Econ of Strategy is the coolest Econ class I've ever taken

[Don]

<div style='font: 12pt Modern; text-align: left; '>Today, after talking about why Dotcoms fails and stuff, I decided to talk to Professor Prag and wonder if he knew much about the video game industry, and how the analysis we did apply there, and amazingly enough, he did! We talked about 20 mins on the state of the video game industry. Of course, he was not a diehard gaming addict, but knew enough about it. In fact I think he said we'll be talking about firms like Sega pretty soon.

Highlights of the conversation:

Sega - They're risen from the dead, and is on the way to the grave, again. Professor Prag agrees with me 100% on the EA response to Sega. It is a whole different ballpark moving from first party to third party. I for the life of me don't know why the mass produced sports game of EA sells so well, but in the realm of 3rd party developers Sega would indeed be wise to heed a company that is far more knowledgable about the market than they are. Sega's response to EA just demonstrated that they've no idea what 3rd party development is like. They simply don't understand that while they may believe, and it may very well be true, that they make better games than EA, this doesn't matter if people don't believe them, and in the current American market there's no reason for your average any PSX/PSX2/N64 owner to believe that Shenmue is really superior to Insert_Sports_Name 2001, or Phantasy Star Online is really a better game than Superman 64 (I recall this title selling a lot despite having incredibly low review scores).

Professor Prag thinks if Sega got bought out by one of the big players they'll do pretty well, and I agree. Except Sega, in their lack of wisdom, is going into the 3rd party business, and I forsee them getting burned here due to their lack of knowledge. It takes more than having good games to sell them. And it is not just advertising, either, though we're starting to deal with the realm of Game Theory here...

XBox - Like Sony, Microsoft doesn't have exactly the strongest 1st party in house development. Professor Prag thinks that they'd have some trouble adjusting to the console market where competition is fierce as opposed to the monopoly MS has on operation systems. However, from what I read about the direction XBox is going it seems like they are pretty 3rd party friendly. I consider the XBox the only real competition to PSX2/PSX, and most economic analysis I've read that's written by real economists as opposed to Joe Gamer agree with this too.

Nintendo - Pokemon is still selling like there is no tomorrow. Nintendo clearly knows how to take advantage of a fad. However, most of their games are children-oriented, and children, as a rule, don't have as much money to spend as teenager or older games. This helps explain why Nintendo has such a deadlock on the Gameboy, because Gameboy is quite a bit cheaper than your next generation console. I think Gameboy will continue to thrive, but the Game Cube will not. It might do well in the American market (Rare is a pretty big factor here), but I don't see any signs that they're going to surpass Sony, and they will continue to lag behind in the Japanese console market, due to a lack of RPGs. The Japanese market isn't everything, yes, but you're not going to pass someone up if Sony continues with the near monopoly it controls on the Japanese next-gen market.

We didn't get to Sony, it was getting late and I don't want to get caught by the traffic on the way back.</div>

[Corak]

<div style='font: 12pt Modern; text-align: left; '>You seriusly think Sega doesn't realize it takes more than game quality to make sales? What basis do you have for saying that, anyway? Please expand on your "Game Theory". And everyone who reported those statements by EA thought it was the rambling of a man scared of his enemy. The response was done by Sega Europe, by the way. Anyway, Sega software sales were very good even on DC with the much smaller user-base of the DC. Sega's games consitantly were in the top 10 even in Japan. True, for most of the time they didn't have much direct competition on the system but they did early on in the DC's life in the US but their software outsold the competition by far. DC having about twice the ratio of software to hardware sales than PSX2 means something. Considering how Sega has done software-wise despite having the burden of poor performing hardware to drag them down, I see nothing but success with all the extra money and resources Sega is going have for advertising, software research and development, etc.

And as for Nintendo we have no idea if Nintendo is going to lack RPGs. The carts is what scared away most developers for the N64. I think it's way too early to have any clue about how this generation will turn out.</div>

[Don]

<div style='font: 12pt Modern; text-align: left; '>I look at Japan and see that their games are consistently blown away by any random game that may show up for the PSX and Gameboy. For example PSO is sitting at around 118K total sales at the 49th place or so right now. Comparatively, looking at couple place up in the Japanese sales chart reveals the Crash Bandicoot Carnival and Everybody's Golf both sold 200K and I've never even heard of these games. Hell, something goffy sounding like "Muscular Ranking V3" has 107K on it. Or what about Hamster Tarou for the Gameboy, whatever the heck that is, it sold 338K. At since PSO is sittiong at 49th place I doubt it'd overtake any of the titles that accumulated about twice the sales or even more.

If you honestly think your flag ship title selling less than any random title on the Gameboy/PSX isn't a problem, you've a problem worse than the one Sega's facing right now. The sale chart don't lie. Numbers don't lie. Sega's been posting huge losses for consecutive years despite still having insignificant market share. Something has to be wrong here.

The only reality of economics is the market itself. The market says EA is right, Sega is wrong. That's why EA can mass produce sports games and other games of dubious gaming merit and still turn a huge profit on them, while Sega 1st party games can't even compete with random Gameboy/PSX games.

And I'll say this again, 1st party and 3rd party development are completely different ballpark. Sega has no idea what they're getting themselves into. They may think PSO or Skies of Arcadia is every good as bit as FF7-9 or DQ7, and that may be true, but they won't sell anywhere close.

And you sound like you really believe Sega has good economic sense... so how are you supposed to explain that despite they have some of the best first party support, and a pretty powerful console, they're still deep in the red? There are plenty of businesses that may be *good* but doesn't have any perception of reality/economics. Look at the dead dotcoms. There is living proof that a lot of people had no idea what reality really is.

As for Game Theory, if I could explain something that for everyone believes in it sees as revolutionary as Calculus is to Physics, I would, but I can't. The part relevant here is the sanity check argument, or that if you can somehow advertise so that everyone believes getting car is the best use of their money, something will still break apart when you start getting the huge traffic jams. Though Sega's situation is far simpler than this since with their nonexistent market share they'd never have to worry about the effect of retaliation. Take a hypothetical port of, say, PDS. The awareness of this game is limited to about the 5000 Saturn users who have it and whoever they managed to convince. This isn't anywhere close to turning a profit. If it is, they would have ported it already without a second thought. Sega, at the very least, would have to run ads in gaming magazines so that it reaches beyond the 5000 Saturn users that once had this game and their friends. They've to hire programmers to port the game over, and that also costs money. Big stores like CompUSA/Best Buy won't even bother carrying this game so they're limited in their distribution to stores like EB which doesn't reach a large % of audience (there's no way most sales of any popular game can be from small stores that are inherently disadvantaged due to economies of scale versus the large companies... that is unless the small stores are the sole source of selling these games). I remember reading that a typical game has to sell around 30,000 to consider a fair return in Japan and I'll assume the situation is analogous in America. And I can almost guaranteed that PDS will not sell 30K, or if it does, it'd have to do so much advertising that they'd still lose money. You simply can't bring a game with 0 awareness to 30K by adveritisng alone... otherwise everyone will be doing this.

As for the hardware to software ratio, the average buyers of a PSX2 versus a DC isn't even remotely comparable. PSX2 has been able to reach the casual gamers, assuming one was lucky enough to get one. I know the Madden Football games has been the best seller (don't know if it still is), and this reflects that the average PSX2 user IS a casual gamer, because I don't know of a single sports game that sells well just because the hardcore fans think it's great. DC's market is almost solely hardcore loyal Sega fans who will suck up whatever the company produces. Once again, the market does not lie. Sega yanked the DC, while Sony still can't produce enough PSX2s for demand. I've never heard that it's a bad thing you can't produce enough stuff to sell them.</div>

[New and Improved Zeus]

<div style='font: 10pt "Arial bold", Modern; text-align: left; '>Isn't it kind of difficult to make assumptions like that when Microshaft and Nintendo haven't even revealed half their cards yet? I might be wrong here, but as an Econ grad, I just think you need to know all the variables before you can make a judgement</div>

[Corak]

<div style='font: 12pt Modern; text-align: left; '>PSO is actually sitting at 30 right now (21 the week before) after it's been out for awhile. It has sold 190K so far and that's not bad espeically when you consider it's big tagline is online and you look at the online situation in Japan as it costs money by the minute in Japan even for local calls. And I get my Japanese figures from checking out Magic Box. They don't keep an archive so I don't have anything I can show you. But from memory, Sonic Adventure sold almost 500K in Japan, VF 3 sold around 400K. Sega Rally 2 sold around 350K. For solid figures I can't remember much beyond that. I just remember seeing at least one DC game in the top 10 almost always, usually 3 or 4 espeically before PSX2 released. And you mention that Sega gets outsold by your average PSX/GB game. Maybe having tens of millions less people to buy your games might have something to do with that.

How can I explain why they are still in the red? Because Sega probably didn't have the funds to advertise as much as they needed to. And mostly because the situation in Japan where most will not even consider buying a console that does not have Square or Enix or Nintendo. But once they do buy the system sales for the big companies can get very generous. And the market there has been in trouble for awhile now.

As for your hypothetical PDS scenario Sega has said absolutly nothing about porting PDS or any particular Saturn game for that matter. That was completly my hoping against hope. All the Sega guy said is "that's the kind of game we're looking at" when the guy mentioned Shining Force 3. He could just be playing to him, or really mean it. But he never mentioned any particular Saturn game.

As for EA vs. Sega right now. If you pay attention to www.gameweek.com Sega and EA usually swap #3 and #4 (EA is usually #3 but still) spaces as videogame manafacturs despite EA having the much more larger userbases to work with.

I agree with you on the ratio thing though. Wasn't thinking it through.</div>

[Don]

<div style='font: 12pt Modern; text-align: left; '>If we do, supposedly there always exist some equation we plug them in and we get a result.

And even if we've all the variables, many times the equations that govern the market is too complex to be actually solved anyway.

Of course, I wouldn't say there's no way my prediction can be wrong. Who knows, maybe Nuon or whatever will come around and be the best next generation system ever and totally kill everything else. But in all likelihood that's not going to happen. In the case of Microsoft we're looking at a company with considerable marketing experience and financial backing, and their attitudes is friendly to 3rd party support to compensate for their lack of a strong 1st party, so I think they'll be a good competitor. In the Nintendo's case, I'm basing this from the past. Nintendo hasn't been doing well in Japan because of a lack of RPG. Though the Game Cube will not have as much limitation, consider they flat off refused to work with Square this doesn't bode well in the RPG department. Nintendo continunes to pump out 1st party games that sell lots just because it's Nintendo, sort of like the next FF can be shipped with just rocks and it'd still sell a lot. In America we also have Rare being a considerable force here. N64 is pretty competitive with Sony here, and I imagine the next generation will probably stay the same, but looking at the market from a world as a whole, they're clearly going to come out behind Sony if they can't improve their situation in Japan, and from what I've heard so far it doesn't seem like that's happening. Much of Nintendo's revenues comes from the Gameboy right now with their near monopoly on the handheld systems. This is where catering to younger audience pays off since Gameboy is cheap so your younger audience can afford it (or at least convince parents to get it). Still, you can't expect to use the profits of Gameboy to cover a next-generation system that's not going to be successful because then you might as well not produce a next-generation console. I'm thinking more about Japan here, of course. Assuming nothing huge changes the American market will remain profitable. But in Japan, with Nintendo's current situation I'm just not seeing how they can make a profit in Japan with their next gen console, and yet they will have to continue developing games there. That will hurt in the long run to continue sustaining a lost cause.</div>

[Corak]

<div style='font: 12pt Modern; text-align: left; '>You're looking at "Dengeki Chart" on Magic Box. I always just look at the "Console Chart". Wonder which one is more accurate. BTW, I meant 140K for PSO. Typo :)</div>

[Stephen_S]

<div style='font: 9pt Arial, Modern; text-align: left; '>Have you ever turned on CNBC and seen a group of economists arguing? It's a circus. No one agrees on anything, and they all use meaningless buzzwords and catch phrases to make themselves look smart. Like, "The business paradigm has shifted," "The entire market is in a cyclical downturn," "We must consider the dampened margins," and my personal favorite, "This company is experiencing negative growth."

So. From your professor's point of view, Sega is experiencing serious negative growth right now thanks to bad strategy coupled with a cyclical downturn in the videogame market. The paradigm has shifted, and Sega is outside the bandwith, possibly due to dampened margins of some sort. Game deflation may also be a key variable.

No, seriously. I'm sure your prof is a smart guy, and he may very well be right. For the sake of Sega, I hope he's wrong. If not, then I'm in for a long period of negative growth.</div>

[Don]

<div style='font: 12pt Modern; text-align: left; '>140 vs 118K, it's not a big difference. And just because online gaming costs money, it doesn't justify why one of your biggest project isn't selling as much as a random PSX/Gameboy game none of us has heard of.

As for other DC game sales, like Nintendo the DC sales are very concentrated around 1st party games just because 3rd party support isn't that strong. For a company like Sega, selling 500K on a big game isn't necessarily profitable. The 30K figure is for your typical random PSX game that's probably developed by a small staff with minimal advertising. Shenmue cost what 50 million to make? I think in America they sold about .5 M, and if we're generous and say it sold that many in Japan too (pretty sure DC isn't nearly as well off in Japan as America) that's 1 M sales. Shenmue is what, $50-60? Even if that's pure profit, they still haven't recovered the cost of the game yet. Of course some of the cost is involved in creating new engines and stuff (FREE) but I'm just not seeing Sega mass producing Shenmue games anytime soon, so I'd say most of the cost aren't something they can use in the future. This is different to, say, Square blowing who knows how much money on FF7, but oncethey got their computers up they can pretty much just mass produce RPGs from it, in particular, FF8 and FF9 took much shorter than the previous development cycle of FFs. I'm not too sure about your numbers. I'm pretty sure DC is doing far better in America than Japan, and Shenmue is the only thing I can think of offhand that sold .5 M even here. I remember seeing Skies of Arcadia dropped off the charts rather quickly, and I don't really have a reason to believe this isn't the norm.

The idea that "If Sega sells X with Y DCs, then selling the same game on PSX with 100Y install base they got to sell a lot more." But this isn't necessarily true. The best example I can think of is FF7. It sold 2.5 or so million back when there's only around 5 M installed base of PSX. I don't know what the PSX installed base is in Japan when FF9 came out but I'd willing to bet it's greater than 15M. I don't think FF9 broke 3 M yet. Assuming there isn't a sudden decline in the quality of the game (and frankly, Japanese gamers just suck up FF games because it's FF), having a 3+ times greater installed base increased the actual sales very little. This is becasue the first 5 million PSX owners, you got your hardcore gamer who must have every game that's ever produced, and your Square fanatic that bought the PSX just because FF7 is for it. But the next 10 million PSX you're starting to get into more casual gamers that don't care much for FF games. Same with Sega. They sell a high % of games relative to # of systems because people who own a DC tends to be diehard Sega fans as opposed to a casual gamer. But when you move to something like Gameboy or PSX, there are only so many diehard Sega fans out there, and in fact it's even worse because even the most diehard fan will probably not buy a game twice, so you may even sell less!

I remember Lunar EB Saga lasted about 1 week on the top 30 chart in Japan (and it was somewhere like #15 or so, nothing spectuclar) before falling off. I haven't heard of any huge success with Grandia in US, and despite Victor Ireland saying they sold a bazillion copies of Lunar, I've yet to hear concrete numbers of Lunar being a top seller in US. Yes I've seen people line up for Lunar at EBs and stuff, but how many copies could possibly be sold there? 30 copies on opening day and maybe another 30 in that month? How many EBs are in the US? I'd guess no more than 1000. That's 60K copies. Not shabby, yes, but certainly not a top seller either. I find it hard to believe that a game that is almost exclusively carried by EB/Babbages can do well in US (though I heard Fry sells Lunar minus the goodies). It just defies basic economics that anything can sell well just from EB/Babbages, because if it's really true, the big companies will sell them too, and they can sell the games quite a bit cheaper than EB/Babbages can. I can't think of a single title in the US that is a top seller that is not carried by, say, Best Buy, and I believe the reverse is also true. Though I will never understand why there are 20 copies of Frogger 2 on Best Buy, clearly they must be selling somehow otherwise Best Buy would have yanked them off the shelves a long time ago and replaced them with something that sells better. The selection of games by the big companies are pretty similar, and it's not an accident. They will only carry what is profitable since they're don't specialize in gaming, they only care about selling what the people buys. In a capitalistic society, or heck, just looking at human nature, it makes zero sense to buy WWF Nitro Turbo Super at EB for $40 when you can get it at Best Buy for $5 cheaper (unless you're planning to burn it and return it, I guess).

Your idea of advertising is wrong. If advertising really improves selling, you'd sell your first born to the black market to fund advertising. Consider the losses Sega face is quite large relative to advertising costs (I heard they lost around 300 million last fiscal year. I think it doesn't take that much money to advertise) they can certainly go out and borrow money or mortage their company if it really will improve the situation. If you've to borrow $5 to make $10, you'd do it. It's that simple. Especially when you're already losing say $200, assuming you can find someone to lend you money, borrow another $5 doesn't really affect your debt that much, and while getting $10 doesn't do much to the debt, it's still better than nothing.

And then there's also the possibility of retaliation. Even if say right now, Sega transferred all their assets to Sony, so Sony started advertising this campaign by having some wrestler saying PSO is as cool as wrestling, so as a result the game suddenly starts selling 2 million copies. But the guy who bought PSO probably didn't go out and buy, say, WWF Nitro Turbo Edition, even though he would've done so if it wasn't for the ad. So then the wrestling game guys will be running ads on why PSO is for wimps and Wrestling is the only way to go. The problem of advertising is that the number of games sold per system is really a limited number. It can fluctuate but it is certainly not infinite. Suppose every year around 10 million games gets sold for the DC. If some huge advertising blitz makes PSO sell 5 million copies (I don't know, people start buying 3 copies of the game and use the extra copies as frisbee or something), this 5 million copies did not come out of thin air. Granted this year they will probably sell a bit more DC games but it's certainly not going to be 15 million copies. So this profit comes at the expense of other people who would've sold their game if you didn't buy PSO. Of course, if you managed to already sell 5 million copies then you don't really care how much retalitory ad gets put on there, but typically companies are very quick to pick up things like that. If they realize your marketing blitz will put you at say 5 million copies which directly interferes with their profit (because people are buying PSO, not their game), then they will quickly counter with ads of their owns to lessen the effect of your ads. Game Theory predicts (and I think accurately) that retaliatory advertising is mutually destructive, because even if every single ad on TV is about some DC game you really can't expect the total # of DC games sold to suddenly jump to, say, 100 million. There will be more DC games sold, but it's certainly not going to make up for the ad cost. So all that money into advertising is wasted as the ads essentially cancel each other out. Note that while retalitory advertising is mutually destructive, you still have to do it because the alternative would be everyone buying PSO and not buying your game, so if you're going down, it's better to take your competitor with you rather than going down alone.

As for the sales of EA vs Sega, EA is 3rd party, Sega is 1st party. This is a huge difference. If memory serves correct Sony is actually on those top 10 manufacturer list too, and look at the game they make. I don't know why people would even want Legend of Dragoon, but it's selling lots. There are some considerable advantages for being a 1st party developer. Furthermore since Sega games typically reach out to its loyal diehard fans, which is a market that does not grow considerably as # of systems increase, while EA's sport games reaches out the average gamer which does grow considerably as # of systems increase.</div>

[Corak]

<div style='font: 12pt Modern; text-align: left; '>Very few games sell more than 140K so I don't see how it's so random, and just because we haven't heard of it doesn't matter. They have very different culture and tastes in Japan. But I'm not denying that sales are dissapointing in Japan, I just think you need to look at all the factors.

Yes, sales are very concentrated about 1st party support, but as I said even when they had healthy 3rd party support early in DC's life they outsold them bigtime. That may be one of the reasons 3rd party support was dropping like flies soon after DC's launch (of course PSX2 had something to do with that to). As for Shenmue, it is expected to be made into tons of games to recoup costs. It sold around 300K in Japan. As for US sales, I'm sure the NFL games sold very well, probably better than Shenmue (the first one lasted on the top 20 charts 2 months in a row ; the 2nd, 3 months in a row). Sonic Adventure is probably up there to as well as Crazy Taxi.

People who buy Sega games tend to be Sega diehards because they had to buy a $150-$200 piece of Sega hardware to get to the games. Things will change drastically when Sega games are opened up to everybody. I don't understand why you can't see that. And FF 8 sold about 300K more than FF 7. It could be purely coincidental or not. It's too hard to tell. Nothing directly coorelates ever, but having much larger userbases to advertise to despite more competition I think is only a good thing, I've only heard you and your economist disagree. But you very well may be right, I just don't think that's the way is looking. It depends on the kind of software Sega will produce and how they tell people about it. Maybe you're right, maybe Sega has no clue how to sell anything and will die a thousand deaths because they didn't let some company buy them out. But I think how they handled the DC and software (when you consider all the factors) indicate something different, you don't I guess.

If advertising didn't affect sales alot then why do companies put so much money behind them? And if they do affect sales so much and don't cost that much then why do only the bigger companies advertise their game?</div>

[Don]

<div style='font: 12pt Modern; text-align: left; '>I know they posted a huge loss last year and I don't think they've been profitable for a long while. How could they be? This is the first year they actually got a console of decent followings and they're still losing a lot of money. One would imagine the situation must've been worse back when they only had the Saturn which did far worse than the DC.

Though it's true perhaps 13 Ecomicsts will have 26 reasons as to why Sega is dying (again, but Sega's pretty good at coming back from the dead too). You just can't be losing money year after year without some kind of consequences.</div>