owned one. In the same year the company's game division accounted for almost half of Sony Corporation's consolidated operating profits. Three factors were critical in Sony's success: the fostering of third party software development; reducing the cost of manufacturing videogames: and the changing demographics of those playing videogames. Sony catered for the first two of these aspects by the use of CDs, while the third was catered for by the new 32-bit techno logy which permitted much more sophisticated games that appealed not just to teenagers, the traditional market for videogames, but young adults as well. Consoles powerful: high quality, relatively low price Finance Audio Packaging Middleware Peripherals Other Graphics services Govemats Software Publishers Retail Developers (console Customers manufacturers) chains Other UK Clusters Cross media IP Competition Opportunity India, Eastern Europe Other media films. books High money value; mass market, hit dependent The governance of the videogame industry in 2005 The other new entrant was the software giant Microsoft which launched its 32-bit games console early in 2002. Microsoft's entry into this market reflected a growing concern that the growth of the videogame market threatened the PC market and a desire to diversify away from software. In any event it paid off as the Xbox quickly took market share from Nintendo's GameCube and to a lesser. extent Sony's PlayStation. Indeed, Microsoft's entry marked a point where, according to Grantham and Kaplinsky (2005: p189). the console manufacturers led by the two "new Kids on the block"have now come to dominate a global value chain comprising software developers, distributors and retail chains to the point where in governance terms they, "dene who produces what, under what terms and for what returns.\" Success in the videogame market now requires deep pockets, extensive distribution and supply channels, and in Chaplin and Ruby's (2006: p226) words, "a willingness to take huge losses on console sales in order to establish a base of customers". It also came with the highly successful arcade game "Mario Bros", A feature of Nintendo's console was that it could only be used with Nintendo-manufactured game cartridges. A special chip in each cartridge prevented other firms from producing compatible products. The Nintendo. console was a huge success. Encouraged by Nintendo's success another Japanese arcade manufacturer, Sega, entered the market with its Sega Master System. Sega was not able to rival Nintendo, enjoying a similar market share to that of Atari. By the end of the 1980s when it launched its hand-held videogame console, the Game Boy, Nintendo was reckoned to have 85-90 per cent of the videogame market worldwide. The start of the 1990s saw further innovation in the industry as Sega launched the Genesis, the first 16-bit console offering significantly better speed and graphics. Although it was quickly followed by a similar offering from Nintendo, this time it was Sega that had the edge helped in part by what rapidly became the videogame sensation, "Sonic the Hedgehog Nintendo lost its market leadership as Sega became the dominant platform with an 80 per cent share of new sales. The advent of further innovation in the form of 32-bit consoles in the mid-1990s led to major changes in the videogame industry. The industry pioneers faced a new threat, this time from new entrants from outside the industry. In 1995 the consumer electronics giant Sony, launched the PlayStation, the first 32-bit games console. The 32-bit technology of the PlayStation was a step- change from the 16-bit consoles that then dominated the market. Not only that, Sony's. decision to use CDs, a technology it had pioneered, rather than conventional games cartridges used by Nintendo and Sega, gave it a major advantage over its competitors. CDs were not only much cheaper to manufacture, they permitted much shorter lead times, allowing Sony to respond very rapidly to changes in demand: Despite having hitherto had nothing to do with videogames, Sony's PlayStation was an unparalleled success. By 1998 more than 50 million PlayStations had been sold, making it the world's bestselling videogames console. One third of American householdsCASE STUDY: ATARI, INC Termed "recreational software," videogames originated in the US in the early 1970 According to Lange (2002) one of the reasons why videogames developed first in the US was that US citizens had far fewer reservations about unadulterated entertainment. Among the first videogames was, Pong, an electronic table tennis game produced by Atari, that briefly mesmerized America. At this time games were often written by hobbyists working in their bedrooms and played on simple home computers. There was no one driving the developments of the videogame industry. Atari, founded in 1972 by Norman Bushnell, originally 'produced arcade machines, indeed Pong was played on such machines and its success led to videogame arcade machines largely replacing conventional pinball machines. But, in the late 1970s Atari branched out with a new innovation, the videogame console for the home. Campbell-Kelly (2003) credits Atari with being one of the pioneer firms that shaped the videogame console industry in the early phases of its development. In October 1977 Atari launched its highly successful Atari 2600 videogame console. The console sold for $200 with profits coming from the sale of game cartridges that retailed for $30 but cost only one third of this to produce. A major factor in the success of the Atari 2600 was the availability of third party software which made a wide range of games available including ones produced by established media firms such as CBS, Disney and Lucas Films. When the videogame market peaked in 1982, annual sales of video, game cartridges in the US stood at $1.5 billion, The mid-1980s saw the appearance of two new Japanese rivals to Atari, in the form of Nintendo and Sega. Nintendo was an arcade machine manufacturer that launched its first videogame console in 1983. Its Nintendo Entertainment System (NES) console represented a major advance in that it offered much improved picture quality through the use of custom rather than off-the-shelf chips. 8 Page