Video Games

A McKinsey team has been engaged by the CEO of a large diversified entertainment corporation to evaluate a $200M capital request to triple the capacity of its video game manufacturing subsidiary. The core question is whether the industry is attractive enough to justify the investment, given signs of market saturation and deteriorating margins.

The client is the third-largest video game hardware manufacturer with 10% market share, behind leaders holding 40% and 35% respectively. The industry has experienced strong historical growth but has recently seen a slowdown, with early adopters (young families) largely having already purchased the product. The division sells only licensed software while top competitors develop their own.

The CEO must decide whether to approve a $200M capital expenditure to triple the division's manufacturing capacity, and the consulting team must determine whether the video game industry is an attractive one for continued investment given the division's competitive position.

Use a market attractiveness + competitive position framework (Porter's Five Forces or standard industry analysis). Assess market size and growth trajectory, competitive dynamics, the client's relative cost position, and the likely impact of capacity expansion on industry pricing.