Console Wars: China Edition

Since 2000, the video game consoles that we all know and love have been banned in China.  However, early this year, this ban has been lifted, allowing Nintendo, Microsoft and Sony to sell consoles and software.  With the recent announcement of Sony manufacturing and selling Playstation 4’s in China, gamers around the world are left to ponder which companies have the most to gain and what products will actually be landing on Chinese shelves.

The History

The year is 2000.  The PS2 just released, N64 was wrapping up shop to make way for a purple lunchbox, and Microsoft isn’t even on the console gaming map yet.  However, not all was well in the video game world, as parental complaints were being voiced in China.  Concerns that the Chinese youth were “wasting their minds” forced the government to step in and implement a ban on video game consoles.  Of course, this reasoning could be argued due to the well known government control over censorship through out the country.  While banning consoles, the ban did not touch online gaming in the form of PC’s and the following year showed a $100 million market for online gaming.  Due to these events PC games are extremely popular in China, with League of Legends holding down the #1 spot as the most played game as of 2013.  Additionally, the lack of consoles had created a huge demand for software and hardware piracy, knock-off brands and companies operating under other names.  An example of this is Nintendo, who operating under the name “iQue”, legally released the handheld DS in 2009.

The Present

In January of 2014, the ban of consoles had been lifted just after the releases of Microsoft’s Xbox One and Sony’s Playstation 4.  The change of the law was only possible due to the new Shanghai Free Trade Zone (SFTZ), which launched September 29, 2013.  The zone allows new foreign investments and acts as a testing ground for financial experiments before they enter other regions of China.  The SFTZ is undoubtedly a huge milestone in the country’s economic reform, but it also serves as a form of control, forcing products to only be sold initially within the city limits.  This of course includes the distribution of video game consoles.  In the case of video game software, the Shanghai local government culture department must approve any games or interfaces before it is released to the public.  Doing so allows China to verify that the content does not harm the nation’s reputation or integrity in anyway.

The Challenges

Different from any other existing markets, the entrance into the Chinese market will prove challenging for companies.  With the strict laws of what content can be sold to the public, many of the games will be made by Chinese developers, limiting the console’s game library. Adopting a business model popular PC’s, many Chinese developers use the “free to play” model, where games are free and money is made by in-game purchases.  This model is used in games such as Planet Side 2, Team Fortress 2, and the ever popular League of Legends.  Pricing of systems will also come into play.  Their is a broad range between the financial classes of China, bringing to question, will the new consoles be too expensive for purchase of a middle class family?  Finally, with the past history of piracy, companies will have to find a way to break the habit of users cracking software and purchasing knock-off hardware.

The Companies

With the official lift of the ban, gaming companies were quick to make plans and public statements selling their consoles in China.  The first company to do so was Microsoft.  Partnering with BesTV New Media Co., Microsoft announced in late April that the Xbox One would be the first mainstream console to be released in China since 2000.  With the combining of the two companies, the two have chosen the name E-Home Entertainment Development to celebrate their joint venture.  The pairing with BesTV is a genius move for Microsoft as the owner of BesTV, Mr. Zhang Dazhong, is also the senior vice president of the Shanghai Media Group, which will undoubtably assure a smooth transition for the Xbox One’s entry to the Chinese market.  Microsoft has announced September as a tentative release date for the Xbox One.

The next company to comment on releasing consoles in China was Nintendo.  Current President of Nintendo and CEO of Nintendo of America, Satoru Iwata, expressed that there were no plans to launch the Wii U or 3DS in China or other emerging markets.  Instead, Nintendo plans to release a new console, accompanied with new software specifically tailored for emerging markets.  This decision was backed by the need to adjust pricing for middle class citizens as well as creating new software that will follow all of the content law guidelines.  Nintendo needs to enter into this market carefully, as it is spending it’s third year in the red, primarily due to poor Wii U sales.

Most recently, Sony announced their plans of how they would being selling the popular Playstation 4 in China.  Not to be outdone by Microsoft, Sony announced the creation of two joint ventures, one to work on hardware,  while the other works on software.  The strategy makes sense, as it will undoubtably help the company follow all of the content laws China has in place.  Sony has partnered with the Shanghai Oriental Pearl Group for the creation of the joint ventures.  While the Shanghai Oriental Pearl Group will have majority ownership in one of the two joint ventures (a 51/49 split), Sony will have majority in the other (a 70/30 split).

The Conclusion

With China’s massive population, companies were quick to investigate how to effectively sell their products to Chinese citizens.  Undeniably there is a market of gamers to sell products to as there is an estimated 517 million gamers in China (To Compare: There are 317 million American Citizens).  More products being sold means more profit for gaming companies, which in turn could decrease pricing for items worldwide.  It also means that more money can be put towards development of future products.  The video game community also gains a new dimension by adding a group of people with fresh ideas for new games and titles.  Competitive and professional gamers alike will be challenged by new opponents, soon playing against one another in the first MLG arena in Zhuhai, China.  Most importantly, China will be able to be included to experience the future of entertainment with everyone else.