The videogame industry was born in the early `60s and has grown ever since. A niche from its beginning and focused on “computer geeks”, this industry has morphed into an ecosystem with highly interconnected products such as movies, theme parks, books and retail.
Jennifer Johns, in her work “Video games production networks: value capture, power relations and embeddedness” claims that there is a symbiotic relationship between place, culture and economy. For her, cultural industries are inherently location-based, resulting in the agglomeration of production in cities or in specific regions (cluster). Additionally, the article aims to examine the structure and dynamics of the videogame industry, drawing upon both secondary data and in-depth interviews conducted with company executives in Europe and Asia. Johns examines the production of software for video games using conceptual elements of the Global Production Networks (GPN), examining how value is captured in the production network, how power is exercized, and how the video games production network is embedded in different locations. It is argued that while hardware production is conducted at the global scale, software production tends to operate within three supra-regional contexts: North America, Europe and Asia.
Therefore, the GPN framework presents three key elements: value creation, power creation and embeddedness. This model helped Johns to understand that each player in the ecosystem is entitled to capture different shares of value. Figure 1 presents the players in the ecosystem and the way they capture value:
Figure 1 – Ecosystem of the video game industry, according to Johns
Three comments about how each player captures value in the network:
- Developers are usually entitled to a fixed fee or a fixed percentage of sales revenue.
- Retailers and distributors capture value following the sale of games.
- Manufacturers are able to capture a significant proportion of the value of a game because their exclusitiy rights of manufacturing.
Empirical evidence suggests that the manufacturer are able to capture 20% of the total retail value of a console game; distributors capture 10% while retailers around 30%. Developers and publishers (combined) capture 40%; however, developers are often the weaker partner in negotiation with publishers.
Johns also noted that, interestingly enough, the ability to capture value changes over time: before the launch of the platform (hardware), manufacturers need developers to provide different games suited to the equipment. After launching the console, manufacturers need very little support from developers, as shown in Figure 2.
Figure 2 – changes of value before and after the launch of the platform.
A study on global video game industry
Want to know more about the global videogame industry in general and the Brazilian market in particular? Check this link. This is a report from a group of researchers from the University of São Paulo, led by Prof. Fleury. Interesting, top-level material
JOHNS, J. Video games production networks: value capture, power relations and embeddedness. Journal of Economic Geography 6 (2006) pp. 151–180