Apple, Video Games, and Disruptive Markets

Posted by: TomS on January 28, 2011 @ 7:36 am

AppleAt lunch the other day, the conversation turned to Apple, and one of my co-workers posed the question, “Why hasn’t Apple released a video game system yet?” At the time, I was playing Angry Birds on another co-workers iPhone, and I waved the iPhone at him and responded “They have.”  He of course responded that it isn’t really what he meant, but I thought a bit more about what Apple has done with its gaming strategy up till now, and they are actually positioned surprisingly well to pull in a huge chunk of the video game market over the next few years.Angry Birds

Before I dive into the details, most of my argument is based on Clayton Christensen’s ideas around disruptive innovation and low-end disruption. In a nutshell, Christensen theorizes that most disruptive innovation occurs when established firms neglect certain market segments because they offer too low of a margin to entice the incumbents.  Innovators enter the low-end segments and the incumbents do not react, but overtime, the entrants overshoot the needs of the low-end markets and begin to pick up additional market segments.  Left unchecked, the entrants eventually overtake the market, driving the incumbents out completely.  Its a pattern that has repeated itself throughout history, and Apple may be repeating it again with the growing library of games it distributes on the App Store.

Is Apple Disruptive in the Video Game Market?

The video game market primarily consists of Nintendo, Sony, and Microsoft.  Their core business has been to build and manufacture consoles while licensing game development to third-party developers and making money off of the heavy licensing fees.  In some cases, the big companies also develop their own games, but in either case, their primary revenue streams come either directly, or indirectly from sales of games for their consoles that range from $30-$60.  In recent years, Sony, Nintendo, and Microsoft have each introduced online stores where smaller developers can also sell games with a reduced licensing cost.

It’s no secret that Apple has the App Store, an online market place where people can buy software for their iPhone, iPod, iPad, and now Mac computer, but they’ve done a few things differently than the big 3 in the video game market, and I believe their now set up to displace the existing video game console market as we know it.

Focusing on Small Developers

First of all, Apple has lowered the bar for entry and focused more on the little guys.  The big 3 video game companies have always had strong ties to their big developers, and the somewhat high barrier to entry for getting a game on one of their platforms is evidence of that.  The consoles tend to have expensive development kits, high licensing fees, and a steep learning curve.  Apple has focused more on independent developers with a free development kit, much lower licensing fees, and the simplified iOS with a well documented API that works across multiple devices (iPad,iPod,iPhone).  The result?  An immediate explosion on the number of applications in the App Store, specifically, a high number of games.  Most of these games have come from developers that Sony, Nintendo, and Microsoft would simply not have dealt with in the past or at best, given a second class status too.  Apple has created a platform targeted at these small developers and now has a library of games that rival’s the size of any other platform.  Additionally, Apple has done so without turning away the big development shops.  The big development companies are still welcome to put their software on the App Store, and many have done so, being unable to ignore the shear number of iOS devices in consumers’ hands.  The big video games have been more than happy to move forward with games solely from big-time developers, and Apple has come in and built a huge library of games by focusing on the neglected area of the market.  The App Store has now proved itself beyond just the needs of small developers and is starting to become attractive to the big-name developers as well.

Lowering Price Expectations

Apple has also changed the game when it comes to price.  As I’ve mentioned previously, the big 3’s core sales come from games in the $30-$60 range, but they’ve begun adding revenue by selling games on their online stores, the majority of which, in my experience, are in the $5-$15 range.  A large majority of the games on the App Store are $5 or less, and many of them are $.99 or even free.  Consumers who buy from the App Store now have an expectation that they can get a reasonable quality game at a cheap price.  It’s important to note that these consumers aren’t “gamers”.  Gamers will still plunk down money for a deeply immersive game that takes weeks to complete.  But gamer’s are only a small percentage of the market.  The people that want games that they can quickly pick up now can get their gaming fix, and get in on the cheap from the convenient App Store.  As Apple grows, Sony, Nintendo, and Microsoft will find it more and more difficult to grow their market segment to the general public unless they lower their prices for games targeted at casual gamers.  Apple has really hit the sweet spot by finding developers willing to sell games at a lower price, and a huge consumer base that wants, and now expects to buy them at a low price.

I glossed over the point in the previous paragraph, but there are quite a few games on the App Store that are FREE.  Yes, the pricing model is free.  There are a couple ways developers reach this price point.  In some cases, it is a short-term strategy to boost sales and get games onto top lists on the App Store.  In other cases, games are simply used as promotional tools for some other product.  Additionally, Apple has released an ad platform for the iOS that allows developers to make money off of ads in games while keeping the game free.  The free model has been a smashing success for Google and has been adopted in a number of forms on the Internet.  The verdict is still out as to if Apple’s ad platform will be successful, but if it is, they’ll have a huge head start on everyone else in monetizing “free” games through the use of ads, a strategy that the big 3 video game companies have chosen not to pursue.

Changing the Device Paradigm

The world used to be simple.  If you wanted to call someone, you got a telephone.  If you wanted to watch something, you got a television, and if you wanted to play games, you bought a video game console.  The consoles came at a high price, but they were highly specialized and let you play video games when other devices could not.  We’re riding a huge convergence wave right now, and the video game console manufacturers have tried to adapt by adding more features to their consoles.  Apple leap-frogged them entirely, however, by simply getting rid of the need for a console.  Technology has advanced to the point where you no longer need specialized technology to play the vast majority of games.  Sure, there’s still a need for consoles when you get to huge games with cutting-edge graphics, but not everyone wants them.  Now Apple has a number of devices that are multi-purpose and can play games.

In the past, consumers were faced with the question of if they wanted to play video games or not, and if they decided they did want to play them, they were faced with a high initial investment before they could play.  Now consumer’s are buying a phone anyway, and they simply have to choose if they want to pay a little bit extra for a full-featured device that also plays video games.  The high cost of of a console is removed entirely, which again is great for casual gamers.

That’s today though.  Mobile technology keeps getting better and better, and the gap between what a video game console can do, and what a mobile phone can do will continue to get smaller, and the convergence wave I mentioned before hasn’t broke yet.  We still have tvs, phones, cameras, and computers, but not for long.  Soon we’ll just be talking about “screens”.  Wherever you have a specialized device today, you’ll soon have a generic screen with access to everything.  Your tv will have access to the internet, games, office productivity software, etc., and your phone will have all the same stuff, just formatted for a different screen size and input device.  Apple is already well positioned for this convergence as well.  They already have the iPhone, Apple TV, iPad,  and a traditional line of desktop and laptop computers.  They also have a similar OS that runs all of them, and software stores that allow you to purchase software online, quickly, easily, and at a low price.  There’s still some cleanup to be done, but it’s not hard to imagine a future where developers release software to the Apple store, and the software can be used on any Apple device, anywhere, and at any time.  Nintendo, Sony, and Microsoft have been happy to hang onto their consoles, only making small incremental improvements in each console generation.  They’ll need to let go of the model in the future if they want to compete with Apple for casual gamers, or get used to a niche market, serving the die-hard gamers.

So What Does the Future Hold?

I’m obviously going to put a huge disclaimer on this section that I can’t predict the future,  Any of the companies I have mentioned can change strategy, new companies can enter the market, and any number of factors can change the game quite quickly,  but I’ve got some ideas as to how this will play out.

The Big 3 Video Game Console Manufacturers

For the next generation of consoles, it seems like Microsoft, Sony, and Nintendo still haven’t gotten it.  They’re going to keep putting out hardware consoles that are specialized for video games, and they’ll miss the boat when it comes to the casual gamer market.  With the casual gamers gone, I’m not sure the market can support 3 big companies, and one of them will likely go the same way Sega did, while the remaining two will stick around and servre niche markets in the gaming industry.  Each one has it’s strengths and weaknesses in how they can survive, but they are also hampered by a slow development cycle.  New consoles come out roughly every 5 years, which means that if one of the companies bets wrong on their next generation, its almost irrecoverable.

Sony currently leads the race when it comes to hardware.  They put out the console with the most power in the latest generation, and they have a good reputation for deep, immersive games that resonate with hardcore gamer.  If there’s one company that is best suited to remain and hit the gamer niche, it’s Sony.

Microsoft is actually the best equipped of the big 3 to ditch the console entirely and build a multi-device platform.  They have the knowledge and existing investment on devices within Microsoft, and with the right strategy and business partnerships, they probably could at least challenge Apple.  Unfortunately, I think the company moves too slowly, and with respect to video games, Microsoft will either become a pure-software player or exit the market entirely.

Nintendo has been happy to be an innovator over the last decade.  They were the first to introduce touch controls with the DS, and the first to introduce motion controls with the Wii.  Sony and Microsoft have proved to be anything but fast-followers, taking several years to release their own motion control devices, and Nintendo has relished their first-mover advantage.  Apple on the other hand, actually is a fast-follower.  They had touch and motion controls soon after Nintendo.  Nintendo is poised to innovate again, being the first to market with a 3D portable console with the 3DS in March.  They can still be a niche competitor, focusing on early adopters who want a different kind of game play, but the piece of the pie that they compete for will be much smaller with many of the customer’s going to Apple.  Nintendo is also very strong in game design and likely could be quite successful as a pure-software player or by implementing a cross-platform strategy where many of their games also work on iOS or any other large, encompassing platform that takes over.


Apple seems to be on the right track.  In my opinion, they’re the first company out there to have a successful App Store on a large scale.  They will likely continue the trend.  As I mentioned previously, I believe their release of Apple TV and the Mac Store is the first in a number of steps of convergence.  Eventually there will be a single App Store where you can buy software, and it will work on all your devices, much like how an iPhone App works on an iPad.  The difference between an Apple computer, phone, and tv will slowly erode.  They’ll simply be different screens with different input devices, but they’ll run the same operating system and the same apps.  Apple will need to continue focusing on ease of use for developers to keep their library of apps strong and large, and they should continue to be a fast follower when it comes to new types of devices and inputs.  They have a quick development cycle and lots of resources, so they are well equipped to do so.  They’ll continue to put their own Apple spin on their products which will also act as a differentiator.  Overall, the future looks bright for Apple, both as an app distributor and as a platform for video games.

And the Challenger

AndroidI’ve been pretty quiet about Google so far.  With its Android platform, Google has followed the path Apple has set.  They now have a single platform that works on phones and tablets and a growing app store which a number of games.  It still hasn’t caught up with Apple, but it definitely has potential.  Additionally, Google is putting ChromeOS out there as an OS for netbook computers, and GoogleTV is out on a number of television sets.  Similar to what I see in the future for Apple, I believe Google will merge all of its media platforms into one OS and app store that works across all devices.  They will have a very similar offering to what Apple is creating, and it will be an interesting battle between the two for dominance in the market.

Google ha a slightly different strategy than Apple, however, and the differing strategies will likely play a part in determining who is going to take the market.  For one, Google is more open towards developers.  Apple tries to strike a balance between restrictions on what can be developed and quality in their app store.  Google tends to draw the line a little more liberally, and in general, there are fewer restrictions on the Android platform.  It’s easier to get development tools (that work on all platforms, not just the Mac), its easier to submit apps, and in general the submission process is thought to be more transparent.  Every few months there is a small bit of uproar about the restrictions on the App Store, and you here very little of the same on the Google side.  Apple’s store has a clear advantage in sales, however, and it can be hypothesized that it is partly due to the greater perceived quality of the App Store’s offerings because of the restrictions Apple puts on it.

Google has also made the decision to stay out of the hardware business.  Instead, it focuses solely on the software platforms and sets up open standards so that many manufacturers can adopt and use the Google platform.  This means two things.  First, Google will see much higher adoption rates for its platform since.  The amount of Android phones sold has already surpassed the amount of iPhones sold.  Almost all of the major phone manufacturers have Android offerings, and they cross almost all segments of the market, allowing for consumers to choose low-cost or luxury Android offerings.  It also means that developing for Android means figuring out the fragmentation problem.  Just because an app works on one Android phone with a certain Android version does not mean it will work on another Android phone with the same version of Android.  Its a tough problem for developers and has the potential to drive them away completely if Google doesn’t provide a simplified solution.

Google is also focusing more on web based apps.  Especially with ChromeOS, there is more and more of a trend to clients and apps being dumb web browsers, and most of the software running on the web.  I’m not saying we’ll go back to the days of dumb terminals anytime soon, but there is a wave of centralization going on as the web becomes a viable platform for complex applications.  Google right now has a lead over Apple if this trend continues rapidly, and it could be a differentiator for Google.  Another way to look at this is to look at the company’s experience with web based offerings.  Google has a number of smashing successes when it comes to web offerings such as Gmail, Google Docs, Google Reader, along with a few questionable, but technically successful products such as Buzz and Wave.  Apple’s offerings on the web are fewer and far between with things like iTunes Ping making little overall impact.  Google does seem to have a clear advantage in its connected and social offerings, but Apple where Apple lacks, there are hundreds or even thousands of App Store developers that are filling the gap.

The final card Google has up its sleeve is that it is the king of the free model.  The vast majority of Google’s revenues come from advertising on its software that it gives to consumers for free.  They know how to get the model to work.  Apple has built a lead over video game manufacturers and other software shops by undercutting them with low-cost, quality software on the App Store, but Apple should be concerned that Google will come in and undercut Apple.  If I’m going to bet that anyone gets the “free” pricing model right, it will be Google, and consumers simply cannot pass up a quality offering at no cost.

Between Apple and Google, I think Google will win the battle in the end.  It will come down to who will be able to keep developers happiest and producing low-cost, quality software, which will be the biggest driver of adoption, use, and sales on the app stores.  Google’s openness and willingness to change and work with developers will be much better received than Apple’s constantly changing rejection policies.  Google will also find a way to solve the fragmentation problem (they’ve got plenty of smart people), and they’ll also be able to back their platforms with their own top-notch web offerings and a proven model for software supported by advertising revenue.  Apple will still be around, but they will be in a secondary role, much as they were to Microsoft for a number of years.  Apple still has a very good shot, but they’ll need to change their attitude and be more public and willing to adopt open standards, and I don’t see the company doing that until its too late.


Yes.  I’m long winded.  But in a few sentences, here’s my point.  The rise of the App Store has allowed Apple to enter the video game market.  They’ve done so in a segment largely ignored by the Big 3 (Nintendo, Sony, and Microsoft).  Apple has gained enough momentum and capabilities that  they’ll start taking a large chunk of the casual-gamer market from the Big 3.  The App Store model, working across all types of devices will prove to be the offering of the future for casual gamers.  Sony, Nintendo, and Microsoft each have a chance of staying in the market as a niche for true “gamers”, but it will likely end up that Sony remains as a hardcore gaming platform and Nintendo remains as a technological innovator. Apple won’t necessarily dominate the rest of the market though.  Google is copying and improving upon Apple’s offering, and because it has a more open policy and previous experience with free models on the web, it can quickly overtake Apple, leaving Apple to fill the role it once filled in the PC market, as a unique, luxury offering, but not a major player.

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