A “winner-takes-all” market refers to a market that is dominated by a single supplier and is subject to significant network externalities. Network externality in simplest terms is the value of a product to an individual customer that is affected and dependant on the number of other users of that product. Thoroughly assessing the case study we came up with the conclusion that the notion behind the market being considered a “winner-takes-all” market was only evident in some generations. Throughout the 3rd generation, it was clear to see the market was categorised a “winner-takes-all” market as a result of Nintendo and their NES. What was so particular about NES and Nintendo’s dominance of the market, specifically 80% of the 2.3$ billion, was the network effect they had innovatively created. Their ‘security chip’ was a revolution and enhancement to the industry which created uproar within the market. The ‘security chip’ was not only a technologically innovative idea but also a barrier for new entrants (software developers); it was evident to see Nintendo had taken clear advantage and exploited their incumbency.
The ‘security chip’ was regarded as a network externality because it enabled them to ensure that only Nintendo manufactured games could operate on the NES. As a result of this, Nintendo prevented independent software developers from marketing games. What is particular to note here is that the implication of network externalities attracts a growing proportion of new competitors. In the 5th generation, Sony had emerged as the clear market leader by 1998. This was the results of a 6 year development during which they had been able to observe the market and produce innovative solutions themselves. Another supreme advantage Sony had was their complementary resources (brand reputation, global distribution etc.). Sony’s use of CD-ROMs and complementary resources (brand reputation, game titles, prelaunch advertising etc.) gave them an edge over incumbent as well as possible entrant (barrier to entry). Thus all of Sony’s strategic tools which they had successfully applied helped categorise the industry as a “winner-takes-all” market, and thus Sony was named the market leader. As Microsoft entered the market, the theory behind “winner-takes-all” began to fall apart.