Introduction of Blizzard Entertainment
Prior to analyzing a firm, a few things must be looked at in order to gain a full understanding of the company. This paper revolves around Blizzard Entertainment, the most successful online gaming company in the world. Beginning with a general description of the company, the paper continues with an external and internal analysis of Blizzard. The external analysis includes an evaluation of each of Porter’s forces, an overview of the whole online gaming industry, and an evaluation of the industry based on a combination of the five forces. Following the external analysis is the internal analysis, which illustrates how Blizzard manages to maintain its current status as industry leader. After the internal analysis of the company is given, dominant design and network effect are discussed. Finally, a conclusion wraps up the key success factors of Blizzard.
Blizzard Entertainment is the game developer company that has dominated the online video gaming industry worldwide for almost twenty years. According to Thorsen, Blizzard’s annual revenue is approximately US $1.5 billion (2008). Despite its large revenue, Blizzard is a small company, consisting of only 250 people and a studio that is fairly small in size compared to those of game developers such as Electronic Arts (Blizzard Entertainment). The world’s most popular game at this point in time, World of Warcraft (WOW), was produced by Blizzard and has recently reached 10 million players worldwide (Schramm, 2008). In addition to developing video games, Blizzard produces comics, models, card games, collector’s editions, and many other products associated with its original games.
Porter’s Five Forces: Consumer (Gamer)
In order to determine the bargaining power of the consumer, it is essential to classify the targeted market, in this case the “gamer.” The gamer is one who spends “more than 25 hours a week” specifically on online computer games (Phillips, 2008). North America is home to approximately 174 million gamers (Phillips). To accommodate this market, game developers have produced over ten thousand online games, and this number is rapidly increasing (Gamezone). The bargaining power of gamers is high, not only due to the multitude of choices available to them but also because of the standard pricing of games, which empowers gamers with high price sensitivity.
Porter’s Five Forces: Substitutes
Other leisure activities, such as television or sports, can potentially replace gaming. Nonetheless, the propensity for the gamer to replace gaming with other activities is very low. Online video gaming is comparable to other types of electronic gaming, such as TV gaming (Wii, PS…etc) and portable gaming (PSP, Gameboy). Even though these substitutes provide other ways of gaming, the threat of gamers turning to other types of gaming is moderately low. The unlikelihood of gamers to turn their backs on online gaming results in part from the fact that online games offer interaction with other people. For example, WOW provides an avenue through which gamers can both communicate with thousands of people and accomplish tasks with other gamers. (Note that the gamer is defined as someone who spends more than 25 hours a week playing “online” games. If gamers included people who play offline games, then the gamer’s propensity to substitute would be higher because interaction with other gamers would be limited.) Another reason for the moderately low threat of substitution among gamers is the low pricing of online games in comparison to the substitutes (AccuVal Insights, December 2007). Most households already have a computer, but few have a PS3, a super expensive device whose sole purpose is for gaming.
Porter’s Five Forces: Threat of Entry
The threat of entry for online gaming is low because the initial capital requirement is extremely high. A game producing cycle takes a minimum of 18 months (Banks, 2002). In addition to the developing of the game, alpha and beta testing is required. This means that takes approximately two years for a product to reach the shelves (Banks). Therefore, in the gaming industry, revenue is not generated until year three. Another initial capital requirement is the cost of building a studio. A standard studio is filled with supercomputers with expensive complex and high tech machinery. As well as having to acquire the necessary capital, game developer companies face the challenge of gaining access to a limited number of distribution channels. With limited access to the market and high capital investment, the threat of new entrants is low.
Porter’s Five Forces: Supplier
The supplies of the online game industry can be divided into two parts: the human capital and the equipment. The bargaining power of suppliers is low, due to the excessive number of game designers in relation to the small number of game developing companies. According to Art Institution, only 10% of game design students and engineers are able to work in their field of expertise (Reeves, Malone, & O’Driscoll, May 2008). Not only is there an excess amount of game designers, there is no labor union in the gaming industry (Reeves, Malone, & O’Driscoll). Without the protection of union, game designers have very little bargaining power in contrast to the employer. In addition, the steady incline of the technology market provides game developing companies with multiple choices regarding game-developing equipment. Game developers have much labor and equipment at their disposal, thereby easing the process of producing games.
Porter’s Five Forces: Competitors
With tens of thousands of competitors, the online gaming industry is saturated. As a result of this saturation, many companies have gone bankrupt. Although online games can be categorized into different genres, very little differentiation exists within each genre. This lack of differentiation makes advertising extremely important, which in turn drives up advertising expenses. Gaming companies often have to hire famous celebrities or well-known artists for their commercials. In addition to advertising costs, the cost of patenting figures in the multiple billion dollar range (AccuVal Insights). While companies work hard to maximize revenue despite high costs, they also compete in multiple non-price dimensions. Innovation, investment, and marketing are three of the areas over which the firms battle. Therefore, the rivalry amongst existing firms is very high.
Porter’s Five Forces: Industry Analysis
Overall, the online gaming industry is a harsh environment for establishing firms. The buyer has the upper hand, with access to a huge variety of games that have virtually no differentiation in the way of cost. Moreover, online games are an unessential part of the daily routine and are even repulsive to many. On top of dealing with the competition and the triviality of the product, firms must invest a great deal of money if they wish to succeed in the gaming industry. Nevertheless, a couple beneficial factors make it worthwhile for existing firms to maintain themselves. First, the enormous competition eliminates a lot of potential rivals, thereby keeping prices constant. Second, firms able to survive despite the stiff competition and high cost have the benefit of abundant supplies of human capital.
Internal Analysis of Blizzard
There are several reasons for Blizzard’s domination over the online gaming industry. First, Blizzard has virtually no capital constraints. While most game developers are forced to release their games to the shelf by the third year at the latest, Blizzard has been known to procrastinate the release of its games (Holt, C. October 2009). For example, after announcing that Starcraft II was going to be released in April 2008, Blizzard moved the release date to December 2010 (Holt). The game has been in the developing phase for almost eight years. The seemingly unlimited number of resources available to Blizzard enables this company to invest heavily in its games, while other companies do not have the means for such heavy investments. Second, Blizzard is known to motivate its employees through its world class working conditions. Many other game developers, who do not have the resources to purchase a studio, find investors who are willing to provide a studio in exchange for the intellectual property rights of the games. The game developers of these competing companies are not motivated to work hard because they receive no more than a salary payment (Banks). Another de-motivating factor for these competitors is that the game developers are not allowed to do what they are passionate about (Banks). The investors normally could not care less about the quality of the games, considering them a mere means of making money. Conversely, each Blizzard game is perfected to the extent that everyone in the company agrees that the game is ready for the market before it is released. Whereas, Blizzard’s people create games with their own background stories and characters, other companies develop games based on a certain theme only because the topic is “hot.” In Japan, a baseball game was produced right after the baseball season. The Spiderman game was produced right after the huge success of the Spiderman movie. Game developers are frustrated because of their lack of decision-making power. After all, game developers are artists, and replicating another person’s work is repulsive to artists.
Blizzard’s biggest success factor has been its impeccable timing. It entered the online gaming industry in 1992, when there were virtually no entry barriers or competitors. At this time, the entry to the gaming market focused mostly on human capital. Another of Blizzard’s success factors has been its propensity to go to enormous lengths in pleasing its customers. Gamers’ opinions matter to the company. The most famous illustration of this fact was the resignation of the art chief (Magrino, August 7, 2008). The art chief of Diablo 3 resigned after several pictures were released as preview and people did not like the art style of the game (Magrino). Even though Diablo 3 was still in the development phase and probably needed another 5 years or so before it could be released, the art chief had to resign because the gamers demanded a different style of art. No second chance was given. With this kind of customer dedication, Blizzard has established customer loyalty. Another tactic Blizzard has used to maintain its customer loyalty is to continue adding new content into its games. For example, Diablo 2 has been on the market for over 8 years, starting out with 2 gigabytes of content and nearly doubling in size with almost no additional cost to the customer
Customers themselves volunteer their loyalty by attacking the competitors of Blizzard and waiting patiently for the development of new games. Blizzard loyalists have derisively called other games “clones” of whichever Blizzard game happens to be in the same category as the ridiculed game. For example, a new Massive Multiplayer Online Role-Playing Game (MMORPG) with even the remotest resemblance to WOW leads to “flaming,” a gaming jargon referring to attacks on other games. While flaming, a Blizzard gamer will sit and wait for the next game to appear on the shelves.
One of the reasons for Blizzard’s success is that all of Blizzard’s game models have become dominant designs. Before the emergence of WOW, there were a lot of MMORPG, all of which required no external device besides a mouse. The keyboard was merely a subordinate to the game. Blizzard, however, made an effort to incorporate keyboards as an essential aspect of gaming (Molloy, December 2007). With the addition of the keyboard to the main gaming system, Blizzard could effectively add new functions and contents to its games. As well as putting the keyboard front and centre, Blizzard was the first to recognize that not all gamers’ objectives are the same (Vella, August 21, 2008). Many MMORPGs are made with only one objective: to reach the highest level. However, Blizzard games offer the gamer a variety of goals (Green, February 2008). WOW has been known to include: guild wars, treasure hunts, flag pursuits, training for careers in blacksmithing or potion brewing, story questing, hunting, and raising pets. In fact, the leveling cap (the maximum level) of the characters is set low, to ensure that everyone can reach the maximum level easily (Green). All of these objectives have made WOW naturally long-lasting. Another design feature quickly picked up by other companies is the add-ons (Linn, December 2008). These are downloadable files that provide gamers with ease in the game. For example, a gamer without a sense of direction can implement an add-on that provides a map or compass function. Currently, WOW has over 10,000 add-ons. As of now, the foregoing qualities are basic standards in the MMORPG realm. New MMORPGs without the above listed functions do not generally make it after open beta testing.
Another dominant design Blizzard has come up with is the model for real-time strategy games. Before the emergence of Warcraft and Starcraft, real-time strategy games were made with similar units and buildings. Blizzard provides a variety of opportunities with dissimilar units and buildings while maintaining the balance of the game (Green, December 2007). For example, Warcraft features battles among elves, humans, and orcs, whereas the battles of most other games pit humans against humans. In addition to displaying dissimilar units and buildings, Blizzard games offer customerized maps so that gamers can create mini-games (Green). In fact, games like Leagues of Legends are spin-offs of the mini-game of Warcraft.
Online games are heavily influenced by the network effect, since human interaction is the main selling point of online games. The network effect is what provides Blizzard with most of its customer growth. The number of WOW players went from 6 million to 10 million in two years, and this extreme growth spurt diminished Blizzard’s competition. As more gamers switch to Blizzard games, fewer people play other games, a process that kills competitors building upon Blizzard loyalty. Every new player adds more value to a game. This is an endless cycle that gives Blizzard the advantage of maintaining its position as industry leader.
Blizzard has survived for 17 years in one of the most turbulent markets on the planet. The secrets to its success have been ensuring that employees are content in their work, developing products extensively, and establishing heavy customer loyalty. All these competencies, combined with plentiful resources and network effects, have enabled Blizzard to flourish and maintain its success. The main advantage for Blizzard is that it has secured its position regardless of the industry as whole. While other game developer companies are suffering from the competitive nature of online gaming industry, Blizzard still enjoys the growth of both customers demand and revenue.
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