Selectively Going Backward to Move Forward? The Role of Backward Compatibility in Video Game and Controller Sales

Abstract

In categories such as electronics, video games, computer hardware and software and other hi-tech products, backward compatibility--the property of the current generation of hardware to allow the previous generation of software or accessory to work with it--is an important strategic decision for firms introducing hardware upgrades. It is a double-edged sword for hardware manufacturers, such as video game console makers as it has potentially differing effects on the previous generation console (PGC) and the new generation console (NGC) products. We examine the role of backward compatibility in the home video game industry by assembling and analyzing a unique dataset comprising aggregate- and individual- level data for video game consoles, games, and controllers during November 2013-April 2018. We leverage two natural experiments, Microsoft Xbox One’s backward compatibility for selected PGC software (i.e., games) and Nintendo WiiU’s backward compatibility for selected PGC accessories (i.e., controllers). We use a difference-in-differences approach, appropriate synthetic control methods, and a descriptive analysis of potential mechanisms together with analysis of relevant social media data. Our results show that when an NGC allows selective backward compatibility for some PGC products, the sales revenues for backward compatible PGC products as well as NGC products increase. The revenue lift is mainly due to a relative price increase effect for backward compatible PGC games but a relative quantity increase effect for NGC games and PGC controllers. Product and buyer characteristics explain the variation in these effects. The relative revenue increase for PGC games comes primarily from high-selling games that gain from positive social media chatter after the launch of backward compatibility. The quantity decrease effect for PGC games comes predominantly from preowners who already own them. The quantity increase effect for NGC games emanates primarily from upgraders who buy the NGC after the introduction of backward compatibility. The quantity and revenue increases for PGC controllers arise primarily from new buyers of the NGC. The positive effects of backward compatibility are high for action games, highly rated games, and general audience games. Firms can thus benefit from a selective backward compatibility strategy.

Keywords: Product management, product upgrade, backward compatibility, video games, natural experiment

JEL Classification: M31, O33, C01, C23, C90