Innovation shocks - unexpected technological changes in platform ecosystems - can significantly impact strategic decision-making for firms. This study examines how game developers adapted their strategies in response to the launch of Sony’s PlayStation 2 (PS2), a major innovation shock in the video game industry. The PS2’s technological leap, combined with its uncertain release timeline and dominant market adoption, created a critical strategic challenge for game developers: how to allocate resources across competing platforms?

Homing strategies

The research identifies comparative adjustment costs (the difficulty of shifting resources to new technology) and opportunity costs (foregone revenues due to platform choices) as key determinants of firms’ homing strategies. This refers to the strategies for providing products for certain platforms. The researchers looked at the following 3 strategies:

1. Single-homing (committing to one platform);
2. Sequential multihoming (releasing games for multiple platforms over time);
3. Simultaneous multihoming (releasing across multiple platforms at the same time).

Some of the researcher’s key findings include:

• Developers with more versatile capabilities (broad platform experience or PC development expertise) faced lower adjustment costs (making changes for specific platforms) and were more likely to simultaneously multihome. On the other hand, more specialised developers with expertise in console-specific programming leaned towards single or sequential multihoming. This allowed them to avoid the higher adjustment costs of simultaneous multihoming.
• Licensed games (such as FIFA, Harry Potter) multihomed to maximise their reach, while niche ‘cult’ games (such as puzzle and family games) often single-homed due to loyal audiences and lower opportunity costs.
• Game engines/middleware played a crucial role in reducing development complexity, enabling multihoming. Middleware refers to existing tools, for example, that can be used without having to rewrite code for game updates.

New insights

Based on their research, the authors were able to offer the following insights and contributions to the literature:

• the importance of adjustment and opportunity costs in complementors’ responses to innovation shocks. Complementors are companies, products, or services that add value to another product when used together.
• a dynamic perspective on homing strategies shows how these choices depend on existing capabilities and costs.
• a number of distinct determinants of simultaneous vs. sequential multihoming. This is an understudied aspect in previous research, despite the common occurrence of these 2 different multihoming strategies in many platform markets.

More details can be found in the online publication. The paper Strategic Responses to Innovation Shocks: Evidence from the Video Game Industry was co-authored with Nicholas Argyres (Olin Business School, Washington University in St. Louis) , Lyda Bigelow (Eccles School of Business, University of Utah), Jackson Nickerson (Richard A. Chaifetz School of Business, Saint Louis University), and Erdem Dogukan Yilmaz (INSEAD).