Eh 109 0047

Internalizing knowledge in the innovative British video
game industry
Denise Tsang
Dans Entreprises et histoire 2022/4 (n° 109), pages 47 à 63
Éditions ESKA
ISSN 1161-2770
ISBN 9782747234016
DOI 10.54695/ eh.109.0047
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© Éditions ESKA, 2022
LES JEUX VIDÉO
INTERNALIZING KNOWLEDGE
IN THE INNOVATIVE BRITISH
VIDEO GAME INDUSTRY
by Denise TSANG
Lecturer in International Business and Strategy
Henley Business School
University of Reading
Les difficultés à organiser les marchés de flux de connaissances ont conduit

les firmes intervenant en Grande-Bretagne à des formes de plus en plus
élaborées d’internalisation des activités qui assurent la compétitivité
des firmes de jeux vidéo. Elles ont d’abord concerné la conception et la
production, puis le marketing et la distribution. L’internalisation a tiré
parti de la multiplicité des villes où créateurs et développeurs ont acquis
une masse critique, et elle constitue désormais une stratégie commune
aux multinationales étrangères qui s’appuient sur leurs capacités d’ac-
quisition et de contrôle et à des firmes britanniques de différentes tailles
qui puisent dans le réservoir britannique de savoirs tacites.
INTRODUCTION as Cambridge-based Frontier Developments’

headcount, for instance, was 680 in 2021 as
compared to the Silicon Valley giant EA’s
The British video game industry that headcount of 11000 2.
evolved over the decades since its beginning
in 1978 has become a key pillar of the creative The British video game industry comprises
economy 1. Parallel to its growth, innovative platform owners, developers, publishers and
firms in the US and Japan, including EA, Xbox retailers, where global and local drivers simul-
Games, Rockstar Games, Nintendo, Sony, taneously shape its development. The industry
Square Enix, Konami and Sega Sammy, have shares three global industry dynamics. First, it
prospered and become some of the largest exhibits an incremental change in preferences
players. These industry leaders have cre- of game format from the boxed set, console
ated global franchises and accumulated a games, and web browser games to mobile
high total headcount; in contrast, innovative phone/tablet games. Second, it maintains
British firms Team 17, Exient Entertainment strong revenue during the Covid 19 pandemic.
and Introversion Software have been and are Third, users’ preferences and tastes change
relatively small in size. Leading firms such quickly and are influenced by current affairs
1
L. Hebblethwaite, “Playing On: How the UK games sector reacted to the challenges presented by Covid 19”,
London, The Association for UK Interactive Entertainment, 22 July 2020.
2
See Frontier Developments, 2021 Annual Report and EA 2021 Impact Report.
ENTREPRISES ET HISTOIRE, DÉCEMBRE 2022, N° 109, pages 47 à 63 47

https://doi.org/10.54695/ eh.109.0047
DENISE TSANG
such as military conflicts. However, the British large-scale and professional development of
industry is unique as innovation takes place AAA games (or games incurring high market-
in numerous towns and cities, rather than ing and production budgets with blockbuster
clustering in hotspots as in the US and Japan. potential). For instance, an estimation of the
total cost concerning New York’s Rockstar
Game development is most critical within Games 2018 hit title Red Dead Redemption
the global video game industry as users’ utility was US$540 million 5. The mobile game fran-
is not derived from functionality but the sense chise of Sweden’s King Digital Entertainment
of entertainment. As of 2021, the three early Farm Heroes Saga increased its complexity
entrants US, Japan and Britain remained at the from 1 level to over 2000 levels between 2015
forefront despite the new competition based and 2019. Nevertheless, individual British pro-
in South Korea, China, Canada, France and grammers have managed to become involved
Sweden. This paper focuses on the British in the complex coordination of blockbusters
video games which enjoy a rich legacy and as employees of multinationals while small
are known for their creativity and sophisti- British development firms have participated
cated technical skillset; British developers in the production through co-development
are renowned for original titles based on with their foreign counterparts.
relatively small budgets. Notable examples of
innovation include the conception of the first This article seeks to provide a historical
intelligent female protagonist in Tomb Raider 3 overview of the innovative British video game
industry and delves into key issues revolving
(1996) and the new approach to user-generated
content in Little Big Planet 4 (2008) where around the growth trajectory of local and
players can play, build and share their games global firms’ boundaries 6. Specifically, the
on PlayStation. article argues the role of internalization in the
strategic patterns of investment and integration
The British video game industry is global in this fast-changing industry. Peter Buckley
at the beginning, with the US and Japanese and Mark Casson put forward an eloquent
multinationals being key players since the explanation for firm expansion into interde-
1980s. They were later joined by European pendent activities through the internalization
entrants. These foreign multinationals not only of markets 7. They build on Ronald Coase’s
published games developed by local studios transaction cost concept 8 and suggest that the
but were also owners of large studios. The difficulties of organizing external markets for
key feature in terms of foreign multinationals’ knowledge among profit-maximizing firms
production in the past few decades was the will lead to forward or backward integration.
3
The character Lara Croft has been studied from a feminist perspective. See J. Jansz, R. G. Martis, “The Lara phe-
nomenon: Powerful female characters in video games”, Sex Roles, vol. 56, n° 3-4, 2007, p. 141-148.
4
The first user-generated content game was Pinball Construction Set published by BudgeCo in 1982. However, Media
Molecule’s Little Big Planet innovatively deployed user-generated content. It takes players to eight different worlds
with over 20 levels of puzzles. After reaching the first world’s 3 levels, players can begin to generate their content
and share them online. See J. Gudmundsen, “ ‘Little Big Planet’ Revolutionizes How to ‘Play’ Video Games”, ABC
News, 20 November 2008.
5
The calculation was based on US$240 million production cost and US$300 million marketing cost. See D. Takahashi,
“Red Dead Redemption 2 could hit 20 million in sales”, Games Beat, 31 October 2018.
6
Related historical work includes S. L. Kent, The Ultimate History of Video Games. The Story Behind the Craze
That Touched Our Lives and Changed the World, Rocklin, Crown, 2001; M. Campbell-Kelly, W. Aspray, N. Ens-
menger, J. R. Yost, Computer: A History of the Information Age, New York, Routldege, 2018; L. Herman, Phoenix
IV: The History of the Videogame Industry, Springfield, Rolenta Press, 2016; A. Gazzard, Now the Chips are Down,
Cambridge, MA, MIT Press, 2016; D. Tsang, “Innovation in the British video game industry since 1978”, Business
History Review, vol. 95, n° 3, 2021, p. 543-567.
7
P. Buckley, M. Casson, The Future of the Multinational Enterprise, London, Palgrave McMillan, 1976.
8
R. Coase, “The Nature of the Firm”, Economica, vol. 4, n° 16, 1937, p. 386-405.
48 ENTREPRISES ET HISTOIRE
INTERNALIZING KNOWLEDGE IN THE INNOVATIVE BRITISH VIDEO GAME INDUSTRY
According to Buckley and Casson, “know- Acorn Computers’ forward integration into
ledge is a public good within the firm, and game development and publishing after its
its transmission costs are normally low” 9. launch of the Atom model personal computer
In the context of video game firms, the act in 1980. Acorn Atom was a locally designed,
of bringing under common ownership and affordable model that attracted external game
control of interdependent activities when development 11. By setting up a new division,
investing abroad means that they become Acornsoft, Acorn appropriated its proprietary
multinationals. Internalization can also be knowledge in computing and ensured the
discussed in terms of the internal coordination supply of dedicated Acorn games, which in
of functional operations such as research, turn increased the demand for its personal
development, publishing and distribution or computers at the dawn of a mass market 12. At
the replication of the same activity such as the time, Acorn was regarded as the “British
publishing 10. To give an example, the French Apple”.
publisher Ubisoft entered the British market
In the following sections, we trace the
with a London subsidiary in 1989; it later
historical evolution of the British video game
added a new office in Guilford and acquired
industry in three distinct periods: 1. Bedroom
the developers Reflection in Newcastle as
coding and new ventures (1978-1993), 2.
well as Freestyle Games in Leamington Spa.
Consolidation and selling out (1994-2006) and
The ownership and control of these British
3. Digitization and indie games (2007-2021).
subsidiaries provided the basics for Ubisoft’s
internalization. Put it another way, the inter- Our discussion will revolve around the
nalization theory explains the French mul- relatively lower cost of coordinating internal
tinational’s expansion in terms of market markets for knowledge flow among local and
imperfection, where it internalized the markets global platform owners, developers, publishers
as the use of external markets generated higher and retailers that drive the internalization of
coordination costs. As a profit maximizer, interdependent activities within firms. The
Ubisoft set up a publishing operation to exploit internalization theory, with its recent extension
its unique knowledge and branding during in the form of internalization-plus, allows
competition. In terms of game development, us to analyze the changing firm boundaries
Ubisoft faced a limited selection of external between participants with a longitudinal per-
studios for potential blockbuster titles, hence spective. As Mark Casson and Nigel Wadeson
the costs incurred in bargaining during con- explain: “Instead of the original owner of a
tracts negotiation for external development technology exploiting it abroad through FDI,
were high. This provides the incentives for a firm domestic to the foreign country may
having internal teams. In a similar vein, this instead internalize foreign knowledge” 13.
powerful theory can be applied to British Internalization-plus, therefore, explains the
firms bringing common ownership and control global expansion of emerging economies
to interdependent activities along the value multinationals into Britain in terms of their
chain. An example is the platform owner acquisition of knowledge from the investment,
9
P. Buckley, M. Casson, The Future of the Multinational Enterprise, op. cit., p. 35.
10
R&D in video games is incorporated in the pre-production stage of game development.
11
“Acorn Atom”, The Centre for Computing History, http://www.computinghistory.org.uk/det/47091/Acorn-Atom-
(White-Box)/. Accessed on 18 May 2022.
12
Acorn’s 1982 model, the Acorn Electron, was widely used in video games. A large number of games had been
written for Acron Electron. Similarly, the popularity of Sinclair Spectrum personal computers at the same time has
also created a dedicated game market.
13
M. Casson, N. Wadeson, “Emerging markets multinationals and internationalization theory”, International Business
Review, vol. 27, n° 6, 2018, p. 1150-1160, p. 1151.
2022, N° 109 49
DENISE TSANG
which they combine with home country advan- of existing knowledge in the creation of new
tage to create new competitiveness 14. knowledge. This is diametrically opposed to
Ancient Greek philosophers such as Socrates
This article employs a single industry
who see knowledge as something funda-
case study methodology to examine this new
mentally new in their philosophical analysis
industry and is based on less conventional and
of knowledge. In a contemporary theoreti-
diverse data sources, including fan magazines
cal perspective, knowledge is a public good
(e.g. Sinclair User between 1982 and 1993,
and it underlies creativity and innovation 15.
Computer and Video Games between 1981 and
Knowledge is commonly defined in terms
2004, Retro Gamer from 2004 onwards) and
of tacit knowledge and explicit knowledge.
trade magazines (e.g. Develop between 1996
The origin of tacit knowledge could be traced
and 2017, MCV between 1998 and 2017, IGN
to the seminal work of Fredrich Hayek and
News from 1996 onwards). Industry databases,
company websites and newspaper reports Michael Polanyi 16; it represents knowledge
were also consulted extensively to track the that cannot be articulated or transferred easily.
activities of local and global firms. As the Tacit knowledge is often compared to crafts-
video gaming magazine publication sector manship and is found in expertise, opinion,
moved online in the 1990s, websites devoted professional advice and innovative feedback.
to gaming such as Eurogamer were used. Tacit knowledge associated with video gaming
Finally, industry publications from TIGA (The includes problem-solving, team leadership,
Independent Game Developers’ Association), network relationship and market intuition;
UKIE (The Association for UK Interactive it is elusive and relates to skills, ideas and
Entertainment) and NESTA (National experience that cannot be captured easily. In
Endowment for Science, Technology, and contrast, explicit knowledge is codifiable and
the Arts), were also consulted. could be found in development tools, software
codes, literary work, artwork, music, etc. 17
Internalization theory argues that the
1. INTERNALIZING public good nature of knowledge where it is
easily diffused and appropriated by users will
KNOWLEDGE AMONG incentivize profit-maximizing firms to bring
INNOVATIVE BRITISH under common ownership and control of inter-
dependent activities within their businesses.
GAMING FIRMS Peter Buckley and Mark Casson state the
growth of MNEs is because of “the increasing
Ancient philosophers had long recognized demand for knowledge-based products and the
the importance of knowledge. Chinese philos- increasing efficiency and scale-economies of
ophers including Confucius adopt an incre- knowledge production together with the diffi-
mental perspective and emphasize the reuse culties of organizing a market in knowledge”18.
14
M. Casson, L. Porter, N. Wadeson, “Internalization theory: an unfinished agenda”, International Business Review,
vol. 25, n° 6, 2016, p. 1223-1234.
15
Knowledge is important in the confluence theory of creativity and the investment theory of creativity, and tacit
knowledge is critical during game design and game production. See D. Tsang, Entrepreneurial Creativity in the Virtual
World, Cheltenham, Edward Elgar, 2015, p. 52 and 62-64.
16
F. von Hayek, “The Use of Knowledge in Society”, American Economic Review, vol. 35, n° 4, 1954, p. 519-530;
M. Polanyi, The Tacit Dimension, New York, Doubleday, 1966, p. 10.
17
The notion of firm-level tacit knowledge, therefore, represents the accumulation of tacit knowledge at the indivi-
dual level. This is the reason why, in their acquisition of British development firms, multinationals tended to include
clauses that the founders to be remained as employees of the subsidiaries for a specific number of years to facilitate
the transfer of tacit knowledge.
18
P. Buckley, M. Casson, The Future of the Multinational Enterprise, op. cit., p. 36.
Table 1. Internalization and video game industry Firm boundary

Industry Internalization Rationale for internalization 1st 2nd 3rd
Participants Mode period period period
1978- 1994- 2007-
1993 2006 2021
Game Forward Improves planning for the launch X X X
Platform integration via of new titles concerning the game
Owners internal platform.
studios and/or
publishing
Game Backward X
Developers integration into
platform
technology
Forward Exploit proprietary technology. X X X

integration via
publishing and/or
retail
Game Backward Avoid bargaining conflict with X X X
Publishers integration via blockbuster developers.
internal game
studios
Forward Exploit market intelligence and X

integration into branding.
retail
Game Backward Exploit market intelligence. X
Retailers integration via
publishing and
game
development
In the historical development of the British improve players’ experience. Table 1 shows
video game industry, this relates to game the rationale behind internalization to resolve
retailers, game publishers, or game platform market imperfection within each period of
owners replacing the procurement of games British video game development that shapes
from external sources with supply from their the boundaries between participants.
own divisions as the costs of coordinating the
internal market were lower than organizing
the pipelines of attractive game titles exter- 2. INTERNALIZING
nally. Similarly, game developers appropriated
monopoly rents from original games when the KNOWLEDGE AND
costs of using market transactions to distrib- INNOVATION DURING EARLY
ute them were higher than the costs of self-
publishing. With the exceptional case of tech-
GROWTH (1978-1993)
nological leadership in semiconductor design,
talented developers engaged in the design The British video game industry could
activity to exploit their technology leadership be traced to the Multi-User Dungeon (MUD)
in the key component of game platforms that game or the Essex MUD developed by Essex
2022, N° 109 51
DENISE TSANG
University students Richard Bartle and Roy (1984), SCi (1988) and Eidos (1990). Most
Trubshaw in 1978 19. This free-to-play game, expanded into game development. Meanwhile,
however, was restricted to those with access specialist retailers such as Microdigital (1978),
to mainframe computers and therefore had Virgin Games (1983), Microbyte (1987),
only a limited number of players. The arrival Game (1991) and Gamestation (1993) also
of locally designed personal computers pro- entered the market; these retailers competed
vided a new game platform that paved way with nationwide high street chains Woolworth,
for the new industry 20. It is fair to say that the Boots, WH Smith and Dixons.
industry was built on players using Sinclair
Spectrum, Acorn Electron and BBC Micro The market and technology in British
and a generation of bedroom coders that had gaming attracted global players. In particular,
substantial experience in programming on US and Japanese multinationals entered in the
these computers 21. Indeed, the British personal early 1980s and shaped the British industry
computers were not only advanced in their in the decades to come. Japan’s Sega brought
design but were affordable for the mass market with it substantial arcade game and handheld
consumers comparable to the imported US console experience in 1982 while its counter-
models Apple, Commodore 22 or Tandy; they part Konami launched the popular MSX games
were therefore widely adopted by youthful Metal Gear in 1983. The Californian firms
gamers and amateur developers. The cohort Activision and EA entered in 1983 and 1986,
of male game enthusiasts was self-taught and respectively. Nintendo also expanded globally
spent hours playing games; they wrote game after the successful launch of the handheld
programs with the new technology, combining console Famicon in Japan in 1983; it assigned
passion and action that enabled the industry Mattel to distribute the global version of
to start from scratch 23. Famicon, the Nintendo Entertainment System
(NES), in 1987. Nintendo soon internalized
Early entrants in the development sector the operation and set up a headquarters in
included Bug-Byte (1980), Superior Software Germany in 1990, which facilitated the setting
(1982), Argonaut Games (1982), Rare (1985), up of a British subsidiary in 1993. Last but
Codemasters (1986), Bullfrog (1987), DMA not least, Sony’s direct investment took place
Design (1987) and Climax Studios (1988) 24. in Liverpool in the same year.
Some of them grew into leading publishers.
Meanwhile, entrepreneurs across Britain also Internalization as discussed in the preced-
identified new market opportunities and set ing section defined the boundary of firms in the
up video game publishing firms. Examples industry. Among the game platform owners,
are Acornsoft (1980), Mastertronic (1983), internalization was pursued by Cambridge
Ocean (1983), CentreGold (1984), Psygnosis personal computer manufacturers Sinclair
19
The Essex Mud (MUD 1) was based on the MIT student game York (1977). R. Bartle further developed the game
into MUD 2 by 1985. See “Richard Bartle (MUD1/MUD2) – Interview”, Arcadeattack, 8 March 2019, Accessed
from https://www.arcadeattack.co.uk/richard-bartle/ on 22 May 2022.
20
For example, Sinclair’s gaming machine ZX Spectrum personal computer was priced at £125. “Clive Sinclair’s
ZX Spectrum: This is where the UK games industry came from”, CNET, 17 September 2021.
21
The video gamers became communities and were connected by hobbyist publications such as Acorn Users and
Sinclair Users.
22
The global hit Commodore 64, for example, was at least double the price of the Sinclair Spectrum in early 1983
and was more of a niche market. Exciting games available for the Commodore 64 included Dormark’s 007 A View
to Kill and 007 Licence to Kill.
23
See BBC, “The BBC Microcomputers and Me, 30 years down the line”, 1 December 2011.
24
These ventures were found in diverse locations: Bug-Byte in Liverpool (1980), Argonaut Games in London (1982),
Imagine Software in Liverpool (1982), Superior Software in Leeds (1982), Rare in Twycross (1985), Codemasters in
Leamington Spa (1986), DMA Design in Dundee (1987), Bullfrog in Guildford (1987) and Climax in Portsmouth (1988).
and Acorn. Both set up game software divi- to improve the function of its computers for
sions to coordinate the derived demand for better gameplay. It could therefore be argued
their technologically superior hardware in that the launch of RISC microprocessors asso-
1980. Over time, Sinclair became renowned ciated with Acornsoft represented an effort to
for its Speccy games associated with the internalize the design of the core component
Sinclair Spectrum computers. There were thir- in the gaming platform. The effort to improve
teen Sinclair-made Speccy games published the video game experience is by no means an
between 1982 and 1984, not to mention the isolated incident. Argonaut Games’ Jez San
thousands of Speccy games written by external designed the Super FX coprocessor to improve
studios 25. Though Acornsoft specialized in the performance of the Nintendo game console
games, business and educational software, the SNES 28. J. San was a self-taught technologist
game segment was by far the most successful. and previously worked in the security systems
In addition to making dedicated games for for British Telecom and Acorn Computers;
Acorn Atom and Acorn Electron, Acornsoft he co-wrote a book on Quantum Theory at
also published titles for Sinclair and BBC the age of 18. J. San showed Nintendo the
gamers. A decade later, Japanese multinational Super FX design and gained a contract in
Sony internalized game development and 1990, subsequently earning substantial fees
purchased Liverpool’s Psygnosis to line up to fund Argonaut’s growth 29.
some exciting games for the launch of its new
Finally, integrating game development and
game console PlayStation. Psygnosis had an
publishing allowed firms to exploit knowledge
in-house development team and was led by
flow and could be observed in this period. The
Ian Hetherington 26, who had tacit knowledge
early developers Bug-Byte, as established by
of cultivating relationships with outside devel-
Oxford chemistry graduates Tony Baden and
opers and helped the creation of new firms
Tony Milner in Liverpool in 1980, moved
in the region. Sony’s internalization strategy,
into game publishing soon after its founding.
therefore, enabled a successful launch of the
Bug-Byte subsequently provided a model
PlayStation with the hit title Wipeout 27.
of firm growth 30. Codemasters, founded in
British game developers with proprietary Leamington Spa in 1986, built a strong brand
knowledge also internalized upstream and and successfully exploited the new market and
downstream activities in this period. As the quickly became the industry leader. Its found-
personal computer was a key platform for ers, the Darling brothers, combined their pro-
video gaming in the 1980s, Acornsoft’s parent gramming expertise accumulated from work-
Acorn Computers set up a new division to ing with Mastertronic with marketing insights
design the innovative RISC microprocessor from industry veterans 31. As mail order was a
25
Sinclair’s previous model ZX81 kickstarted the industry with about 100 video games. Sinclair developed a couple
of games for the platform and the most popular game Monster Maze was the external game by J. K. Greve Software.
26
Hetherington’s approach to nurturing creativity among independent development firms facilitated the success of
DMA, Traveller’s Tales, Bizarre Creations and Reflective Interactive in the region.
27
See the pace of the production of Wipe Out in “PS1 at 20: the making of Wipeout”, Eurogamer, 29 September 2015.
28
Argonaut licensed the Super FX to Nintendo to be used in the production of Super Nintendo Entertainment System
or the SNES consoles, which resulted in the console running 200 times faster at 3D polygon graphics. See “Jez San
On Star Fox, Super FX And Teaching Nintendo How To Fly”, Nintendo Life, 1 December 2019 and “Interview with
Jez San” in arwinglanding.net, 28 September 2007.
29
Argonaut was listed on London Stock Exchange in 2000.
30
Though Bug-Byte lasted until 1985, firms spun out of it including the high-budget game specialist Imagine Sof-
tware. The collapse of Imagine in turn created companies including Psygnosis, Denton Designs, and Rage Games.
Rage was the first publicly listed game firm in Britain.
31
For example, Microdigital founder and Imagine Software manager Bruce Everiss brought his marketing experience
to Codemasters.
2022, N° 109 53
DENISE TSANG
norm in early game distribution, Codemasters substantial knowledge of US and Japanese

further gathered up-to-date marketing intel- developers in her role with British Telecom;
ligence by maintaining communication with she was, therefore, able to publish a large
players and interacting with them through number of Japanese and US game titles in the
written correspondence. Codemasters not new firm. With a global market outlook, SCi
only internalized its publishing operation, but established a small internal development team,
it also made a good judgemental decision that producing games such as Time Slip (1993) 35.
changed its target segments from low-price SCi managed to grow throughout this period
video games to full-price games 32. Climax, with sound financial management and a lean
from its base in Portsmouth, accumulated team publishing a diverse list of video games.
proprietary assets and expanded to Brighton, Most specialist retailers such as Game
Nottingham, London and Los Angeles. The increased the number of retail outlets in this
entrepreneurship family background of its period. Virgin Games, however, internalized
founder generated an ownership advantage to publishing and acquired 50 % of the financially
take Climax further and grow subsidiaries and distressed Mastertronic in 1987 36. The new
intellectual assets, which the firm capitalized entity not only distributed video games but
on in the following decades. also launched Sega’s game console the Master
Small British publishers advertised for System in Britain. The Virgin conglomerate
games at the price of £250 as a weekly roy- soon realigned its corporate strategy. Hence,
Virgin Games sold Mastertronic’s distribution
alty payment in the early 1980s 33. However,
talented programmes tended to be more inter- network to Sega in 1991 and retail stores to
ested in collaborating with established pub- Rhino Group 37 in 1993.
lishers. Internalization could be seen among In summary, the British video game
larger British publishers and retailers with industry began as a cottage industry where
proprietary marketing knowledge, integrating individuals or small teams produced games
back into game development to exploit first- informally on non-commercial premises.
hand insight of the evolving market, with the With a fast-expanding home market, the new
aim to implement their visions in enticing industry quickly attracted foreign investment.
game titles. For example, the national retail Internalization into game platform design and
chain Microbyte recruited Debbie Bestwick to forward integration into publishing could
head its publishing division in 1988. Bestwick be seen among developers endowed with
led the merger with Sweden’s game devel- proprietary technical or market knowledge.
oper Team 7 to create Team 17 in 1990 34. Some publishers and retailers with superior
The publisher SCi created in 1988 by former brands also ventured into game development
British Telecom video game software division to exploit their market knowledge. The case of
manager Jane Cavanagh also internalized soft- platform owners Sinclair and Acorn stood out.
ware development. J. Cavanagh accumulated As early leaders in personal computers, the
32
“Codemasters”, Retro Gamer, 30 December 2016.
33
See advertisement of Software Invasion in Southfields, London in Acorn Users, June 1984, 76. Software Invasion
invited individuals to send in programmes for evaluation in its advertisement. Software Invasion left the publishing
business in late 1980s whereas Southfields remains a location for video game retail.
34
As the CEO, S. Beswick was responsible for Team 17’s backward integration into development, drawing upon
local talents. She was one of the few female CEOs in the industry; she led Team 17’s listing on London Stock
Exchange in 2018.
35
From https://www.mobygames.com/game/time-slip. Accessed on 1 June 2022.
36
Mastertronic expanded into the USA and Europe too quickly and ended up with severe financial problems.
37
Rhino Group, founded in Basingstoke in 1992, expanded in the video games retail sector through acquisitions.
“Rhino set to buy video game shops from Virgin”, The Independent, 3 November 1993.
two firms forward integrated into game devel- For example, the production and marketing
opment and game publishing to increase the expenditure of Grand Theft Auto V, released
supply of dedicated game titles. Unfortunately, in 2013, amounted to US$265 million 39. This
the delay from subcontractors over Christmas could be compared to the sales revenue of less
in 1983 and in 1985 triggered off sales decline, than US$100 million in the largest British
severe financial crises and eventually their exit. publisher Codemasters.
This created a domino effect and affected sales
Beginning with about 50 firms in 1994,
of Sinclair and Acorn games. Acorn was sold
the total number of video game firms accu-
to Olivetti in 1985 and Sinclair to Amstrad in
mulated to approximately 300 by 2006 40. The
1986, respectively. Amstrad subsequently kept
established London-based publicly listed firms
the game software division but Olivetti sold
Eidos, CentreGold, SCi and Argonaut Games
Acornsoft to the publisher Superior Software
attempted to defend their positions, but without
in 1986.
success. In Liverpool, the first publicly listed
British video game firm, Rage Software, went
bankrupt in 2003. Nevertheless, the velocity
3. INTERNALIZING of technological and marketing forces led to
KNOWLEDGE AND the growth of smaller and more nibble firms
from the ashes of their larger predecessors.
INNOVATION DURING For example, VIS Entertainment was created
INDUSTRY CONSOLIDATION in Edinburgh in 1996 by former employees
of DMA Design and focused on AAA games
(1994-2006) as in the State of Emergency. VIS, however,
went into administration in 2005 after delays
The second period witnessed the creation and the cancellation of projects; the Dundee-
of blockbuster titles such as Grand Theft Auto, based 4J Studios (2005) and Tag Games (2006)
Tomb Raider and RuneScape despite Britain’s emerged from VIS. Other notable entrepre-
loss of early prowess in personal computer neurial firms created during this period include
manufacturing 38. These games achieved a sub- Sumo Digital (1993), Frontier Developments
stantial number of Guinness World Records. (1994), Jagex (1999), Mind Candy (2004) and
The latest Grand Theft Auto franchise, Grand Mediatonic (2005).
Theft Auto V, won over 30 records. On the
The importance of cash flow in an industry
other hand, an impressive Guinness record
where there was a relatively long production
was achieved by RuneScape in 2017 operating
cycle made the co-development of games
Massively Multiplayer Online (MMO) Game
attractive among developers; the strategy
with 255 million subscribers. Additionally,
enables developers to generate a steady stream
Tomb Raider won the record for the World’s
of income before the launch of the game titles.
Best-Selling Videogame Heroine in 2019.
Mediatonic, which was created by two finalists
This period is marked by the launch of at Brunel University in the Brunel Science
dedicated game consoles – Sony PlayStation Park in 2005, was typical. It worked on the
(1994), Microsoft Xbox (2001) and the US and Japanese publishers’ game concepts
Nintendo Wii (2006). The unrivalled popular- to sustain healthy cash flow and generated
ity of these platforms heightened the sunk cost profits by excelling in project management
not only in production but also in marketing. and game development. Parallel to this, the
38
Sinclair’s game software division was sold, along with its PC division, to Amstrad in 1986. Olivetti acquired Acorn
Computers in 1985 and sold Acornsoft to Superior Software in 1986.
39
L. M. Brittan, “Grand Theft Auto V has made more money than any movie ever”, NME News, 11 April 2018.
40
J. Mateos-Garcia, H. Bakhshi, M. Lene, “A Map of the UK Games Industry”, NESTA, September 2014, p. 20.
2022, N° 109 55
DENISE TSANG
retailing sector consolidated as the US multi- Eye Productions, Sony Music and others.
national Electronic Boutique acquired stakes Mind Candy’s Chief Licensing Officer was
in Rhino in 1995; the integrated group then responsible for liaising with over 100 firms
purchased Game in 1999 41 and expanded using the characters for food merchandise,
Game retail stores in Europe. The US video stationery, trading cards, membership cards
rental giant Blockbusters Entertainment 42 and clothing, etc. 45 Mind Candy grew rapidly
also challenged local retailers with video in the late 2000s but its sales revenue gradu-
game rental; it further acquired the large ally declined as it failed to tap into the rising
game retailer Gamestation in 2002. The small mobile phones and tablet platforms among
mail order specialist retailers, therefore, dis- children 46. Other London developers includ-
appeared while Virgin exited video game ing Introversion and Mediatonic internalized
retailing as this period progressed 43. game publishing and distribution in 2006
via their own websites and were therefore
Internalization was adopted by game
early followers of Valve’s concept of online
developers with unique capabilities. Jagex’s
gaming hub Steam (2003).
technological knowledge enabled it to distrib-
ute RuneScape using the web browser as a Internalization was pursued by some large
game platform in 2001. Jagex was co-founded publishers. However, Codemasters committed
by the game enthusiast and Cambridge’s to strategic partnerships with firms including
computer science undergraduate Andrew Jester Interactive and Warner Brothers to
Gower the previous year; A. Gower spent expand its market share. By avoiding deep
thousands of hours in programming that internalization, Codemasters’ sales revenue
resulted in the first version of RuneScape, grew from £8 million to £56 million between
a variant of Essex MUD. RuneScape is the 1997 to 2003. Eidos and SCi internalized in
first free-to-play online game and quickly an attempt to improve the coordination in
built a large community of devoted players. research, production and marketing. However,
In contrast, London’s Mind Candy built on they underestimated the extent of resource
internalization of game development 44 to commitment for bringing under common
appropriate the monopoly rents from Moshi ownership and control of these activities. The
Monsters games. Mind Candy also worked history of Eidos before the merger was about
with independent firms in the provision of internalization via acquiring the publisher
magazines, books, albums, and an animated CentreGold in 1996. Eidos was originally
musical comedy film; it maintained owner- founded as a video technology compres-
ship and control of the intellectual assets via sion firm in 1990 47; it acquired the James
working with Skyjack Publishing, Spider Bond game publisher Domark as well as
41
Game had 86 stores nationwide at the time. “Software Retailer Raises its Game with Takeover”, The Guardian,
13 April 1999.
42
Blockbusters entered the UK in 1989 when it purchased the Rhino Group founders Bev Ripley and Terry Norris’s
Ritz video. See “Rhino set to buy video game shops from Virgin”, The Independent, 3 November 1993.
43
“Virgin Megastores sold off in MBO”, MCV/Develop, 17 September 2007.
44
Mind Candy’s serial dot-com entrepreneur Michael Acton-Smith, who created the firm in 2004, was the force
behind the growth of the Moshi Monsters online game franchise that targeted children between 6 and 12.
45
https://retail-merchandiser.com/profiles/mind-candy/ Accessed on 26 May 2022.
46
By not responding to the new game platform, Mind Candy retreated to the single niche Moshi Monster title, the
Moshi Twilight Sleep Stories, in 2010. The Moshi Twilight introduced sleep technology with stories, sound and music
to help children attain mindfulness. Interestingly it led to Acton-Smith setting up Calm in Silicon Valley in 2012, a
phenomenally successful mindfulness platform.
47
Eidos was founded by Stephen Streater as Eidos Technologies in 1990, to be specialized in video compression
technology. It evolved into a game console publisher and developer in four years. A. Ajami, “Eidos founder steps
down”, Gamespot, 27 April 2000. See https://www.gamespot.com/articles/eidos-founder-steps-down/1100-2460634/.
the developers Big Red and Simis in 1994 closed in 2011. Internalization combined
and increased its size. Nevertheless, Simis foreign multinationals proprietary intellec-
spun out as a result of a management buyout tual assets, global marketing and financial
and became Guilford’s Kuju in 1988. Eidos resources with the expertise of British game
became the largest in Britain after merging development; internalization, therefore,
with CentreGold 48; it gained CentreGold improved the coordination across the complex
game development studios Core Design 49 process. The marketing resources of foreign
and Silicon Dream Studio 50. The merger multinationals, in turn, allowed reinvest-
made the new firm the 15th largest global ment into existing franchises. Consequently,
firm by sales revenues in 2000. Eidos, how- DMA’s Grand Theft Auto, Sports Interactive’s
ever, accrued losses of over £50 million in Football Manager and Creative Assembly’s
2001 and it failed to foresee the decline of Total War continued to be globally successful
the 32-bit personal computer game platform 51. franchises.
The leading publisher SCi acquired Eidos in
As mentioned earlier, the publishers Sony,
2005 52; SCi, unfortunately, failed to predict
Microsoft and Nintendo dominated the game
the rise of Nintendo Wii game consoles and
console market. Their intense rivalry drove
was acquired by Japan’s Square Enix in the
their internalization towards securing studios
next period.
with attractive intellectual assets. Most nota-
Parallel to this, US and Japanese multi- bly, Sony’s success in the entry of gaming in
national publishers internalized game devel- Europe was associated with Sony Liverpool’s
opment in Britain by acquiring studios. Their Wipeout. The game combined futuristic racing
purpose of internalization was to coordinate with background music and targeted players in
the knowledge flow across functions, allow- their twenties who were familiar with handheld
ing them to exploit superior knowledge and game devices; most importantly, these affluent
resources in game marketing with internal players became enthusiasts of PlayStation
production. The acquisitions of 100 % equity consoles 53. In the case of Nintendo, it took
stakes included Atari’s Reflection Interactive a 49 % equity stake in Rare in 1994, which
(2000), Electronic Arts’ Bullfrog Productions was a prolific developer for Nintendo. Rare
(1999), Studio 33 (2003) and Criterion (2004), produced hit titles Golden Eye 007, Banjo-
Rockstar Games’ DMA Design (2002), Warner Kazooie and Jet Force Gemini during its
Brothers’ Travellers Tales (2005), Sega’s collaboration with Nintendo and it accounted
Creative Assembly (2005), Sports Interactive for 9.5 % of Nintendo’s total gaming revenue
(2006), and Buena Vista Games’ Climax in 2001. Nintendo decided not to exercise its
Racing (2006). Some of these acquisitions right to acquire the remaining stakes in Rare
were less durable. Atari sold Reflection and after its equity ownership arrangement expired.
it became Ubisoft’s Newcastle subsidiary in Microsoft in turn acquired 100 % stakes in
2006 while Climax Racing in Brighton was Rare by purchasing the shares from Nintendo
48
CentreGold was created by the merger of CentreSoft and U.S. Gold. It was a leading publisher in Europe and was
listed on the London Stock Exchange in 1993. See “Floatation will value Centregold at 50m pounds”, The Independent,
19 October 1993; “Deals that Shook the Industry”, MCV/Develop, 25 July 2008.
49
Core Design developed the game Tomb Raider. Tomb Raider was associated with two films, starring the US actress
Angelina Jolie. The intellectual property associated with Tomb Raider was acquired by Crystal Dynamics in Cali-
fornia in 2003. Core Design became Rebellion Developments in 2006. See “Lara Leaves UK”, BBC, 31 July 2003.
50
C. Wilkins, R. M. Kean, The Story of US Gold: All American Software: a very American, British software house,
Kenilworth, Retro Book, 2017.
51
“Eidos Cash Call Hits Share Prices”, BBC, 29 May 2001; J. Green, You Are My Hero, London, Snowbooks Ltd., 2014.
52
S. Bowers, “SCi shares flourish after founder is forced out”, The Guardian, 19 January 2008.
53
“Sony Playstation Launches in Europe”, The Centre for Computing History, 29 September 1995.
2022, N° 109 57
DENISE TSANG
and Rare’s founders in 2002, at US$375

million. Additionally, Microsoft acquired 4. INTERNALIZING
Lionhead Studios in 2006. With successful KNOWLEDGE AND
web-based game franchises in the Far East,
Korea’s NCsoft set up a Brighton subsidiary INNOVATION DURING
in 2004. The internalization, however, was DIGITALIZATION (2007-2021)
confined to sales, distribution and customer
services of MMO games.
The watershed in British video gaming
Overall, as the technology of the gaming towards the late 2000s is associated with
platforms evolved during this period of con- the rise of digitization, which in turn altered
solidation and selling out, the size of game the rule of competition. Digital distribution
development teams increased as game pro- became mainstream with the diffusion of
duction professionalized. Some independent online delivery and online payment technol-
developers became subsidiaries of multination- ogy. The online gaming hub Steam, launched
als and continued to acquire new skills. With by Valve during the last period, was soon fol-
a few exceptions, British game developers lowed by Facebook, Microsoft and Sony. Other
focused on co-developing games with larger powerful digital firms also became retailers;
publishers. Internalization was pursued by they included App Store (2008), Google Play
those with unique technology and marketing (2008) and Nintendo eShop (2011). The larger
capabilities, yet they struck a good balance in British publishers Codemasters and Eidos
terms of the extent of internalization. Large entered into an agreement with Steam for
multinational publishing firms integrated back digital distribution in 2007 54. Parallel to this,
into the sizeable British market to exploit technological advances revolving around the
their first-hand knowledge while powerful former Acorn Computers’ RISC microproces-
platform owners integrated forward to improve sor technology 55 allowed sophisticated games
coordination and secure a portfolio of exciting to be played on mobile platforms. Indeed,
dedicated titles. Some British publishers also mobile phones and tablets enjoyed a meteoric
internalized game development to improve rise and shared approximately 50 % of the
the coordination of activity arising from the video game market towards the end of 2010.
time lag between R&D, production and mar- The spread of mobile gaming further created
keting of games; but as this period came to a new segment of casual players that fuelled
an end, the ownership and control of Eidos, substantial growth in the industry. These new
SCi, CentreGold, Game and others no longer players, including a female audience and
resided with their founders. people who used to play broad games, tended
not to have the complex skill to play console
games and were attracted to easier-to-play
games. Video games finally became part of
the British mainstream culture, with players
across all age groups in this period.
In 2007, the retail market further consol-
idated when the Game Group 56 purchased
54
“Eidos Launching with Steam”, Game Zone, 15 March 2007; M. Goldstein, “Codemasters latest publisher to join
Steam”, Shack News, 24 October 2019. Despite its online initiative, Eidos was acquired by Square Enix in 2009.
55
The original work concerning the RISC microprocessor could be traced to early research in the ARM project of
Cambridge’s Acorn Computers.
56
The Game Group’s US stakeholder Electronic Boutique left in 2002 (https://www.bbc.co.uk/news/business-17336697,
accessed on 1 May 2022). However, Game was required to pay 1 % royalties on its UK turnover to Electronic Boutique
until 2006. See https://www.casemine.com/judgement/uk/5a8ff70460d03e7f57ea5dc5.
Gamestation’s 217 outlets from Blockbuster, The rise of mobile gaming, which required
hence creating a leading high street entity that only a small team for original game develop-
targets both casual and hardcore gamers 57. ment, led to a re-focus on intellectual prop-
In total, there were about 600 firms in the erty 63. Mediatonic is an example of a developer
British video games industry in 2007 58. The that switched to original games after a decade
number of new entrants rose rapidly. By 2018, of co-development with publishers. It uti-
the number of small firms (predominantly lized its cash reserve to exploit its proprietary
developers) totalled 2261 and 62 % of these knowledge and funded new game projects. It
small firms were less than 10 years old and had launched the global hit franchise Fall Guys
less than 250 employees 59. Typical develop- in August 2020 64. Fall Guys attracted 1.5
million players 24 hours after its launch in
ers targeted the mobile game market such as
August 2020 and sold over 10 million units
Lockwood in Nottingham (2009) and Kwalee 60
on Steam by November 2020 65. The franchise
in Leamington Spa (2011) had less than 10 was in the sixth season by November 2021.
employees at the beginning. Publicly listed
firms including Team 17 grew steadily and Other developers such as Ustwo monetized
employed more than 500 professionals by intellectual assets via internalization. It sold
2021 while privately owned established firms games and in-game items in the digital distri-
such as Sumo undertook foreign investment in bution channels and worked with advertisers
India, Canada and Poland 61. Game developers to generate income with free-to-play games.
Ustwo’s first mobile game Whale Trail, which
Climax, 4J, Frontier and others continued to
improve efficiency and effectiveness when cost £150 000 to produce, was sold in App
Store at £0.69 during its launch in 2011. By
co-developing AAA games with publishers.
2013, the game generated £203 811 from the
4J, founded in 2005, was able to expand with
store and therefore covered its cost; Whale
the game console version of Minecraft in 2012; Trail further brought £37 818 to the firm from
it coordinated game production globally to sales in Google Play and £24 142 from adver-
deliver Mojang’s blockbuster to PlayStation tisers 66. The internalization among developers,
users. The project management experience of therefore, represents the exploitation of cre-
its veteran founders meant that it was able to ativity and technology. Ustwo also shows the
maintain a lean core team during the produc- importance of tacit knowledge gained from
tion process; it expanded with a core team of the related IT industry as it had seven years
less than 20 people during its first 12 years of expertise and knowledge in designing com-
and drew on external resources during its mercial applications and other original nursery
production process 62. rhymes applications before diversifying into
57
Game acquired the rival Gamestation for £74 million. “The Game Group cleared in buyout of Gamestation”, The
Times, 16 January 2008.
58
J. Mateos-Garcia, H. Bakhshi, M. Lene, “A Map of the UK Games Industry”, art. cit.
59
CBI, “Centre Stage: Keeping the UK’s Creative Industries in the Spotlight”, 22 October 2019.
60
Kawlee was created by the co-founder of Codemasters, David Darling.
61
Investors in Sumo Digital at the time including China’s Tencent which owned 8.75% of the firm. See NME Gaming
News, 19 July 2021.
62
R. McLaren, “Profits Stack Up at Dundee Minecraft Company 4J Studios”, The Courier, 2 August 2019.
63
The team size for console games is 50 as compared to less than 10 in mobile games.
64
“Mediatonic launches 300-strong Tonic Games Group – what the Fall Guys developer is planning next”, MCV/
Develop, 18 June 2020.
65
“Fall Guys has sold over 10 million copies on Steam”, Game Developer, 17 November 2020.
66
N. Lomas, “Ustwo Spends to Keep Whale Trail Flying”, Tech Crunch, 10 October 2013.
2022, N° 109 59
DENISE TSANG
video games in 2008. Ustwo considered its new studio in Guildford to add to its facility
trial and error over the years shaped its more in Newcastle; it further acquired Free Style
successful franchise Monument Valley 67. Games from Activision in 2017 to create
Ubisoft Leamington Spa. Ireland’s Keywords
Established development firms with Studios also acquired Climax in 2021.
decades of tacit knowledge in gaming also
forward integrated into interdependent activ- The giant of mobile games, China’s
ities. For instance, Team 17, Lockwood and Tencent, replicated its global acquisition
Frontier diversified into publishing. Catalis strategy in Britain. It bought 9 % of Frontier
Group as created by former Eidos employees in 2017 68. It invested US$25 million in
combined local firms such as Curve Digital, Lockwood 69, the creator of Avakin Life, in
Kuju and Testronic to provide full video game 2020. Tencent also acquired a minority stake
services such as game testing, game deve- in Derby’s Playtonic and began the process of
lopment, etc. acquiring 100 % stakes in Sumo for more than
US$1.2 billion in 2021 70. Tencent’s acquisition
We will continue to address the internal- could be elaborated by the internalization-plus
ization strategy that enables platform owners framework proposed by Mark Casson and
and publishers to avoid the difficulties to Nigel Wadeson 71, which explains the acquisi-
coordinate with external studios for AAA game tion of knowledge from advanced economies
development in the self-publishing era. Among rather than exploitation of existing firm knowl-
the game consoles and streaming service edge accumulated at home. Internalization in
providers, forward integration via acquisition this context allows Tencent to combine the new
was used to ensure a supply of exciting games game development and marketing knowledge
for their game platforms. Evolution Studio from additional subsidiaries with the cost
was under Sony between 2007 and 2016. advantages in programming from China to
Media Molecule became a Sony subsidiary in create a competitive advantage 72.
2010. More recently in 2021, Sony acquired
Firesprite and Fabrik Games. Similarly, The internalization theory also shows
Microsoft acquired Playground Games and that US and Japanese multinationals inter-
Ninja Theory in 2018. Their strategy was nalized game development to resolve poten-
imitated by streaming firms as this period tial conflicts during contract negotiations
drew to a close. with talented developers. The latecomer
Epic Games acquired Mediatonic in 2021.
European multinationals also invested Activision acquired Bizarre Creations in 2007
in Britain. Germany’s Crytek acquired Free and opened the studio Blast Furnace in Leeds
Radical Design in 2009. Sweden’s King for mobile gaming; however, the two studios
opened a small studio in London to develop were closed in 2011 and 2014 respectively.
mobile games in 2012. With the successful EA acquired Playfish in 2009 and Chillingo
development of Facebook-based games, it a year later. Sega created Hardlight studio in
expanded with a large, new headquarters that 2012 to focus on mobile phone games; Sega
housed its legal, HR, marketing and develop- then acquired Two Point Studios in 2019.
ment teams. At about the same time, France’s Finally, Codemasters and Playdemic brought
Ubisoft commissioned a custom-designed in new expertise and joined the EA family in
67
S. Dredge, “From MouthOff to Monument Valley: Ustwo’s Path to Apps Fame”, The Guardian, 29 May 2015.
68
A. Ram, “Tencent takes 9% stake in UK’s Frontier Developments”, Financial Times, 28 July 2017.
69
https://www.gamesindustry.biz/articles/2020-11-04-tencent-invests-in-lockwood-publishing. Accessed on 12 May 2022.
70
J. Allen, “Tencent to buy ‘LittleBigPlanet’ developer, Sumo Digital for $1.27 billion”, NME, 19 July 2021.
71
M. Casson, N. Wadeson, “Emerging Market Multinationals and Internalization Theory”, art. cit..
72
L. Chen, Influence Empire: The Story of Tencent and China’s Tech Ambition, London, Hodder & Stoughton, 2022.
2021. Prior to the integration, Codemasters original games. British developers since the
renewed its contract for the FIA Formula late 2000s were able to employ digital distri-
One Championship franchise and it strength- bution to pursue a self-publishing strategy for
ened its racing development teams with the original games. Opportunities were abundant
purchase of Sega Racing (2008), Swordfish and internalization was used extensively.
Studios (2008), Evolution Studio (2016) and The shift in the balance of power, therefore,
Slightly Mad Studios (2019). Codemasters did stimulated upstream and downstream firms’
not acquire the intellectual properties from acquisition of developers in order to coordinate
their multinational owners but focused on their pipelines of mobile games. From the
tapping into the knowledge base of existing platform owners’ perspective, internalization
teams in order to generate additional owner- improved the complex coordination of new
ship advantages in its racing game portfolio. games with the new generation of console or
Codemasters, therefore, kept the new teams mobile technology. From the perspective of
in their existing locations and benefitted multinational publishers, they were able to
from the collective knowledge accumulated exploit superior marketing capabilities and
by the gaming professionals 73. The sales of improved communication with internal stu-
Codemasters enabled the resourceful EA to dios. Finally, the electronic distribution model
add both human and intellectual assets to the meant that physical retail outlets became
competitive sports genre 74. increasingly obsolete. Hence, the Game Group,
which went into administration in 2012 and
The internalization strategy of foreign
was rescued, further rationalized its operation
multinational subsidiaries facilitated the global
closing over 10 % of its retail outlets in 2020 76.
and local coordination in game production
during the long time lag between produc-
tion and marketing. Within the development
function, the integration of British teams not CONCLUSION
only improved the coordination of production
but also brought in fresh ideas. The expertise
The history of British video games has
of multinational subsidiaries and established
been and is associated with knowledge and
developers’ project management accelerated
innovation; our discussion shows that its
the innovation process. It enabled them to
development was driven by difficulties in
make valid judgments in the coordination of
coordinating external markets of knowledge
AAA games across continents. For instance,
concerning production and marketing. The
Rockstar Games’ Red Dead Redemption
accumulated knowledge embedded within
involved the task of coordinating 1600 game
individual participants was a fundamental
designers and programmers across Britain
driving force in the industry between 1978
and the US 75.
and 2021. Most notably, the tacit knowl-
To sum up, the popularity of mobile games edge deriving from developers’ experience
means that small development teams using in game design, programming, market trend
appropriate hardware and software became and project management were transferred
efficient units of independent production for through interpersonal exchange formally and
73
See M. Martin, “Codemasters Acquires Sega Racing Studio”, Gamesindustry.biz, 25 April 2008 and D. Person,
“Evolution Studios joins Codemasters“, Gamesindustry.biz, 11 April 2016; J. Batchelor, “Codemasters moves F1
team into new Birmingham studio”, Gamesindustry.biz, 25 April 2019.
74
M. Gamble, “Codemasters agrees five year Formula 1 contract extension’, Share News, 1 November 2019.
75
D. Takahashi, “Red Dead Redemption 2 could hit 20 million in sales”, Games Beat, 31 October 2018.
76
“Game store closures: the full list of branches we know are shutting – and why they’re being closed”, inews.
co.uk, 13 January 2020.
2022, N° 109 61
DENISE TSANG
informally enabling firms to innovate from with their marketing subsidiaries to exploit
the early days and to continue for decades the branding and specialization in handheld
on a large scale. The locational preferences and personal computer games. As the indus-
of industry professionals, in turn, become the try evolved, platform owners and publish-
fundamental driving force of the emergence ers acquired developers with enticing game
of clustering of firms across cities and towns franchises to improve the coordination and
in Britain. Knowledge is a public good and monitoring of the expensive AAA projects.
its tacit nature provides a good case for its Historic British studios, including DMA,
exploitation through internal markets. As seen Core Design, Rare and Sports Interactive
in the preceding sections, the organization of were acquired. More recently, publishers and
British firms and foreign multinationals allow streaming firms searching for ideas for block-
them to internalize proprietary knowledge and buster mobile games also used internalization
bring under common ownership and control to avoid potential bargaining conflicts with
of interdependent activities in research, pro- developers during contract negotiations. The
duction, marketing and distribution. Britain, latest wave of acquisitions involves studios
as a result, has become a home of leading such as Mediatonic and Sumo. Finally, the
multinationals. consolidation in retail is also driven by the
market and technology dynamics of mobile
Two themes emerged from our discussion devices, which required direct marketing.
across the three periods within the British Hence, the leading retailer the Game Group
video game industry development. First, the sharply reduced the extent of ownership and
technology associated with video game plat- control in high street outlets after 2010.
forms shaped the trajectory of the firm bound-
ary. Among the developers, early successful A related point here is the extent that
firms internalized aspects of game platform internalization is supported by creativity and
design to exploit proprietary knowledge within external factors. Talented programmers and
the technological and marketing paradigm. founders of innovative British studios such
Argonaut Games internalized the design of as Codemasters established the firms and
semiconductors to improve the gameplay of internalized interdependent activities during
handheld consoles in the late 1980s. During the their growth. They set up operations abroad
dominance of PlayStation, Xbox and Nintendo to tap into supply and demand dynamics.
in the 1990s and 2000s, platform owners They also used externalized relations when
and large publishers were able to invest in the costs of using the markets were relatively
game development while the relatively small low, as in the case of liaising freelance pro-
independent British studios adopted co-devel- grammers and small firms in industry clusters
opment and worked in partnership with their across Britain to facilitate the production of
resourceful US and Japanese counterparts on video games. This competitive strategy among
AAA projects. For instance, Frontier, Team British developers was similar to that pursued
17, 4J and Mediatonic emphasized cash flow by firms in France and Sweden (with the
from external projects along with selected exception of stronger supporting institutions
that emerged in the two European countries).
internal projects. Since the 2010s, established
developers and new firms focused on original Second, the extent of internalization posed
games as digitization unveiled opportuni- strategic implications at the firm level. Early
ties in terms of self-publishing. Parallel to British platform owners or personal computer
this, game publishers and platform owners manufacturers failed to compete as they did
internalized external markets in response to not strike a good balance between internal-
the heightened coordination costs associated ization and externalization. With cutting-edge
with the prevailing technology. The early US technology in personal computing in the late
and Japanese multinationals entered Britain 1970s, Sinclair and Acorn internalized game
development and game publishing but exter- in the research, production and marketing
nalized the production of well-designed game functions, which accelerated internalization
platforms. Both failed as they were hit by the among large firms and the pursuit of the
shortage of personal computers from external status quo among smaller developers. Global
suppliers in the early to mid-1980s. Sinclair platform owners and publishers acquired
relied on Timex in Scotland while Acorn British developers to replace external markets
relied on Astec in Malaysia; additionally, with internal markets. The former aimed to
Acorn established a subsidiary in Hong Kong coordinate the launch of the new game plat-
to coordinate external sourcing. From the forms with blockbuster titles while the latter
internalization lens, the complexity of the exploited its proprietary knowledge in global
new personal computer market where Apple, coordination of production and marketing to
Commodore and IBM have competed for the tackle the time lag and uncertainties in the
supply of components, sub-systems and units industry. Meanwhile, most British develop-
argues for internalization of manufacturing. In ers pursued co-development to sustain their
the second period, British developers and pub- operations. The rising popularity of digital
lishers focused on core activities in balancing distribution since 2007 led to the emphasis
tensions between internalized and externalized on competing for exciting game titles among
activities and were able to survive amidst publishers and platform owners and their
challenging times. Indeed, no matter how efforts to alleviate contract bargaining issues
much resources publishers could have spent
with independent developers. Additionally,
on AAA game concepts, they were inevitably
the internalization-plus approach explains
surprised by ingenious ideas from external
the more recent expansion of emerging
developers. Most developers maintained a
economy multinationals such as Tencent’s
reasonable extent of internal development by
core teams and the use of external suppliers acquisitions of studios. Internalization-plus
for standardized artwork in low-cost locations. suggests that rather than internalize and
They relied on publishers to finance, promote, exploit existing knowledge in Britain like
distribute and support game franchises. As their US and Japanese counterparts, emerging
the third period approached, opportunities economy multinationals work the opposite
emerged with digitization and called for a bold way and acquire new knowledge from their
internalization strategy in marketing and dis- new investment. By doing so, they combine
tribution. The balance of internalization versus the new knowledge in video gaming with
externalization was, therefore, re-addressed. their headquarters’ location advantages such
as low cost to create competitive advantages.
In summary, the path of technological
and marketing advances demonstrates the The difficulties in coordinating externally
usefulness of internalization theory in the as a result of market imperfection suggested
British video game industry. The propri- by P. Buckley, M. Casson and N. Wadeson,
etary knowledge embedded among industry therefore, provide a comprehensive expla-
participants provided the rationale for its nation of British video game development.
exploitation and the expansion of the firm In conclusion, the British video game indus-
boundary between 1978 and 1993. The pro- try is a story of internalization among profit
fessionalization of game development in the maximizers tackling market imperfection.
second period between 1994 and 2006 led to Creativity and innovation, at the heart of the
the emphasis on improving the coordination competition, drive internalization.
2022, N° 109 63

Eh 109 0047

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Internalizing knowledge in the innovative British video

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Les difficultés à organiser les marchés de flux de connaissances ont conduit

INTRODUCTION as Cambridge-based Frontier Developments’

ENTREPRISES ET HISTOIRE, DÉCEMBRE 2022, N° 109, pages 47 à 63 47

Table 1. Internalization and video game industry Firm boundary

Forward Exploit proprietary technology. X X X

Forward Exploit market intelligence and X

norm in early game distribution, Codemasters substantial knowledge of US and Japanese

and Rare’s founders in 2002, at US$375

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