If consoles can't crack China, their future is limited

Failure in the Chinese market could mean consoles being pushed into an ever-smaller niche

The launch of Sony's PS4 and Microsoft's Xbox One consoles in China hasn't attracted much fanfare, perhaps because both firms were aware from the outset of what an uphill struggle this would be, and how much potential for disappointment there was if expectations were set too high. Last week saw the first stab at estimating figures, from market intelligence firm Niko Partners, who reckon that the two platforms combined will sell a little over half a million units this year; not bad, but a tiny drop in the ocean that is China's market for videogames.

These are not confirmed sales figures, it's important to note; market intelligence firms essentially make educated guesses, and some of those guesses are a damn sight more educated than others, so treating anything they publish as hard data is ill-advisable. Nonetheless, the basic conclusion of Niko Partners' report is straightforward and seems to have invited no argument; the newly launched game consoles are making little impact on the Chinese market.

There are lots of reasons why this is happening. For a start, far from being starved of a much desired product, the limited pre-existing market for game consoles in China is actually somewhat saturated; the country is host to a thriving grey import market for systems from Hong Kong, Taiwan and Japan. This market hasn't gone away with the official launch of the consoles, not least because the software made officially available in China is extremely limited. Anyone interested in console gaming will be importing games on the grey market anyway, which makes it more likely that they'll acquire their console through the same means.

"China is the largest marketplace in the world, with a fast-growing middle class whose appetite for luxury electronics is well-established... So yes, the failure of consoles to engage strongly in China would be a big deal"

Moreover, there's a big cultural difference to overcome. Game consoles are actually a pretty tough sell, especially to families, in countries where they're not already well-established. Their continued strength in western markets is largely down to the present generation of parents being accustomed to game consoles in the home; cast your mind back to the 1980s and 1990s in those markets, though, and you may recall that rather a lot of parents were suspicious of game consoles not just because of tabloid fury over violent content, but because these machines were essentially computers shorn of all "educational" value. I didn't own a console until I bought a PlayStation, because my parents - otherwise very keen for us to use and learn about computers, resulting in a parade of devices marching through the house, starting from the Amstrad CPC and ending up with a Gateway 2000 PC in which I surreptitiously installed a Voodoo 3D graphics board - wouldn't countenance having a SNES in the house. That's precisely the situation consoles in China now face with much of their target audience; a situation amplified even further by the extremely high-pressure nature of Chinese secondary education, which probably makes parents even more reluctant than mine when it comes to installing potentially time-sucking entertainment devices in their homes.

Besides; Chinese people, teens and adults alike, already play lots of games. PC games are enormously popular there; mobile games are absolutely huge. This isn't virgin territory for videogames, it's an extremely developed, high-value, complex market, and an expensive new piece of hardware needs to justify its existence in very compelling terms. Not least due to local content restrictions, neither PS4 nor Xbox One is doing that, nor are they particularly likely to do so in the future; the sheer amount of content and momentum that would be needed to make an impression upon such a mature landscape is likely to be beyond the scope of all but a truly herculean effort at local engagement and local development by either company - not just with games, but also with a unique local range of services and products beyond gaming - and neither is truly in a position to make that effort. It's altogether more likely that both Sony and Microsoft will simply sell into China to satisfy pre-existing local demand as much as possible, without creating or fulfilling any expectations higher than that.

Is this important? Well, it's important in so much as China is the largest marketplace in the world, with a fast-growing middle class whose appetite for luxury electronics is well-established. Apple makes increasingly large swathes of its revenue in China; companies with high-end gaming hardware would like to do something similar, were the barriers to success not raised so high. Without building a market in China, the global growth potential of the console business is fairly severely limited - the established rich nations in which consoles are presently successful have a pretty high rate of market penetration as it is, and growing sales there is only going to get tougher as birth-rates fall off (a major factor in Japan already, but most European and North American states are within spitting distance of the Japanese figures, which is worth bearing in mind next time someone shares some moronic clickbait about sexless Japan on your Facebook feed). So yes, the failure of consoles to engage strongly in China would be a big deal.

The deal looks even bigger, though, if you view China as something of a bellwether. It's a unique country in many regards - regulations, media environment, culture, sheer scale - but in other regards, it's on a developmental track that's not so different from many other nations who are also seeing the rise of an increasingly monied urban middle class. If the primary difficulty in China is regulations and content restrictions, then perhaps Sony and Microsoft will find more luck in Brazil, in India, in Indonesia, in the Philippines and in the many other nations whose rapid development is creating larger and larger audiences with disposable income for entertainment. In that case, China may be the outlier, the one nation where special conditions deny consoles a chance at market success.

If the problem with China is more fundamental, though, it spells trouble on the road. If the issue is that developing nations are adopting other gaming platforms and systems long before consoles become viable for launch there, creating a huge degree of inertia which no console firm has the financial or cultural clout to overcome, then the chances are that consoles are never going to take root in any significant degree in the new middle class economies of the world. Games will be there, of course; mobile games, PC games, games on devices that haven't even been invented yet (though honestly, Niko Partners' tip of SmartTV games as a growth market is one that I simply can't view from any angle that doesn't demand instant incredulity; still, who knows?). Consoles, though, would then find themselves restricted geographically to the markets in which they already hold sway, which creates a really big limit on future growth.

"You can't spend vastly more money making something unless your audience either gets bigger, or more willing to pay, and there's little evidence of either of those things in the console world right now"

That's not the end of the world. The wealthy nations which consume consoles right now aren't likely to go anywhere overnight, and the chances are that they'll continue to sustain a console audience of many tens of millions - perhaps well over 100 million - for years if not decades to come. Moreover, the future of games is inevitably more fragmented than its present; different cultures, different contexts and different tastes will mean that it will be a truly rare game which is played and enjoyed to a large degree in all quadrants of the globe. There'll still be a market for a game which "just" does great business in North America, Europe and so on; but it'll be an increasingly small part of an ever-growing market, and its own potential for growth will be minimal. That, in the end, is a fairly hard cap on console development costs - you can't spend vastly more money making something unless your audience either gets bigger, or more willing to pay, and there's little evidence of either of those things in the console world right now.

The real figures from China, if and when they're finally announced, will be interesting to see - but it's unlikely that Niko Partners' projections are terribly far from the truth. Whether any console company truly decides to put their weight behind a push in China, or in another developing country, over the coming years may be a deciding factor in the role consoles will play in the future of the industry as a whole.

Latest comments (16)

Morville O'Driscoll Blogger & Critic 3 years ago
Mmmm... Interesting article. Glad I clicked on it. :)
it's on a developmental track that's not so different from many other nations who are also seeing the rise of an increasingly monied urban middle class.
I would be very interested in an examination of the opposite... That is, future console and gaming trends in countries where the disposable income of the middle-and-working-classes is (or will be) shrinking - the UK, Russia, some South American countries (?).

Edited 1 times. Last edit by Morville O'Driscoll on 10th July 2015 9:18am

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Darren Adams Managing Director, ChaosTrend3 years ago
Guess they will have to start thinking about sustainability over market growth and more profit just in case they can't crack China. Would seem like a logical thing to do anyway; become sustainable under present conditions and then look to break new markets. If the future of consoles (yes, again...) is hinged on breaking China then I would say it was a risky gamble.
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James Coote Independent Game Developer 3 years ago
(though honestly, Niko Partners' tip of SmartTV games as a growth market is one that I simply can't view from any angle that doesn't demand instant incredulity; still, who knows?)
Smart TV's make far more sense when you don't take them in isolation. Your smart TV, along with your phone, tablet and laptop will all run Windows 10 or Android. Onto which you'll install the PSNow or Steam or Xbox app, through which you buy and play games, chat to friends etc.

As services, Xbox and Playstation could have a future, but not as products. The trick will be to find the games that let you play across multiple devices in a way that makes sense. So in your intergalactic MMO, you trade and outfit your spaceship on your phone, then when you get home, hop on your PC or smartTV and launch into epic dogfights. If you're building an IP / franchise, rather than simply a series of sequels, it makes even more sense, but I don't see many developers going down that route right now.

Furthermore, there's a generation of kids growing up in the West on mobile games, who are more likely to recognise Angry Birds than Mario or Sonic. It's clear from the contrasting fortunes of PS4 and Wii U that appealing to the "core" gamer is key to console success right now. But at the same time, by going down that route, consoles risk driving themselves into a niche that is only going to get smaller over time.
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Show all comments (16)
Andrew Goodchild Studying development, Train2Game3 years ago
The generation that are all aparejty growing up on tablet and smartphone, well quite a lot of them seem to also play Minecraft on Xbox and PlayStation. A few of them also play Gta V and Borderlands if my 10 year old's friend list is anything to go by. It usually takes about 3 minutes max for the conversation to turn to minecraft, and the only ones who predominantly play on mobile Minecraft, are those who can't get their patents to buy a console. Of course, others may have differing experience with their kids. Mine mainly use tablets for YouTube videos of lego and minecraft.

Edited 1 times. Last edit by Andrew Goodchild on 10th July 2015 5:26pm

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Yannick Boucher Development Director, 2K China3 years ago
Oh boy, I'd have so many things to say about this. But first of all, this is my personal take. ;)

One thing I'll say is that there IS a market for consoles in China, but yes, it remains a "premium" market, for richer people in Tier 1 cities with a lot of global exposure. Of course, that market is a tiny drop in the ocean of phone, pad, and free to play PC games that are completely dominating the Chinese market. But it is a market that exist, and it is a market that is actually growing. Very slowly, but steadily.

Rob you've done well to open with the fact that neither MS nor Sony said much about their expectations, as you don't want to set them too high, and that's for a reason that you also covered: gray market consoles and games from Hong Kong, Singapore, and Taiwan are doing quite well. Almost every single HK/Asia region console release has Chinese (often both traditional and simplified) localization, with some of the bigger titles even having Chinese ONLY versions. Those are surely not meant for a population of 7 million people (Hong Kong).

So, no, you can't count on China to "save" the global console ownership base. As we've seen countless times with companies trying to break into China, the first mistake you can make as is the classic "if I can get just 1% of that population, that's already 1 million sales; easy!". Famous last words. It simply doesn't work that way, China is a much more complex and diverse market than that.

That being said, you can't say it's a failure either just because official channel sales are lukewarm. This is something that pretty much everyone already expected. What it does though, is provide exposure to the platform, for the consumers to then be able to buy it for cheaper on the gray market if they want.

Being based here, I can tell you that consoles are definitely a very niche market, but not one that is fading in any way. At the same time I wouldn't take the risk of investing in console development purely for China. Investing (mainly in publishing) for the Greater China Region + Singapore, however, that's a whole other story. Because those are the sales numbers you need to look at to get the bigger picture.

So, would console games for China be my first priority? Good god, absolutely not. But would I look at my global portfolio and work hard to try to make as much of it available in the region, though? You bet. So to me, it's not the real sales figures from China that are interesting. It's the real sales figures from the Greater China Region combined. Because those are the ones that reflect the actual consumers' purchasing behaviors.

Edited 6 times. Last edit by Yannick Boucher on 10th July 2015 5:56pm

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For me the console business model carried on from the 80's is a busted flush waiting to be put down - the same way that retail sales took an age to have the stake driven through it. For the Western corporate scene the console has been an incredibly profitable walled garden to exclude creativity and ensure they held control. Now looking at the vast and innovative Chinese (Asian Dragon) market - the attempt to try and sell the same failed business plan to this market could be terminal if not seriously suicidal !

In attempting to force this model on China the Western market could be setting itself up for replacement, if not complete destruction!

Edited 1 times. Last edit by kevin williams on 10th July 2015 6:25pm

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Brian Lewis Operations Manager, PlayNext3 years ago
I have never understood the basic 'assumption' that there is a continued need for dedicated console hardware/software in today's market. Regardless of the region, the technology that is being used today has reached a point where the traditional console gaming approach no longer makes sense.

The original 'need' for console games was driven by cost, hardware requirements, and software compatibility. There was a very real competition on all three fronts that drove the console gaming industry. Improvements in any of these aspects could drive the market. However, this is no longer valid in todays markets. Console's use standardized PC hardware (for cost, performance, and availability reasons). Consoles software is compatible with existing PC software (where the development is done) and in many ways is just an interface overlay on similar software. The cost for a console is not significantly different than that of a comparable computer system (of choice).

Just as there was a time when it made sense for Mac's to run totally proprietary software on proprietary hardware, and today run a Linux based OS on standard PC hardware, there was a time when consoles could do the same thing. This last generation of consoles has shown that the time when that approach would move the market has passed. Console entertainment needs to move the service model, where what they offer is no longer arbitrarily restricted to a small (and shrinking) userbase.

Microsoft was in the perfect position to do this with the current generation of console's... but was not willing to make the logical leap in time. The Xbox One is basically a dedicated PC running a variation of Windows. This makes the whole console experience a service.. not a product. However, their choice to limit this service (and the profits from it) to the limited amount of people that purchased their dedicated hardware (rather than the much larger possible userbase of people that have compatible hardware) was based on the preconception that they were offering a product, and not a service.

In China (and other established markets) the first question asked, is 'why would I give up my time/money spent on existing, comparable/compatible products for this more limited product?'. It is only when the offering becomes a service, changing the proposition from 'or' to 'and' that more established regions will see sustained growth.
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Payton Liu Production Support Analyst, IBM China3 years ago
Well written, fantastic read! I couldn't say no to your arguments.

For the big question you asked about console in China and its future, I think it's a China specific situation - regulations & censorships. China is not an ideal example for looking into developing markets, it has so many complexities that Brazil, India and others don't have.

As Yannick said above, the console market in China is very niche, even counting the grey market. For Chinese version games, you do need to take Hong Kong, Taiwan and Singapore (though I doubt this country since its official language is English), then some from China mainland into account - these regions together translate into millions of gamers.

@Yannick, I can't agree more with you on this. The huge population of China do NOT automatically support a big market for any products or services. You do need to invest time and money into researching the perfect customers if your goal is to succeed and make profits in China. Apple and many others did, and we don't need to be reminded how successful they are, don't we?
So, no, you can't count on China to "save" console ownership base, as we've seen countless times, the first mistake you can make as a company is the classic "if I can get just 1% of that population, that's already 1 million sales; easy". Famous last words. It simply doesn't work that way, China is a much more complex and diverse market than that.
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Greg Wilcox Creator, Destroy All Fanboys! 3 years ago
Someone here in the US please hire Mr. Liu as a consultant. China isn't going to adopt western consoles in the manner in which companies want them to at all. As noted, pursuing the marketplace with attempt to change tastes is going to run some people out of business or at least cost them a lot of wasted time. Sony and Microsoft are better off figuring out how to keep western audiences entertained at whatever premium prices they can rack up for their consoles and content. China's not going to go backwards so these companies can move forward anytime soon.
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Yannick Boucher Development Director, 2K China3 years ago
In response to Brian, Kevin, and others who feel the same way, I'm always a bit perplexed by people who view "consoles" as a product that could never evolve into a "service". Playstation Now, Xbox for Windows, for example. the console manufacturers know the score. A platform is just a platform, whether it's a physical box next to your TV, or a piece of software IN your TV, or anything else in between. At the same time Steam is the closest thing a PC could come to to being a "console". So I feel the next step will really to start a serious discussion over what constitutes a "console" vs. a "platform". And why wouldn't both be interchangeable in the very near future. But I digress... :)

But that's for
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Craig Page El Presidente, Awesome Enterprises3 years ago
I feel like consoles could do well in China if Sony, Microsoft, and Nintendo put some effort into it. Maybe they could figure out what Chinese gamers want, then make a bunch of platform exclusive games to make the gamers there happy.
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Just because Consoles dont really crack China or Japan, doesnt mean anything...the world will keep revolving. for could be we would see a future form of consoles that are a singularity of wearable, mobile, web and console all rolled in one..for now, its ok to ignore China, there is a whole geopolitical scene going on in the undercurrents not reported in mainstream media whereby gaming will be cracked down upon
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Brian Lewis Operations Manager, PlayNext3 years ago

Let me explain how consoles have NOT evolved into a service, despite the market being ripe for it. Let me start with Microsoft.

Xbox live is a great product, and one that could easily be used as the basis for a Microsoft entertainment service. It, as much as the hardware, is what has made the Xbox successful. Just like iTunes was the key to the iPod/Pad/Phone popularity, Xbox live was the service that made the Xbox popular. Now, lets compare this to 'Games for Windows' from Microsoft. This is the natural extension of Xbox Live to the PC, which also runs MS software (Windows). This service was never allowed to work with, or have comparable features too Xbox Live. It was never allowed to have the success that a simple port of Xbox Live would have had. This was done, because it would have allowed customers to have the benefits of Xbox Live without having to purchase Xbox hardware. The goal was to sell product (Xbox) vs sell a service (Xbox Live). Even today, with windows 10, they are still blocking full integration, even when both pieces of hardware are running the same OS. Sony is not a lot better.PS Now is there to sell Playstations. There is no effort to reverse the approach, and to promote PS Now, and to only sell Playstations, as needed to support this.

Consoles use the loss leader approach to market growth. They sell the hardware at a loss, and then makeup the loss later on software sales. If they were to move to a service based approach, they would be able to sell the software to a much larger market, and would not need to sell as many consoles (at a loss) and in the long run could offer consoles as a premium option (similar to apple). They key is that they would need to focus on the service/marketplace, rather than the fixed hardware. This is a huge change in thinking that no console maker has been able to make yet.
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Jeff Kleist Writer, Marketing, Licensing 3 years ago
Brian, what services is Windiws 10 blocking? Seems to me it's pretty much all there.
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Yannick Boucher Development Director, 2K China3 years ago
@Greg: Trust me, there's way more going on behind the scenes that people are not aware of. You think MS and Sony are just sending a couple of guys with suitcases to Shanghai? :) Not quite. :) Payton was in fact quoting me on some parts. We both know the score, being on the field right here in China, and with a solid experience of the games industry/IT, how to do business, and knowledge of the importance of government relations.

@Brian, I'm not sure why you insisted on your point that consoles HAVE not evolved, as I made it very clear in my comment: "people who view "consoles" as a product that could never evolve into a "service".". "COULD" being very clearly the operative word here.

Edited 1 times. Last edit by Yannick Boucher on 28th July 2015 4:14pm

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It is great to see so much interest in the Chinese games market here, and good to see the lively discussion about the console and Smart TV gaming segments specifically. Niko Partners splits the market by screens, and our recent report that was referenced in this (and many other articles) was about TV-based gaming inclusive of legal consoles (Xbox One and PS4 Chinese editions), grey market consoles (all consoles sold via the grey market in China), and Smart TV gaming (OTT boxes, game-specific Android or AliYun OS based boxes, and Smart TVs with preinstalled games). We agree that consoles are a niche market in China, they have been all along. Maybe 3 million units tops were ever sold in a single year through the grey market during the years of the ban. This year’s sales forecast of 550,000 units that Niko Partners made in our June 2015 report (see our site) is only for the legal sales of PS4 and Xbox One Chinese editions.

We also see, from our many many executive interviews, in-depth in-country company visits, and thousands of gamer surveys, that Smart TV gaming (OTT box or otherwise) is popular because the price point is much lower and the availability is greater and the games are plentiful because they tend to not go through the harsh regulatory process that console games go through. They are domestically developed, and many are ported from mobile games. If it weren’t for the lack of a practical controller we think that Smart TV games would be even more popular than they are already. Then if you take a look at the game-dedicated boxes, such as Suzhou Waniu’s OBOX and Xiaocong Network’s 360 Warchief (in partnership with Qihoo 360), and it starts to look like a very interesting sub-segment of TV-based gaming.

We are happy to talk to any of you about our research and analysis, and we think that if there are great games released in China for the consoles there is a chance to build demand among a broader, yet still niche, set of gamers.
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