History of computer gaming
Few industries have had such a meteoric and world-altering rise as the computer industry. From the number crunching military machines of the Second World War to the sophisticated miniature offices we keep in our pockets today, they all serve their purpose to make our lives safer and more convenient. Along with the design of serious applications came always the need of the mostly young engineers and programmers for relaxation and competition. In February 1951, Christopher Strachey tried to run a draughts program he had written for the NPL Pilot ACE. This became the first computer game ever written, even though the first version overloaded the computer’s memory banks.
Tennis for Two was the first computer action game. It was developed in 1958 by American physicist William Higinbotham and ran on an oscilloscope which simulated a game of tennis or ping pong.
The commercial success of video gaming came in the 1970. Although coin operated games were available as early as 1971 it wasn’t until Nolan Bushnell and Ted Dabney founded a company called Atari and released the VCS (later called 2600) system in 1977 that computer gaming entered the living room. The big names in the industry weren’t Microsoft or Sony but Intellivision and Colecovision. In 1977 the market had become over saturated, creating the first video game crash. Quality had become second to quantity which led to an overproduction of mediocre machines and questionable cartridges. Fairchild and RCA left the industry leaving Atari and Magnavox as the sole contenders.
The home computer market took off with the release of the Commodore 64, Sinclair ZX 81 and Spectrum and the late success of the Apple II computer. The driver behind the surging sales was the ability to play realistic games in color and with sound. Soon home computers had taken a big bite out of the console market, especially since adults now could buy a computer to “do work” on and play games besides. In 1984, the computer gaming market took over from the console market causing the second video game crash.
In 1985 one brand dared to enter the market with an 8-bit console. The Super Famicom, or NES as it was renamed in the US, was manufactured by the innovative Japanese company Nintendo. The Nintendo Entertainment System was one of the greatest successes in computer gaming history. The effective use of gaming icons like Mario made the games instantly recognizable and the Japanese sense of humor made a refreshing contrast to the often violent and serious games of its US counterparts. Nintendo is the only company from that era that is still active and successful in the computer gaming business. Atari has become all but extinct, the brand name changing hands frequently.
The PC industry has traditionally kept its focus on the professional market. Geared toward word processing power and number crunching, it never gained the popularity as a gaming device like the consoles did. In the 90’s however, dedicated graphics and sound chips meant that games could be played on PC’s as well. Microsoft was never very interested in the gaming market (although they made a very good Flight Simulator) but the release of third party software using Microsoft’s DOS operating system created a whole new genre of gaming. Three dimensional shooters like Castle Wolfenstein and Doom pulled the serious gamer away from “kiddy consoles” like the NES. The PC soon became the gaming platform of choice for immersive, time consuming games while the console was used for fast moving action gaming and Japanese style adventuring. Big names in the console industry were Sega, with their Master System and Megadrive and again Nintendo with the 16 bit Super NES, leveraging on the popularity of Mario, Zelda and other brand characters.
The fifth generation saw a new name emerging. Sony, the Japanese electronics giant, had an opportunity to conquer the gaming market with its PlayStation. The 16 bit system sported sophisticated 3D graphics and, more importantly, could also be used as a CD and Video CD player. The PlayStation was a huge success, committing Sony to the still expanding gaming market. In 2000 Sony had surpassed Nintendo as market leader and released the second incarnation of its gaming system, the PlayStation 2. Microsoft in the meantime had seen a whole industry grow on what was basically their business operating system and wanted to have a piece of the market. In 2001, the Xbox was launched.
Supply and demand.
The Xbox took off in a complicated and demanding market. In 2005 Sony was still the undisputed market leader with 5 PlayStations and 4 PlayStation 2s sold for every Xbox. Nintendo had lost much of its luster with much lower sales numbers for its 5th generation GameCube system. The Xbox was a first for Microsoft and many people thought that Gates and friends couldn’t pull it off. PC gaming had become very popular with gamers buying equipment that cost multiple times that of the Xbox. It was almost impossible to believe that a machine that was basically a PC in a different package with limited memory and no expansion slots could survive against a dedicated console like the PlayStation 2. Microsoft had delayed the launch of the Xbox to be able to provide the latest processor and graphics chips to directly compete with Sony’s flagship. To gain sufficient market share, Microsoft would almost certainly have to sell the Xbox console at a loss and try to make up with software licenses given out to third party game designers.
An additional challenge for Microsoft was that the manufacturing and distribution needed a completely different approach from the traditional software the company was used to. The machine was made out of hundreds of parts that needed to be supplied at just the right time to avoid bottlenecks at the manufacturing plants. Time to volume was the critical factor. There were only a few time windows, like the Holiday period, to successfully launch the machine.
Microsoft’s sought help in the supply chain management from Flextronics, a contract electronics maker which provides electronics manufacturing facilities to original equipment manufacturers (OEM). Together with Flextronics, Microsoft selected 40 major suppliers, negotiated continuity of supply agreements; ensured capacity was in place, established complex logistics channels, found software tools to automate some of its supply chain tasks. To keep transportation lines to the markets in the US and Europe short, the company decided to use “industrial parks” in Mexico and Hungary. Suppliers were invited to set up shop in the parks making supply both flexible and efficient. There was an average of 600 [engineering change orders] weekly across the supply chain in the early stages of the design so flexibility was very important.
Manufacturing in Asia would be cheaper but as Sony had experienced, long transportation lines can lead to shortages at critical moments. The higher cost meant that Microsoft’s entrance in the computer gaming market came at a price of $4.4 billion in operating losses in May 2005. The first generation of X-boxes were market driven and not cost driven since Microsoft could not afford supply shortages in stores. Later models had a less critical time to market factor, which led Flextronics to move manufacturing from Mexico to much less expensive Chinese factories. Microsoft is now sourcing components locally within different geographies, creating new logistics channels, and doubling supplier capacity to support manufacturing in new regions, like the Asian market .
The sixth generation of consoles was a culmination of everything the most demanding gamer could want from a console. At the same time, new market segments were being identified. The Sony Play Station 3 not only provided the power for next generation gaming but was also a weapon for expansion in the broader electronic entertainment market. The next generation of video content carriers was Blu-Ray and HD-DVD. Sony as one of the founders of the Blu-Ray standard saw an opportunity for leverage and included a Blu-Ray player in its next generation console. Microsoft had already made several attempts to distribute content online and decided not to include an expensive add-on, managing to keep the price of its next generation console, the Xbox 360 below its competitor.
Although Microsoft kept its main supply chain and manufacturing manager, Flextronics it decided to out-source some of the designs to cater to non-US markets. Instead of keeping production close to the end-user, the cost factor was a bigger issue this time. Xbox 360’s would be made in Chinese factories and shipped to the US and EU as readymade products. Sony’s delays in bringing out the competing PlayStation 3 meant that Microsoft had some time to build up a head start. The success of titles like Halo and Halo 2 meant that there was an established base of Xbox enthusiasts that almost certainly wouldn’t wait for the Sony product to come out. IBM designed and co-manufactured the custom microprocessor that powers the Xbox 360. The microprocessor is a triple-core PowerPC that runs at a frequency of 3.2GHz. At a cost of $106, this single part accounts for 20.2 percent of the total Bill-of-Materials cost for the Xbox 360. Factoring in costs for the hard disk, the DVD drive, enclosures, the Radio Frequency (RF) receiver board, power supply, wireless controller, cables, literature, and packaging – the total BOM cost for the Xbox 360 Premium reached $525, well above the retail price of $399 .
To keep decreasing cost, Microsoft would continually have to redesign the components which made centralized manufacturing critical. To change the supply chain now required changing only the plant in China instead of changing several links in different parts of the world.
Global launch.
One of the characterizing features of the video game industry is that the end-users don’t want to wait for the product. In Japan, gamers are known to wait for days in front of a store to be the first to buy a new game or console. When Microsoft decided to launch the Xbox 360 globally it took a big risk. If supply wouldn’t be able to keep up with demand, the potential for damage to the brand name were great. For the first time ever, Microsoft plotted the near-simultaneous rollout of Xbox 360 on three continents: November 22, 2006 in the U.S., December 2, 2006 in Europe and December 10, 2006 in Japan.
Microsoft had already started planning the supply chain with its logistics partners more than a year before. The goods moved by barge from the factories to Hong Kong, at which point Microsoft took nominal ownership. The shipper had chartered Boeing 747 freighters for transit to its main distribution centers in Memphis, Tenn., and Duren, Germany, about 37 miles from Cologne. The booking of high-security trucks, both in the U.S. and Europe, was coordinated with customs clearance to keep product from sitting idle between its release and movement inland. Once again, flexibility was the hallmark of Microsoft’s distribution strategy. Most shipments went to the major distribution centers, where they were processed by one of the company’s “distribution turnkey vendors,” or DTVs. Rail played an important role in North America. Railroads have come under criticism in recent years for severe delays and capacity constraints, Microsoft sidestepped the problem by shipping on dedicated stack trains moving directly from Los Angeles to Memphis, via the Burlington Northern Santa Fe .
The risks of the global launch were evident. The longer the supply chain, the more issues could occur. If the product wasn’t ready at the factory, the ships couldn’t sail which made the smooth transition from manufactured product to sold product difficult. The sheer size of the operation made it difficult to manage. There was however a hidden opportunity in the unprecedented scale. The “buzz” created by the anticipated launch of the Xbox360 meant that many more potential customers were ware of the new console. The global launch also meant that coordination was central and potential issues could be dealt with simultaneously. Despite the changes in supply chain management, the Xbox 360 was in short supply at its launch date , a fact that might have actually benefitted sales in the long run.
Multiple suppliers.
Microsoft used three suppliers to make the Xbox 360 instead of only one. Because the company owns the rights to all the component designs, it can switch to the lowest bidder at any time. Flextronics and Wistron stayed on as assembling partners, later joined by Celestica. The supply contracts specify that Microsoft can discontinue working with a partner at any moment and can have other partners join whenever needed. In 2007, Wistron phased out production for the console, ending a six year cooperation. With Microsoft dropping its selling price of the Xbox 360 console earlier this year, it tried to push the profit pressure onto its three OEMs. Wistron, seeing it’s gross margin drop to 5.49% in the third quarter of 2007 couldn’t cope with a lower margin. In 2008 Asustek picked up production for the Xbox 360, showing advantages of flexibility .
Using multiple suppliers has its limitations. The coordination and quality assurance control is more complicated. Using multiple suppliers hasn’t made Microsoft impervious to lack of supply. Quality issues with the DVD drive, heat problems and the dreaded “Red Rings of Death” have led to problems with 3 out of 10 Xboxes, setting Microsoft back $1.05 to $1.15 billion in the second calendar quarter of 2007 . Because there is not one “owner” of an issue it is hard to look for the root cause. Only after pressure from end-users did Microsoft admit there were problems, offering to repair the affected consoles for free “This problem has caused frustration for some of our customers and for that, we sincerely apologize," Microsoft's entertainment chief Robbie Bach said. "We value our community tremendously and look at this as an investment in our customer base."
Conclusion.
As an avid gamer I have owned almost every gaming console in existence since 1980. During my law studies I worked in one of the first computer gaming stores in The Netherlands and I have experienced the anticipation that a new console or game can bring from close by. The issues that companies like Microsoft, Sony and Nintendo are facing are different from most other products because the gaming market is a very personal and emotional market. The video game industry crashes of the 70’s and 80’ were caused by the lack of quality and the emphasis on quantity. The distance make supply chain management crucial for today’s complex consoles. Sony, Microsoft and Nintendo have all had supply issues and survived. Companies like Samy (too expensive), Sega (quality and margin loss), Atari and even Philips have been less fortunate. To survive a company needs to take the market very seriously and keep informing the customer of expected issue.
Update:
There's an interesting article on the pricing policy for the hard disk upgrade that is available for the X Box 360. You can find it at http://kotaku.com/387864/why-360-hdds-are-so-ridiculously-expensive
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