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China: The next frontier for consoles?

China: The next frontier for consoles?

Fri 02 May 2014 6:36am GMT / 2:36am EDT / 11:36pm PDT
Emerging MarketsBusiness

Microsoft is the first platform holder to test the Chinese market after a long ban - but this market will prove tough to crack for consoles

When the Xbox One finally rolls out in Asian territories this September, almost a year after its western debut, all eyes will be on its performance in one key territory. Not Japan, where expectations for the console's performance are about as close to absolute zero as you can imagine, but rather China; a late, and somewhat surprising, addition to Microsoft's launch plans.

You'd think that China, the world's most populous nation and second-largest economy, would be an obvious and attractive target for a console platform holder. Indeed, China is on track to be the world's top economy within the coming years (perhaps even next year, according to recent projections in the Financial Times); corporations around the globe are eyeing the nation's rapid growth and swelling middle class as a huge opportunity. Games on PC and mobile phones are already big business in China; why shouldn't console platform holders take a piece of that pie?

Yet in September, when Microsoft introduces Xbox One to the Chinese market, it will be the first platform holder to attempt such a launch for many years. Neither Nintendo nor Sony has shown any indication that they intend to bring their present home console platforms to China, and despite the apparent potential of the market, you'd struggle to find any serious analyst who expects Xbox One's performance there to be anything more than an interesting experiment. Chinese news site QQ reports that Microsoft is only planning to ship 100,000 units of the console in the region; Microsoft denies that rumour, but only does so in pointless newspeak. It's "a figure which does not reflect Microsoft's vision," apparently, which translates into actual human language as "we can't deny it, we just don't want you to say it out loud".

"Chinese gamers have mostly grown up without consoles and are used to mobiles and PCs as their gaming platforms, so the level of demand is questionable"

So what's the problem with China? Why isn't the world's largest economy in waiting an open goal for console manufacturers? The problems are actually summed up quite well by the very circumstances which have allowed Microsoft to launch Xbox One in the market - namely the partial repeal of a rule dating back to 2000 which quite simply banned the sale of any foreign-made games console in China. Sony tried to flout the rule by marketing the PS2 as a more generalised home entertainment device, but even after trying to accommodate the thoroughly unimpressed Chinese authorities, found itself subject to a ban. Nintendo had a little more success, creating a joint venture called iQue which marketed a heavily modified N64 (the iQue Player) with a very limited range of software, but since since 2003 has focused solely on handheld consoles.

The recent expansion of the Shanghai Free Trade Zone has brought with it a change to this rule, along with many other liberalisations of trade within a specific zone around Shanghai. This has allowed Microsoft to establish a partnership with local firm BesTV - not just for Xbox One, but a more broad partnership aimed at extending Microsoft's media interests into China.

Note two things about the above narrative. Firstly, for all its rapid growth and development as a marketplace, China was as recently as 2000 and beyond still establishing strict new rules prohibiting overseas countries from bringing consoles and games to the country. These rules were justified largely on cultural grounds; the authorities were apparently concerned that console games were bad for the development of children and would violate the cultural norms which the country's censors wish to enforce. Concerns for childhood development, however, seemed not to apply to the country's homegrown games industry, which has boomed in recent years. China now has a huge market for mobile and PC games, largely served by domestic companies, with only occasional success stories for western companies who manage to navigate the nation's tough regulatory environment; Blizzard being the obvious example.

I don't doubt that Chinese concern over the cultural aspects of games was real. The Chinese authorities believe strongly in the power of media and communication to impact upon their populace, and have a particularly deep-seated fear of external influences which might loosen their grasp on power within the country. Console games, a creative industry dominated by America and Japan - nations seen as rivals at best, as enemies at worst - would certainly appear suspect to those authorities, and a belief that games are bad for children's development, albeit unsupported by research, does seem commonplace among Chinese parents. The justifications weren't untrue, then; they were just very, very convenient, since they allowed the authorities to enact trade rules that very effectively protected a burgeoning local industry from international rivalry. This kind of protectionism is not unique to China, nor is it necessarily a bad thing, but the government's willingness to wield this weapon in its economic battles around the media industries is a major concern for any new player in the marketplace.

This is far from being the only protectionist measure with which console manufacturers - Microsoft included - must contend. The second thing that's notable about the narrative is that Microsoft is to launch the Xbox One in China not by itself, but in partnership with a local company, BesTV. This is not because of any particular desire to tap into local knowledge and experience, but rather because of legal requirement; doing business in China requires a local partner. Blizzard's World of Warcraft, a rare foreign success story in the market, is presently operated in China by local firm NetEase, and as mentioned, Nintendo's foray into the market also takes the form of a joint venture.

This naturally reduces both the profitability of any operation in China, since the overseas parent company simply receives a royalty payment rather than the full profits of its operations, and also reduces control over Chinese operations in a potentially frustrating manner. Blizzard notably ran into major difficulties with the launch of World of Warcraft expansion packs in China, with the nation's censors objecting to large swathes of content; the launch of Wrath of the Lich King in particular seems to have been delayed far, far longer than the company would have wished as a consequence of switching Chinese partners (from The9 to NetEase) during the negotiation process with the authorities.

"None of this is to say that console success in China is impossible; merely that it is very, very unlikely"

Such problems are, of course, surmountable, especially if the pot of gold at the end of the rainbow is big enough. Certainly, there is some audience for consoles in China; grey imports from Hong Kong are openly sold in Chinese stores, albeit at pretty high prices which are only appealing to the most devoted of enthusiasts. However, Chinese gamers have mostly grown up without consoles and are used to mobiles and PCs as their gaming platforms, so the level of demand is questionable. Moreover, those platforms are where Chinese game developers publish their work, tailor-made for their own audience. Software in a market like this is chicken-and-egg; no console platform will succeed without software that appeals to the local audience, yet no local developer will work on a new platform without a decent installed base. Microsoft's dollars could intervene to help, but that would require a very major financial commitment to a market in which success is a very, very slim possibility.

There is, of course, an appetite for content from overseas within China, which could help to drive uptake of consoles like the Xbox One. In this, however, the hand of China's censors remains a serious issue. Although the Shanghai Free Trade Zone regulations finally permit the sale of consoles, they do not free platform holders and publishers from the onerous requirement of passing their software under the watchful eye of the censorious authorities before release. In the past, the changes to software demanded by those authorities have been very significant; even small graphical elements which are seen as running counter to traditional Chinese culture in some manner are forbidden in many cases (although they pass without mention in locally developed software), while any game with an overtly political message will simply never be released. You may not think that terribly many games have an overtly political message, but then again, you're (presumably) not a member of any of China's censorship authorities, who have a penchant for seeing threats to the nation's civil order around every corner.

None of this is to say that console success in China is impossible; merely that it is very, very unlikely. I haven't even mentioned the issue of piracy, which remains rampant in the country, and means that many game consumers have become accustomed to paying incredibly low prices for software, while games companies have largely switched to business models like subscriptions and F2P for their wares. This is just another problem sitting in Microsoft's way; adding pricing and business model to a list which already contains major cultural, legal and censorship hurdles.

It's easy to see, I think, why Microsoft is alone in taking advantage of the newly liberalised Shanghai Free Trade Zone; why Sony is holding back from further engagement with the nation (although it does a fine trade in Hong Kong) while Nintendo is keeping its engagement low-level through its existing iQue partnership. Both firms actually have major business interests in China; like Microsoft, they manufacture their consoles there. Yet neither is keen to throw good money after bad in the hostile and difficult Chinese market. No doubt, they will watch Microsoft's experiment carefully - they would be foolish not to - but nobody should hold out serious hope for consoles in China. There are new markets to be tapped all around the world for videogames and consoles, but for all its growing wealth and success, China is about as far from being low-hanging fruit as you can imagine.

12 Comments

Payton Liu
Production Support Analyst

13 19 1.5
Very insightful analyse, you must know China pretty well to write down these much details.

Posted:2 months ago

#1

Nick Parker
Consultant

279 143 0.5
This indeed will be one to watch but one that Rob, as usual, so well describes as facing tremendous challenges. Cultural issues can also include the preferred platform to play games on. South Korea is less protectionist yet gamers brought up on significant broadband access, prefer online PC play despite availability of consoles. Consoles fair better in the remaining Far Eastern markets like Singapore, Hong Kong, Taiwan and Malaysia where mainly Sony has achieved respectable sales in the millions of units installed base.

Posted:2 months ago

#2

Roberto Bruno
Journalist

103 68 0.7
Frankly, from an egoistical standpoint as someone who's mainly into PC gaming, my hope is that China and other Asian countries will keep being mainly PC-centric markets.

The change I would like from them, on the other hand, is becoming a lot more open about exporting their output outside of the national borders.
Not because *right now* there is anything specific I'm looking for, but just because as a general rule the more they will be competing internationally, the better their standard will become, which will translate in more enjoyable games for us all around the world.

I know, I know... This is a comment from a gamer's standpoint and not one focusing enough on the business side of things, as it would be more appropriate to this site.

Edited 2 times. Last edit by Roberto Bruno on 2nd May 2014 4:57pm

Posted:2 months ago

#3

Yannick Boucher
Producer

9 23 2.6
My take on Sony is they will remain content on focusing on Hong Kong. What nobody has mentioned here, is that there are no official numbers on the % of these consoles and game copies destined for the HK - SG - TW market end up re-imported into China. Nobody is tracking this seriously, centrally, as far as I know. And I personally have a hunch that that number is bigger than we think.

Also, on the subject of piracy, yes, it means that the market is used to a completely different pricing. But just saying "there's rampant piracy!" is totally foregoing two important facts: the new consoles haven't been cracked, and probably won't be for a while because 2- you can't use their online services otherwise.

And again, I believe there's a market, even if small, for Chinese players who want to be playing on Xbox Live, or PSN, on console exclusives (I would say "I've seen it myself" but that wouldn't be a very credible sample ;) ). As for the censorship of content hurdle, everybody's mentioning that this announcement doesn't matter because consoles have been available on the gray market since forever. I say yeah, exactly. Who's to say now that this is gonna change? Possible scenario: Console is now totally legit, and possibly packaged with your cable service. The games for it remain on the gray market. Somehow that seems to have escaped most people.

Anyways, I'm not saying "this is the future". I'm just saying, I don't believe it's a "perfectly pointless" move, as some others have expressed. I think there is SOME value there, as long as everyone keeps their expectations (and budgets) in check. There are also a lot of assumptions that are being made for now, regardless of being bullish or bearish; would it be a "closed" Xbox Live just for China? How "locked" would the console be to China and to it's operator? What's the plan on pricing?. We'll see.

Edited 4 times. Last edit by Yannick Boucher on 2nd May 2014 5:12pm

Posted:2 months ago

#4

Payton Liu
Production Support Analyst

13 19 1.5
Allow me to give you some possible answers ;)

As for Hong Kong (HK) where I visit regularly, it might be mission impossible to gather gray market sale figures. Professional goods carriers (I don't use the term "smuggler" here because it's perfectly legal for mainlanders to buy consumer products from HK to China mainland, as long as you don't exceed the legal limit.) buy consoles and games (and other related attachments) in isolated video game shops located all over HK. I don't believe HK video game shop owners keep a book for non-HK purchases, at least I don't see them noting down anything. There is no GAMES (UK) or GameStop (US) like shops in HK, most of them are just privately owned small outlets. Sony has some so called "Blue Stores", but they are just private shops that have official contracts with Sony. Certainly it would be good have some data, but it can be a massive effort (time/money) to do so.

Since this is all about Microsoft, let me take XBOX 360 for example. We all know it's been hacked, and of cause jail broken machines can't access XBOX Live (XL). Most Chinese console gamers just don't care about those online service, they download game images by Bit Torrent or eMule. It will take them time since China's incoming Internet speed is greatly affected by national wide firewall, but a few days aren't too long. You really need to visit China and see for yourself, piracy exists virtually everywhere, not just gaming. Gamers who buy genuine games such as myself are in minority. I've got people (colleagues, friends, family members) questioning my support for genuine products (games, music, movie, etc.), "Why spent all that much money? Just download them free from Internet. What's the difference?". You see, general public or common people in China do not really have a sense of copy right. Surely, it's illegal, but as I said in another post, law enforcement in China focus on something else, they don't really care about pirating.

PSN is totally accessible here in China, though sometimes connections may fail due to various conducts. The thing for Microsoft is that gray market doesn't generate profit for its China operations. Can Microsoft convince government not to lock Chinese version console to China only? Sony co-operated with PS2, and got banned nonetheless. Putting this further, if Microsoft have official agreement to block XL service that are not orientated from China, is this going to force people to buy Chinese version XBOX ONE and games? I doubt that, hardcore console gamers are quite likely to boycott XBOX all together. And about the cable service, every house in China that has TV cables is forced to join a national wide digital networks. Installing private satellite dish is illegal in China, and will be dealt with strongly by law enforcement. I don't think Microsoft can get pass media streaming service easily.

Let's see following scenarios:
a) Not locked console + not locked XL - very unlikely to happen - people buy games from gray market and watch pirated American media by other ways => lose profit for Microsoft;

b) Locked console + not locked XL - again, very unlikely - people buy both consoles and games from gray market, and media part same as above => lose profit for Microsoft;

c) Not locked console + locked XL - Microsoft commit suicide again? - same as "a)";

d) Locked console + locked XL - very likely to happen - hardcore gamers will leave, and people can keep watching pirated American media by other ways => lose profit for Microsoft.


I'm just here to provide some concerns, and I am really worried.

However, you are right on this one - We'll see.

Edited 1 times. Last edit by Payton Liu on 2nd May 2014 9:09pm

Posted:2 months ago

#5

Andrew Ihegbu
Studying Bsc Commercial Music

436 146 0.3
I will state this: It may well be in Microsoft's interests to platform lock Chinese Xbox Ones. This would provide great barrier between China and the international stage allowing MS to deploy radical methods to try and wean Chinese gamers off piracy.

Posted:2 months ago

#6

Swen Yan
Independent Web / Mobile APP Developer

4 2 0.5
Agree with Yannick. As a console gamer living in Guangzhou, one of the "Tier 1 Cities" of China, I've withnessed the growth of geniue software sales that happened over the past few years. It can be reflected by the strong sales of PSN prepaid card which is only appeal to people who are willing to pay for contents.

On "taobao.com", which is the biggest auction site of the country, over 30,000 pieces of PSN card are sold in last 30 days. The sales is dramatically boosted after the launch of PS4 and is consistently increasing. You can confirmed for yourself by visiting following link:
http://s.taobao.com/search?spm=a230r.1.8.3.M5RFae&promote=0&sort=sale-desc&initiative_id=tbindexz_20140503&tab=all&q=PSN#J_relative

PS3 was cracked in 2010, 4 years after the console launched in 2006. IMO, this 4 years has been a important period for geniue software market of China.

Despite of the absense of privacy, some eager gamers still pick up PS3 because they LOVE it! They have learned to get as many games as they can with limited budget, by borrowing games from each other, trading off the games they've played, buying used-games. Some game stores even have rental! When gamers found that geniue softwares are not expensive as they expected, their behaviour changed.

Currently, playing geniue software is considered some kinds of STATUS among the gamers as it is really costly. Just imagine that a console price at $2000-$3000 while one copy of game cost $300, that is how it feels like in China(not the actual price, just feeling). So in fact privacy gamers are very jealous of geniue gamers and desire to become one of the "upper class" someday. This is not all about gaming.

But there is one interesting thing I want to mention. In China, gamers who play privacy and those who play geniue software is NOT mutually exclusive. A gamer can spend $100(USD, FYI) on a collector's edition of his beloved franchise while possessing tons of privacy game in his console. Chinese gamers are willing to pay for something that they feel really worths the money.

One of my friends owns a PS3(the FF13 limited edition) and an Xbox360. He had the Xbox360 cracked then play privacy software on it. But he doesn't cracked the PS3. When it comes to PS3 exculsives, he buys geniue software. And he also enjoy PSN online gaming.

The console market of China maybe still small but it is definitely growing. I am also hoping that Chinese developers can take this chance to join the global console gaming market and become more relevant. After all, console is still the crown jewel of video game.

Thank you for reading. Apology for poor English.

Edited 1 times. Last edit by Swen Yan on 3rd May 2014 4:31am

Posted:2 months ago

#7

Neow Shau Jin
Studying Bachelor in Computer Science

42 53 1.3
@Swen Yen

I certainly hope Chinese developer can enter the console market. I'm a Chinese in Malaysia and there is a lot of Chinese IP that I am a big fan of since many years ago(and by that I mean Mainland China, Hong Kong and Taiwan, collectively), as console was banned in China, they are only available on PC, but in recent years playing any Chinese games means you need a Chinese national ID, which locks out overseas gamers who are interested in Chinese games, and I haven't played one for many years since.

One game I remember fondly was the adaptation of SheDiaoYingXingZhuan on the PS1 developed by Sony's Hong Kong Studio, sadly nothing more comes after that.

Posted:2 months ago

#8

Yannick Boucher
Producer

9 23 2.6
@Payton, I have worked in China for 5 years in the game industry, and have been working WITH China for even longer than that, so I already know what you've broken down further. ;) My position is rooted in all that info, don't worry. ;) @Swen here is developing a lot of the points I'm understating.

And so when I say that nobody IS counting the traffic of games between HK and mainland, that is what you just reiterated. I also know that the general public doesn't care about Xbox Live and PSN (or even knows about them); fully aware of that. My whole point here is that this isn't a product that should be targeted to the "general public" by any stretch of the imagination. This is for upper middle-class families in "Tier 1 cities", who may have an interest in console games from abroad. I know that is a very niche market, but it's a market nonetheless. It's worth investigating.

As for your different scenarios, I agree that D is probably the likeliest. Would it be possible to circumvent the locks? Maybe that would be a yes as well.

However I totally disagree with your "Microsoft loses profit" conclusion on A,B,C though! I completely fail to see how a gray market game unit sale (or even a console sale) is a loss for Microsoft? It's a physical unit manufactured and sold by MS, and written in their books as a sale. Whether it goes to HK or China doesn't matter at all purely on the P&L sheet. If anything, Scenario A, B are still revenue generators for MS. Even possibly D, if the partnership terms make sense (though frankly I wouldn't hold my breath on that).

Personally I am not worried at all. I see it as a test of waters. If it works, all good, if it doesn't, too bad. It's only if Microsoft dreams too big that it would be worrisome for them. But so far, nothing has pointed to that, other than our own speculations. In fact, their strategy is most certainly not even fully formed yet. I just see it as an interesting trial for now.

Edited 1 times. Last edit by Yannick Boucher on 3rd May 2014 2:31pm

Posted:2 months ago

#9

Swen Yan
Independent Web / Mobile APP Developer

4 2 0.5
@Neow Shau Jin

Thank you for supporting Chinese games. The requirement of Chinese national ID is in order to prevent online game addiction of teenagers by setting limitation to their play time. However, that is really boring for adults. So I usually play on oversea servers to protect my personal information.

Regarding console game, maybe SpicyHorse led by American McGee is the only relevant game studio located in China mainland at this moment, and looks like they have shift their focus to mobile game recently. And I won't forget to mention thatgamecompany, the studio behind the phenomenal PSN exclusive "the Journey". Its leader Jenova Chen is borned in Shanghai and hadn't left the city until he finished college. From him, we can see the potential of Chinese game designers.

Posted:2 months ago

#10

Payton Liu
Production Support Analyst

13 19 1.5
@Yannick & Swen

Thanks for providing additional information regarding China console markets!

I certainly have confidence on Chinese console developers, given following evidences:
1. Ubi Shanghai studios - many Ubi AAA titles have some parts outsourced to China.
2. God of War 3 - one art designer is ethic Chinese (maybe Cantonese, guessing by his accent).
3. Uncharted 3 - outsourced some coding to China. (end credits showed that)

If given freedom, Chinese locale developers can actually create fantastic games.

The big question now is: can all these locale talents be released within China rather than having censors blocking their creativeness?

Edited 1 times. Last edit by Payton Liu on 5th May 2014 11:13am

Posted:2 months ago

#11

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