INDUSTRY ANALYSIS

1. INDUSTRY ANALYSIS Make Believe Games, LLC

2. 01. OVERVIEW COMPANY Make Believe Games, LLC INDUSTRY CATEGORY Video Game Software Publishing INDUSTRY DEFINITION Establishments that carry out all operations necessary to produce and distribute video game software. These firms may design, develop, and publish games, or they may solely be involved in publishing. NAICS CODE 51121e CURRENT PERFORMANCE UCF STUDENT RESEARCHER Johnny Appleseed The recession restricted industry revenue growth down to 2.4% over the past 5 years to 2013. Consumers have been responding favorably to the publicity surrounding new game releases and are buying more games as disposable income rises. As consumers regain confidence in the economy, profit margins are expected to rise. DATE OF PREPARATION October 20, 2013

3. 02. INDUSTRY PERFORMANCE The recession restricted industry revenue growth down to 2.4% over the past 5 years to 2013. Consumers have been responding favorably to the publicity surrounding new game releases and are buying more games as disposable income rises. Since 2008, industry profit margins have decreased from 10.9% to 5.9%. As consumers regain confidence in the economy, profit margins are expected to rise.

4. 03. CURRENT TRENDS Trend 1 Trend 3 Trend 2 Blockbuster Sales Graphics Drive Sales Online Interaction In response to the economic downturn, companies have shifted to a more “movie style” sales approach, investing heavily in a few game releases instead of a variety of smaller ones. Product development efforts, marketing focus, and a significant portion of most company’s resources,are being allocated towards larger games to ensure their success. Although risky, this strategy has proved successful under current market conditions. HD-quality graphics, especially for action sports games, have taken the largest share of industry revenue. Visual effects are becoming increasingly complex, requiring consumers to invest in new technologies, adding new revenue streams for publishers. Investments in pushing the envelope for visual gaming capabilities is a risky, yet necessary, endeavor for companies wishing to remain competitive. 3D graphics are expected to become the norm for games over the next 10 years. Online gaming services have received explosive growth, with subscriptions to online games becoming increasingly lucrative. Publishers have also embraced the downloadable content (DLC) delivery model to forgoe the high costs of physical delivery channels. The DLC model has created significant cost advantages for companies integrating them (and in many cases heavily promoting them) in addition to their current retail distribution.

5. 04. GROWTH PROJECTIONS Overview The industry is expected to become increasingly profitable as it shifts towards an online delivery model. Wages for software engineers will continue to rise over the next five years due to the expectation for rapid advancements in gaming technology. Also, the smartphone gaming market is expected to grow at a rapid pace as handheld devices become more ubiquitous. Annual Growth Rates (%) • 2014: 9.2% • 2015: 7.3% • 2016: 6.6% • 2017: 6.5% • 2018: 3.2%

6. 05. FORECASTED TRENDS Trend 1 Trend 3 Trend 2 Leisure Time More Dimensions Marketing & Security IBISworld expects disposable income to strengthen over the next five years, which will help increase industry sales. But, as the job market regains traction and Americans return to carrer oriented positions, leisure time is expected to dwindle, leading to a decreased interest in playing video games. Fertility rates will infuence the impact of the newly found income & career focus as the number of young Americans in the market increases. Due to the target audience’s interest with 3D effects, production and sale of games with 3D capabilities are likely to rise in future game sales. These new and engaging visual effects will continue to grow in quality and quantity as companies are forced to participate in this segment of research and development to remain competitive. Publishers are demanding more options and add-ons from game developers to sell more accessories, causing market expenditures to rise. Peripherally related product categories, such as headsets, chairs with high quality audio, and a variety of adapters for controllers have proved a profitable segment for video game publishers. Security costs are also expected to rise steadily as companies truggle to maintain their expanding customer databases.

7. 06. DEMAND DETERMINANTS Factor #1 Factor #3 Factor #2 Customer Loyalty Leisure Time New Consoles Children who grew up playing video games are continuing their hobby into adulthood. This is increasing the pool of potential games, widening the opportunities for sales for publishers. Continuing its downward pressure on video game demand is steadily decreasing leisure time available due to a migration back to carrer jobs in America. This has also increased the amount of disposable income per household, which helps offset the negative effect of decreasing leisure time. A key driver of customer willingness to play video games is the amount of leisure time at their disposal. Any noteworthy increase in fertility rates (producing more young Americans) is likely to result in more spending on video games. The argest segment of video game consumers are maes from 18 to 45 years of age. The main ndustry growth driver is the release of new consoles. Improvements in home entertainent equipment, which also enhances the gaming experience, has helped spur demand for immersive gaming experiences. The release of Microsoft’s Xbox One has generated a noteworthy buzz and is proving to be a profitable release. New game releases with advanced graphic capabilities will continue to drive reenue for this new console.

8. 07. MAJOR MARKETS Market Segmentation 36% • The pie chart to the right displays the size of the most significant markets in the video game software publishing industry. • Males between the ages of 18 and 45 represent the largest proportion of industry revenue at 36%. • Even though females make up a smaller portion of video game purchases, they should certainly not be ignored. The second to largest group, totaling 29% of industry revenue, are females between the ages of 18 and 45. • Males under the age of 18 make for a noteworthy segment, representing 19% of the market. • The most profitable segments of consumers are males up to the age of 45, and females between the ages of 18 and 45. Males: 18 to 45

9. 08. KEY SUCCESS FACTORS Technology New Products Skilled Workforce Relationships Brand Loyalty Accessory Sales New products are essential to maintaining market share. A new product with superior appeal can rapidaly improve sales. A low frequency of new game releases can cause revenue streams to dwindle. Brand loyalty to particular consoles or game publishers is extremely important because companies significantly boost their revenue by selling new products to existing customers. A significant revenue driver in the video game market is the sale of accessories to existing consoles. The more diverse and attractive the accessories being offered, the more valuable the customers become. The industry heavily relies on the development of new technologies, so firms must continue to attract and recruit talented employees to stay competitive. In such a technologically advanced field, firms need to be able to quickly offer new games for the most recent consoles. Firms are also adapting their delivery methods such as buying games online. Many publishers rely on outside developers for their new products. Companies must establish & maintain a strong relationship with these developers in order to offer a desired line of products.

10. 09. COST STRUCTURE Profits Profits are relatively high, but also volatile. Successful companies earned an average of 5.9% EBIT in 2013. Profit margins are expected to rise in coming years due to online delivery methods. Wages Video game publishing is labor intensive that puts a large premium on innovation. The industry is expected to pay out 36.7% of 2013 revenue in wages. Purchases Purchases account for 14.2% of industry revenue. Advanced graphicsw and gaming complexity are expected to boost competition among publishers.

11. 10. MAJOR COMPETITORS Activision Blizzard (18.5%) Electronic Arts (15.6%) Microsoft (11.8%) Annual Revenue (million) = $2,243 Annual Revenue Growth = +2.3% Annual Profit (millions) = $576 Annual Change in Profit =+1.9% Annual Revenue (million) = $1,892 Annual Revenue Growth = +5.6% Annual Profit (millions) = $39 Annual Change in Profit = +129.4% Annual Revenue (million) = $1,424 Annual Revenue Growth = +5.6% Annual Profit (millions) = $78 Annual Change in Profit = +2.9%

12. 11. SUPPLIER BARGAINING POWER

13. 12. SUMMARY Supplier Bargaining Power Suppliers within this market are mostly games software publishers and developers. Small development studios compete through creative designs and by partnering with large publishers. Large companies publish a portfolio of titles and have the advantage of economies of scale in manufacturing, marketing, distribution and selling. Some of these companies, e.g. Electronic Arts, Activision Blizzard and THQ, are large multinational concerns with a long established presence within the global market and strong brand recognition. Such companies may exert stronger bargaining power as retailers need to stock popular products to meet customers demand. Possibilities of forward integration for suppliers exist – i.e. in the form of developing their own online distribution centers, or focusing on online gaming, an area that is increasing in popularity as more and more people have access to fast broadband internet connections. However, there are many software publishers operating within the market and the product they offer is characterized by short life cycles and frequent introductions of new products, which again need to achieve significant market acceptance to appear on retailers’ shelves. Even the most successful titles remain popular only for a limited period of time, which weakens the power of software providers. Supplier power within the US games software market is assessed as moderate. SUPPLIER BARGAINING POWER

14. 13. BARRIERS TO ENTRY

15. 14. SUMMARY Barriers to Entry There is a number of ways to enter the US games software market, for example; by starting a new company, diversifying an existing company’s operations into software retail, acquisition of a company already operating within the market, etc. Like in most retail markets, barriers to entry are not particularly high. It is possible to start activities on a small scale, perhaps opening an online company thus reducing fixed costs and lowering the exit barriers. However, economies of scale are an issue as large retailers such as Wal-Mart utilize their size to offer a diversified range of products and they may exert strong bargaining power negotiating on prices with suppliers, some of which they are able to pass on to consumers. Competing with them successfully requires a significant capital outlay. The fact that switching costs are low and consumers are largely prone to switch if lower prices and good quality products are offered is favorable to new entrants. Overall the threat of newcomers is moderate within the US market. BARRIERS TO ENTRY

16. 15. CONCLUSION Contact Us ADDRESS 4000 Central Florida Blvd. BA1, Room 235 Orlando, FL. 32816 SUMMARY The Video Game Software Publishing Industry landscape is exploring new frontiers with the explosion of new electronic devices that can be used for gaming (i.e. smartphones). These new devices have created new market segments to sell video game software andhave also opened new distribution channels directly to consumers. A strong factor in firm success is in maintaining compatibility with new emerging platforms and including advanced graphics in new game releases. Overall, due to the greater variety of video game accessible technologies, the market for video games is expected to grow at an annual rate of 6.5% to $16.6 billion over the next five years to 2018. PHONE (407) 823-4501 EMAIL cford@bus.ucf.edu WEBSITE www.cel.ucf.edu