (which allow parents to control what games are played by their children and what kinds of content they are exposed to), “trial” or “demo” versions of games, and new digital distribution platforms like Valve's Steam, Xbox Live Arcade, or the PlayStation Network, all provide greater choice and access for consumers.
Ultimately, implementing legal protections for TPMs will benefit consumers by providing greater certainty in the digital marketplace, which will, in turn, spur investment in the development of new digital products, services, and distribution methods, more consumer choice and lower prices. Furthermore, legal protection for TPMs also enables a vibrant ecosystem of digital business models. If a creator or company chooses to sell their work as a digital product or service, legal protection for TPMs helps ensure that this choice is respected, much in the same way that locks on the doors of a bricks and mortar store allow the owners to ascertain when and how consumers can access their product. However, if they choose to give their work away and make money in some other manner (or not at all), they are free to do so.
By ensuring that consumers have a variety of digital offerings to choose from, legal protection for TPMs allows market forces to protect consumer interests, so if a consumer does not like the conditions of sale or terms of service for one digital product or service, they can simply take their business elsewhere. Failing to protect TPMs under the law effectively means that the government is dictating the business model, which is bad news for business and for consumers.
The gaming industry urgently needs an updated copyright regime that protects our creators and rights holders, in recognition of the important role they play in the digital economy and in terms of the industry's future prosperity.
The Entertainment Software Association or ESA's primary objective of its Anti-piracy plan is to attack and reduce global entertainment software piracy, estimated to cost the U.S. entertainment industry millions and millions of dollars every year. The program's primary components are enforcement, training, including education and enforcement programs in the United States and abroad. ESA members actively participate in shaping the industry's anti-piracy priorities and ensure that available resources are properly allocated for the enforcement of their intellectual property rights. ESA's anti-piracy efforts on the Internet, and in the United States and select foreign markets are directed towards the active protection of members' game products through online enforcement, criminal raids and prosecutions, and civil litigation. ESA's training programs helps to elevate the protection of interactive game product as a priority for law enforcement officials, as well as enhance their knowledge of the entertainment software industry and its products. In addition, ESA's intellectual property education and outreach efforts help to foster respect among members of the general public for the intellectual property rights of the software publishers.
In an attempt to reduce piracy, the French have passed a new law requiring Internet service providers to cut off Internet access for repeat copyright infringers. Under the new ‘HADOPI' legislation ISPs have to warn their customers twice that they are accused of infringing copyright. If both warnings are ignored, Internet access for that subscriber will be terminated for up to a year - and they'll have to keep paying their ISP bill throughout this period too.
The law goes much further than disconnecting alleged file-sharers though. In addition it is now possible to take “any action” in order to put a halt to copyright infringement. For example, websites can be blocked without having to provide hard evidence that they are engaging in illegal activities. The Pirate Bay has already been mentioned as one of the sites that could be easily taken out under the new law.
According to the BBC, this law will also be implemented in the UK in the near future to help regularize piracy within the gaming industry also.
In China, videogames companies and investors are rushing to tap the promise of China's game market, but many of them are discovering that a slow moving bureaucracy and rampant piracy remain significant hurdles.
According to Li (2010), “hackers and other forms of piracy reduced the industry's profitability by roughly 1.5 billion USD last year (2009).”
In the United Kingdom (U.K), the video game industry is worth £1 billion, but despite this contribution to the economy, the U.K's sector has fallen behind countries such as Canada, France and South Korea which offers subsidies to game developers.
The number of video game developers in Canada increased by 42% in 2009 compared with only 8% growth in Britain. In an article taken from http://business.timesonline.co.uk/tol/business/economics/budget/article7074192.ece
Mr. Darling said that, “he would offer help to the computer games sector” which was also the case with the film industry in the U.K. The film producers are allowed to claim 20% of their budget in a tax rebate which is estimated to be £100 million a year.
Mr. Darling also said that, “we need to keep British talent in this country.” This decision should increase the investment in the British games developers by £457 million over five years and create 3,550 graduate-level jobs.
In the U.K., the video game industry employs 28,000 people, which consist of 9,000 developers, the video game industry patronizes the economy more than the film industry does. In the fiscal year of 2009, games revenue was 44% higher than box-office receipts and DVD sales combined in the U.K.
For a video game to be considered for tax relief in the U.K., the game would have to be “culturally British” like the Harry Potter video game trilogy.
CASE STUDIES RELATING MICROSOFT
A compilation of various case studies would be used to ascertain the stance which Microsoft has taken against the Piracy industry in the Gaming sector.
* The first issue addressed would be, “What is Microsoft's stance on piracy in the gaming industry?”
In an article from http://www.microsoft.com/piracy/reporting/default.aspx, Microsoft claims that “Software piracy equals lost wages, lost jobs, and unfair competition. Struggling to fight against piracy, some companies must devote resources to anti-piracy technology, ultimately slowing down the development of better products and services. Others fail under the pressure of prices that legal resellers can't match. Reporting piracy means keeping a level playing field, and ensuring the most reliable products for your customers.”
Analysis- This can be traced to the previous literature review chapter where competitive advantage was discussed. The piracy industry represents the type of innovation which can be achieved with lowered costs and has gained a significant market share from Microsoft.
Microsoft, being the industry leader and with maximum market share can rely on their competitive advantage to maximize profits and gain customers.
* The second issue would be, “Has the piracy industry forced Microsoft to make any changes to their strategies?”
This question was solicited as to clarify whether the piracy industry has had an impact on Microsoft's sales strategies.
In a section from http://www.businessinsider.com/2008/11/microsoft-piracy-makes-china-an-irrelevant-market, Microsoft CEO Ballmer (2008) states that pirates in China are denting Microsoft's profits and terms China as an irrelevant market due to the high number of piracy.
Ballmer (2008) is quoted as saying, “China's not really very important to our business right now…..I'd like it to be but it's not because of the high rate of piracy of intellectual property. We need some IP reform in China for it to be important to our financial results.”
Microsoft has countered the piracy in China by issuing a new anti-piracy program called “Windows Genuine Advantage” which validates the operating system run on the computer and if found to be illegal; the “windows” is void.
Analysis- Microsoft has realised that the Chinese market is famous for pirating the Western Hemisphere's culture et al. The executive at Microsoft has stated that China is considered a lost market due to the excessive piracy of the software and games and hence has formulated strategies to at least recuperate some profits from this.
* The third issue discussed would be, “has the piracy industry inflicted any negative effects on the gaming industry as an entirety?”
In an article from Pachter (2008) pointed out, “the gaming industry will weather the economic storm”. True enough, games are selling more than ever and are hotter than ever. They also happen to be more expensive than ever. In result, piracy has skyrocketed to unseen heights.
Just recently Electronic Arts lost millions when 500,000 copies of Will Wright's latest creation, Spore, were illegally downloaded in record breaking numbers. The project took an approximate $80 million to produce and sells for $49.99. But with piracy on the rise, production cost and price means little or nothing during these times.
“This problem was a http://zkwang.wordpress.com/2008/06/29/pc-piracy-is-1366-billion-dollars/
Analysis: While the industry loses equal amounts of the money invested into these projects due to piracy, competition is ultimately good and encourages Microsoft to revamp their marketing strategies.
· The fourth issue posed would be, “Are there positives from the piracy industry?”
A study from the Institute of Policy Innovation and an article from the Dutch Government http://blog.kennisland.nl/knowledgeland/2009/01/21/why_trying_to_become_a_guitar_hero_is_bad_for_the_music_industry_but_good_for_the_economy/
have suggested that piracy has actually had positive effects on the industry.
“The research shows that the economic impact of file sharing on the Dutch economy is strongly positive when viewed from both short term and long term perspectives. As a result of file sharing consumers get access to a wide range of cultural products. This has a positive impact on the economy … According to estimates the positive economic effects for customers' amount to 200 million euro per year.”
Analysis: Microsoft has benefitted from the advancements and exposure piracy has offered. Microsoft has realized that they can now sell games via peer-to-peer downloading like what the piracy industry has been doing for free all along, hence capitalizing on lost profits.
* The fifth issue is, “Who is benefitting the most from the rise and exploitation of the piracy industry?”
This question is posed as to ascertain who's gaining the most from this new market entrant.
In an article from http://www.mcvuk.com/news/36988/MW2-most-pirated-game-of-09, it was written that, “Call of Duty: Modern Warfare 2 was the most pirated game of 2009 according to BitTorrent tracking statistics.”
Then it was said that, “An interesting thought to stem from the numbers is that of the detrimental effect piracy has on sales. Modern Warfare 2 has broken every sales record around in its short time on the market, and it has done so despite the high level of piracy.”
This has shown the high level of piracy for the year ending 2009. The article then claims that, “Is that evidence that games piracy is not directly related to lost sales?
Analysis: This has shown that piracy within the gaming industry doesn't really correlate to lost sales as per say evidence from above article. The real beneficiaries are the consumers who are offered the product at a lower price than that of Microsoft.
* The sixth issue would entail, “Has the Governments of the various markets done anything to curb piracy and help the sales of Microsoft?”
In an article from http://www.guardian.co.uk/technology/2009/may/18/computer-games-designers-tax-breaks, it is claimed that the British Government rewards the British gaming developers with tax breaks as an incentive to stay in the industry with the growing piracy market taking a toll. CEO of Tiga, Wilson (2008), said that “We're not asking for a handout, we're not asking for a subsidy to stave off collapse, we're asking for an investment to allow the games industry to be even more successful.”
He also went on to say that, “There's no principle which the government can cling to and say there shouldn't be a tax break for a specific industry…Quite apart from the massive bailouts for banks, there have also been smaller schemes that have been effective for other industries.”
Analysis: The Governments of the major markets and especially Britain has given the developers an added incentive to cover for the rapid rise of the piracy industry and hence prevent foreclosure of the gaming industry.
IMPACT OF PIRACY ON MICROSOFT'S SALES
According to Microsoft.com, the 39 million Xbox 360 consoles has been sold around the world with 500 million games being sold. CEO Ballmer also said that the premium Xbox LIVE feature currently has an estimated 40 million users online which has grown in the last 5 years.
Drawing from prior information in the previous chapters, the increase and drop in sales can be explained. The drop in sales was a direct result of the piracy and the global recession which crippled the economy for the major part of 2008-2009. However the increase in sales would've been a result of governmental laws on piracy coming into effect hence forcing consumers to purchase original software and games and also as a result of the new sales and marketing strategies implemented by Microsoft.
SUMMARY OF FINDINGS AND ANALYSIS
The data in the findings and analysis chapter has illustrated the factors associated with the rise in the piracy industry within the gaming industry dominated by Microsoft globally. It has also shown how the piracy industry has forced Microsoft to adopt new approaches to it sales and strategies.
There are numerous recommendations which can be attributed to the findings and analysis. It is safe to say that further research should be conducted into the rise of the piracy industry. This is to ascertain the fact that the researcher has only reviewed and focused on games and consoles whilst, the industry really consists of other peripherals which was nearly impossible to review and research given the time constraints and other limits.
Notwithstanding, Microsoft was investigated as to determine the impact of the piracy industry on a gaming and software developer. There are other gaming and software developers globally, which can be investigated and may have different results from Microsoft with respect to the impact of the piracy industry.
With the “age of information” and technology available, the respective governments should rigidly implement more laws and rethink their strategies for the level of piracy which is occurring in the world today. The governments should mobilize specially trained personnel to intercept the operations of the pirates within the industry and enforce strict jail terms for perpetrators of the crime.
Microsoft has been successful so far in dominating the market of the gaming industry in light of the assault posed by the piracy industry. However, Microsoft should consider the reason why consumers are patronizing the piracy industry and lower their prices so that low income earners can afford a gaming system and the relative software.
Microsoft should consider “peer to peer” sharing and downloading by implementing a legal system for customers to operate in. This would nullify the piracy market and hence allow Microsoft to regain lost market share.
Microsoft should also reconsider doing business in China as it seems that there are no laws which can protect the company from being exploited by the rampant piracy in the country.
Microsoft should also consider rewarding customers for purchasing original software and consoles so that their customer base and core competitive competency would increase and remain loyal.
It can be acknowledged that the author has achieved the objectives that were devised from the beginning of the dissertation study. These objectives were accomplished by analyzing data which was collected over a stipulated timeframe with the literature review assisting with comprehension of the topic presented. A diligent ideology of the gaming industry in particular the piracy industry is important, as it has pioneered the mode of data exchange in the digital world. It was essential to clarify the impact of the piracy industry on Microsoft and the gaming industry.
The hypothesis, ‘Has the lack of laws by various Governments inadvertently caused a new industry to thrive, at the cost of the major established giants in the industry?' This was tested and proved to be accurate.
The findings and analysis demonstrated that the piracy industry was instrumental in a decrease in sales for Microsoft and loss of profit. It was also proven that with the piracy industry's gain of market share, Microsoft was forced to develop and explore new strategies to recapture their lost market share and competitive advantage.
It was also noted that the piracy industry was not limited to Microsoft, but the gaming industry as a whole which resulted in the British Government implementing ‘tax breaks' to save the industry in the United Kingdom.
 Exogenous- is a term used to sum up the contributions of various authors to a model of long-run economic growth within the framework of neoclassical economics. Haines, Joel D. (January 1, 2006) Volume 16; Issue 2; Page 106.