Derided for years by older generations as an industry purely aimed at children, the video games industry has grown to such a level that it is now among the most dominant – and most profitable – of all the entertainment industries.

Worth around $80bn, the global video game industry has exploded in popularity over the last two decades, in part due to technological innovations but also because of the ageing population of youthful gamers that are reluctant to put down their control pads once they hit their 30s. Indeed, in the US, the average age of gamers is 34, while roughly two fifths of these gamers are female, defying the stereotype that this is an industry purely for adolescent men.

But despite this perception of the industry as a niche, frivolous market catering predominately to single young men, it is neverthless one that is shaping the future for many other markets.

It is not just about the major console designers and the games developers, however. Mobile devices and online platforms are rapidly expanding the gaming industry's reach. There is also a vast ecosystem of branch industries that serve the console-makers, which includes a wide array of smaller, specialist firms that are innovating in all manner of areas.

Last year, US industry group the Entertainment Software Association (ESA) published its report into how the gaming industry has grown to the level it is today. Michael D Gallagher, President and CEO of the ESA, spoke about how the sector has experienced a level of growth unmatched by any other. “No other sector has experienced the same explosive growth as the computer and video game industry. Our creative publishers and talented workforce continue to accelerate advancement and pioneer new products that push boundaries and unlock entertainment experiences. These innovations in turn drive enhanced player connectivity, fuel demand for products, and encourage the progression of an expanding and diversified consumer base.”

Key players
The industry's key players for the last decade have been Japan's Sony and Nintendo and US tech giant Microsoft. Sony's PlayStation revolutionised games consoles in the middle of the 1990s, bringing games to a more mature customer base. By the turn of the century, Microsoft decided to get in on the action by releasing its wildly popular Xbox console. Nintendo, previously the dominant player in the industry, retreated to offering consoles to a more family-orientated audience as opposed to hardcore gamers, as well as innovating motion-sensor products like its Wii console.

Last November proved to be the new dawn for the industry, with Microsoft releasing its hugely anticipated – and somewhat controversial – Xbox One console to replace its industry-leading Xbox 360. Sony followed suit, releasing its Playstation 4 console, which it hoped would reverse the company's decline over the last decade. Nintendo aimed to steal a march on both rivals by releasing its Wii U product a year earlier.

Both the Playstation 4 and Xbox One come with radical new technologies designed to take gaming – and home media – to the next level. However, each company took a very different approach to the launch of their new console. Microsoft received derision from the gaming community when it announced it wouldn't allow gamers to lend their games to friends and required an internet logon each time they were played – decisions that were quickly reversed. It also raised concern from people with its insistence that the Xbox One would use its Kinect motion tracking camera to monitor the room at all times, enabling it to sense when a user enters the room, and recognise the voice and physical appearance of that user.

Anand Shimpi, founder of AnandTech news and an expert on internal computer components, told the BBC in November he thought there were clear similarities between the two new consoles. “For the first time the guts of both the Xbox and PlayStation are very similar – their processor and memory hardware vary in performance but not capabilities. Gone are the days when Sony's machine was substantially more difficult to program for than Microsoft's. In fact, the PlayStation 4 has appreciably more graphics horsepower under its hood than the Xbox One, there's no way around that fact.

“Both firms have licensed the same GPU (graphics processing unit) architecture, but Sony's chip has 1152 ‘cores' compared to Microsoft's 768. Microsoft runs its cores at a slightly higher speed, but the maths works out to Sony having about a 40 percent peak potential graphics performance advantage.”

Shimpi added, “The real question is whether this translates into a substantially better gaming experience. Typically developers building one game for multiple platforms target the lower performing one, and may offer some additional perks to the faster one – smoother frame rates, slightly improved visuals.”

Controlling the living room
The new wave of consoles to enter the market in recent months have included features designed to amaze and astound players accustomed to relatively straightforward gaming. While online platforms are nothing new, both Microsoft and Sony have created online hubs where players can download exclusive content, play against complete strangers on the other side of the world, and access a range of additional services. No longer just about gaming, the industry has sought to diversify into new areas, with both the Playstation Network and the Xbox Live platforms allowing apps to be downloaded that include television and film streaming service Netflix, as well as email services and video messaging.

The Playstation Network has been praised recently for its openness to independent developers and flexibility, but Shimpi believes that Microsoft's existing user base gives it an advantage here. The company still has a widely used ecosystem of services that will help it retain users. Shimpi says, “Here's where Microsoft believes its other strengths – Xbox Live, developer relations, the Kinect sensor – will give it the advantage. Microsoft is basically counting on everything else being so good that developers would rather give it their exclusives.”

The tech market many think is likely to be revolutionised next is in the living room. With apple rumoured to be launching a smart television set capable of doing many of the things personal computers are used for, consoles like the Playstation 4 and Xbox One are attempting to become the entertainment hub of people's living rooms.

Apple has itself bought a company responsible for the Xbox's Kinect motion-detecting capabilities. In November it confirmed the $360m acquisition of Israel-based firm PrimeSense, which developed key parts of the Kinect service. It is unclear what Apple plans to do with this, but it's thought that the technology is likely to be implemented into a future smart television set. It certainly shows that there are innovative independent firms in the gaming industry waiting to be snapped up by some of the world's leading tech companies.

Value chain
A typical value chain doesn't necessarily apply to the video game industry, in which constant innovation means developers have to keep an eye on the latest trends. A concurrent engineering approach to developing products is employed, allowing new games to be created quickly. The development of a video game console begins with the investment layer, where funding is sought for the development and production of games. Most developers look to outside investment in order to fund their games, with leading companies like Activision and EA (see table) investing large amounts in potential new game franchises each year.

Once funding is received, the creative teams get to work designing the visuals and sounds for games, creating a unique style and story for the game. Leading developers like Ubisoft, maker of the popular Assassin's Creed series, are renowned for creating distinct worlds in their games. Another, Rockstar Games, has been feted for its incredibly detailed approach to creating whole, living cities in its Grand Theft Auto series of games. The creativity of the games industry has led to many of the best writers that are traditionally found in Hollywood deciding to pen complex stories for video games, while actors are hired to give their likenesses and voices to characters.

Production is then carried out, where the necessary tools and game engines are created. Upon completion of the technical aspects of the games, distributors and publishers are brought into the equation. Some of the leading games companies, such as EA, Take-Two and Activision distribute their own games, but other firms act as the mechanism for spreading the game around the world. Japanese firm SEGA, which used to make consoles, is known for distributing many popular titles, including the Football Manager games.

The penultimate stage in the value chain is the hardware layer, which is the consoles or mobile devices that provide a platform for the games. While traditionally dominated by consoles like the Xbox and Playstation, mobile platforms are becoming increasingly prevalent, promoted mainly by both Google and Apple.

Finally, the game and platform reaches the end user, the consumer of the title and person that all companies hope will go onto promote the game among friends, buy additional content and any subsequent versions of the game. Word of mouth plays a crucial role in the industry, perhaps more so than any other. Users tend to lend their games to each other, spreading the word among the community. While Microsoft's decision to restrict games to one user may have been justified in terms of preventing piracy and boosting sales, it also would have potentially damaged the ability for the reputation of games to spread.

Loss leaders
Many observers have speculated whether the new consoles from Microsoft and Playstation will be loss leaders, as has been the case in the past. Usually, manufacturers have taken a hit when selling new consoles because they've subsidised the cost. Sony is reported to have lost around $260 on each Playstation 3 console it sold, contributing to a loss of $1.2bn during 2008. This time, Sony has priced its new console in the US at a surprisingly low $399. According to reports, the components of the Playstation 4 cost a combined $332, not including packaging or a controller. Sony is attempting to capture market share, tying users into its ecosystem of services, which it hopes will make up for the losses made on the consoles.

Microsoft, on the other hand, has gone for the higher price of $499, hoping that its already considerable user base will enthusiastically buy the new machine. Marketing manager Yusuf Mehdi told GamesIndustry.biz in September that it was the company's intention to at least break even. “The strategy will continue, which is that we're looking to be break even, or low margin at worst, on the Xbox One, and then make money selling additional games, the Xbox Live service and other capabilities on top. And as we can cost-reduce our box, as we've done with the 360, we'll do that to continue to reduce and get even more competitive with our offering.

Wooing developers
Getting developers onside to create the best games is crucial for both Microsoft and Sony. While Microsoft has been widely praised in the past for providing an open platform, Sony lost ground by complicating matters for smaller, more independent developers. Daniel Kaplan, business developer at Stockholm-based game-maker Mojang, says it remains to be seen how easy it is to develop for each platform. His company is the maker of the hugely popular Minecraft game, which has sold more than 45 million copies. He told the BBC, “Both Microsoft and Sony talk about the new platforms as indie-friendly and it will be interesting [to see] if that is the case.

“So far, for us it has been quite good but what I'm hearing from other developer friends, who are not in the same fortunate position of having had a bestselling game like Minecraft, is that there still seems to be a lot of forms to fill in to gain access to software development kits and tools.

The difficulty independent developers are finding is the need for two distinct development kits when designing for each platform, says Kaplan. “The idea that you need a separate development kit – a special version of the console that can be very expensive – to create games for the PS4 and Xbox One is quite bad for indies since a lot of them usually have very little cash at hand, so removing as much friction as possible would be ideal.”

He points to Google and Apple's approach of having a standardised developer kit. “There is really no need of all of this behaviour since both Google Play and Apple's App Store have shown that you can create open markets for all kinds of developers with the same deal for everyone.

“Giving more or less everyone the same opportunity is important for the indies. It allows their developers to focus their time on creating games and not on filling out forms describing different features or ordering developer kits for a lot of money that may not ultimately bear fruit for them anyway.”

He concludes, however, by saying that both companies are changing the way they operate and it will be interesting to see how open they become. “With that being said, both Microsoft and Sony are changing and I'm really looking forward to what will happen in the future.”

Wooing the developers for exclusive content is key for each company, and Sony's new openness to independent developers and easy-to-use platform could give it an advantage, says Shimpi. “I suspect that's what will happen this generation. At worst you'll see parity between the two consoles, but at best you'll see developers give PS4 versions of cross-platform games a slight edge. Where things get really interesting is what happens if a developer chooses to develop exclusively for the PS4 and go all out.”

There is unlikely to be a clear winner in the market, however, as both have developed consoles with distinct products. “Sony appears to have built the faster gaming machine, while Microsoft has built a system that might appeal to a broader audience and perhaps consume less power. There are strengths in both platforms – anyone hoping for a clean sweep will likely be disappointed.”