Thinking Point
	Do you think that the increase in computer games playing at home reduces the creativity and social interaction of young people? How does this compare to watching films at the cinema?

Until 1986, when Japan-based Nintendo introduced a more technologically sophisticated and user-friendly game console, the hardware side was also in disarray. But with tight control of software development and marketing, Nintendo was able to revive and to then capture up to 80 percent of a once-again booming market in which no significant competition appeared until the early 1990s. By that point, the annual operating profits of Nintendo had already grown to over $1 billion--an amount exceeding the 1991 profits of all the major Hollywood studios combined. By the late 1990s, sales of game hardware and software, led by Sony's PlayStation, were similar in size (around $7 billion) to US domestic box-office revenues.

With change the only constant, the game industry in the 1990s rapidly moved toward standards that utilized more powerful computer platforms that enabled enjoyment of massively multi-player games (MMPGs, e.g., Ever Quest). These can be distributed via wireless, cable, or telephone lines, or on inexpensive discs (CD-ROMs and DVDs). With such processing power at hand, games can readily incorporate full-motion video (FMV), which, in effect, turns them into interactive movies.

Coin-op
Coin-op has had a far more rigid industry structure than that seen in home video games. But fluctuations in demand have nevertheless been quite large (Figure 5), and the industry's dominant companies have, in response, become vertically integrated in performance of the four functions that define a presence in the coin-op business. Those functions include:

Cambridge University Press

Figure 5: Coin-operated machines in the United States. Total coin-operated revenues (bars) and average video weekly gross collections, 1980-99. Source data: Play Meter.

Game design, wherein designs may often cost up to $1 million per model. Manufacturing and assembly, in which component producers of monitors, printed circuit boards, and memory and microprocessor chips participate. Both coin-op and home segments consume a significant portion of worldwide electronic-component production. Distribution, through which machines of various manufacturers are wholesaled, serviced, and sometimes exchanged. Distributors supply credit to smaller operators to finance purchase of machines and generally support new-model demand by accepting trade-ins of used equipment. Conversion kits, primarily new circuit boards that enable existing cabinets and monitors to be adapted for new games, may also be provided. Operation or ownership of locations, either of arcades or of a string of smaller locations in which the machines are placed. Operators and location owners will normally split revenues on a 50:50 percentage or some similar ratio after a certain minimum payment or guarantee to the route operator has been assured.

Profit dynamics
For the manufacturer, a hit game--like a hit movie or record--can generate extraordinary returns, particularly in home versions, where profitability can far exceed that of the coin-ops. Indeed, by the late 1990s, games such as Nintendo's GoldenEye or Legend of Zelda had generated domestic gross revenues of more than $200 million, even though the cost of production and development had been no more than $6 million for each game. Such revenue to cost ratios are far more impressive than, say, in movies, where the production cost for most projects able to generate in excess of $200 million in revenues would be typically several times higher.

Although most games will not be nearly as profitable as these, substantial benefits may yet accrue to console manufacturers such as Nintendo or Sony through the license fees of perhaps $10 a unit that they might normally impose on outside game developers. As in other entertainment segments, it only takes a few big winners to handsomely offset the more modest returns or losses on the majority of titles released. Of course, a large installed base of compatible consoles or computers is also an essential precondition for achieving such impressive results.

Still, it is this kind of potential profitability (especially as ultimately projected on a global scale) that continues to attract consumer electronics companies and software developers to a business that thrives on technological improvements of game-playing multimedia machines for the home and for arcades and indoor theme-park attractions.