Vertical Integration

Vertical Integration

Definition

  • Vertical Integration refers to a type of management control where a company owns all stages of production for a product – from initial development to the final product’s sale or distribution.
  • Within video games, this could involve a company in charge of developing a game, marketing it, distributing it on platform they own, and handling post-launch updates and maintenance.

Effect on Industry

  • Vertical integration tends to streamline production and innovation, as control over many sectors often improves efficiency.
  • A side effect of this process could be a reduction in market diversity, as companies following vertically integrated processes tend to monopolise their particular sector of the market.

Examples

  • Sony is a notable example of a vertically integrated company, as they control PlayStation Studios (which develops games), the marketing channels (Sony Interactive Entertainment), and the distribution platform (PlayStation Network).
  • Another example is Valve, owning both the developer and publisher (Valve Corporation) and the distribution platform (Steam).

Purpose

  • Vertically integrated companies can ensure a chain of production that perfectly aligns with their goals, without having to depend on third-party companies or platforms.
  • This process also can mean that profits are kept in-house, as the integrated company takes on the role of several different companies at once.

Criticisms

  • Critics argue that vertical integration can lead to monopolistic practices, with companies owning every aspect of a game’s production and release, thereby Elminating competition.
  • Concerns are raised about the lack of diversity, potentially leading to a homogeneous gaming landscape where the biggest companies control almost every aspect of the market.

Regulation

  • The oversight and regulation of vertical integration are crucial to maintaining a balanced and fair video games industry.
  • Authorities such as the Competition and Markets Authority (CMA) in the UK govern to avoid anti-competitive behaviour that can arise from vertical integration.
  • The rise and popularity of indie developers show an opposition to this kind of monopolisation, often using independent distribution platforms to sell and promote their games.
  • With the rise of digital platforms like Steam or Epic Games Store, there’s a mixed model of vertical integration and open market in the games industry.