Disclosure: The organizers of ChinaJoy paid for my trip to Shanghai. Our coverage remains objective.

SHANGHAI — The entire video game industry is eagerly anticipating Microsoft’s launch of the Xbox One game console on Sept. 23 in mainland China. After a 14-year ban on consoles, the Chinese government has finally approved the sale of game machines in the country of 1.4 billion people.

If Microsoft succeeds, it will be the rare case of an American company excelling in an increasingly open and important Chinese game market.

At ChinaJoy, the 250,000-attendee gaming trade show in China, Microsoft held a press conference announcing launch details, such as the $600 price for the system. It was evident at the event that the company has gone through great efforts to open up the market for consoles in what is now the world’s largest overall market for games in both players and dollars.

Showgirls at Microsoft's Xbox One booth at ChinaJoy.

Above: Showgirls at Microsoft’s Xbox One booth at ChinaJoy.

Image Credit: Dean Takahashi

But the market is a complex one, and it has to be pretty scary for the otherwise mighty American corporate giant. For starters, Microsoft had to go to the trouble of creating a $79 million joint venture with China’s BesTV to build Xbox One consoles. It did so to comply with a requirement that foreign companies work in joint ventures with local Chinese companies.

Those machines will be very expensive, costing the Chinese at least $200 more than it does for those in the U.S. (where people pay $400 for the equivalent console without Kinect). Sony has the same burden, and it hasn’t yet announced a launch date for the PlayStation 4 in the territory. Both companies will be subject to selling their goods under a 17 percent value-added tax.

Regarding the price, Microsoft said through a spokesperson, “We believe Xbox One will deliver tremendous value in China as the ultimate all-in-one gaming and entertainment system. With innovative pricing models for games, Xbox Live Gold, compelling console bundles, local customer support and two year warranty, we’re bringing unique value in an entirely new market category in China. And we’re tailoring this experience for the local market: fully localized Chinese user interface, translated content, alpha version of the Mandarin voice model and local payment methods.”

Meanwhile, the Chinese are sending mixed signals. Government authorities conducted searches of Microsoft offices in China as part of an antitrust investigation last week. And both Microsoft and Howell Expo, the organizers of ChinaJoy, had to postpone scheduled interviews with GamesBeat last week because they were busy dealing with surprise visits from government officials.

Microsoft’s executives had to clear their schedules. The interruption was inconvenient, as Microsoft was clearly a big sponsor at ChinaJoy, leading to lots of advertising throughout the 100,000-square-meter venue housing the show. But the Chinese officials wanted to see the Xbox One games.

And yesterday, a harshly worded statement on the State Administration for Industry and Commerce (SAIC) website warned Microsoft, according to the New York Times, “not to interfere with or hinder the investigation in any way.”

Shawn Luan, senior vice president and general manager of Howell Expo, said in an interview with GamesBeat that Microsoft’s toughest problem will be dealing with government restrictions, such as censorship of content where the company will have no choice but to submit to the will of the authorities. He said that the government will exercise its privilege of approving content, and that could very well slow down the process of launching new titles.

Xbox One retail shelf at ChinaJoy booth.

Above: Xbox One retail shelf at ChinaJoy booth.

Image Credit: Dean Takahashi

“Unpredictable things are always happening in China,” Luan said. “The gaming industry is very sensitive here. All kinds of things related to media content need to be reviewed [for censorship] before they launch into the market – games, movies, lectures, all kinds of publications.”

He added, “The Chinese market will become more open in the future. That’s a trend no one can stop.”

Observers at ChinaJoy said the flexing of the government’s power was no coincidence. There was no public explanation of the surprise visits.

Microsoft said through a spokesperson, “Microsoft complies with the laws and regulations of every market in which we operate around the world. And in China, just as in every other market where we have Xbox, we are working hard to bring the content gamers want to see, while taking great care to meet relevant government agencies’ regulatory standards. Critical to this effort is our strong local partnership with BesTV, the publisher of all games on Xbox One in China.”

At ChinaJoy, the presence of the acid green color of Microsoft was ubiquitous. The company sponsored the show badges, had a huge and crowded booth with its very own Chinese booth babes, and it also held a well-attended Xbox One developer day event during the show.

After hours, Microsoft co-sponsored a party with the International Game Developers Association at a swanky bar in the Bund, a luxury center of Shanghai. The party featured green lighting and outrageous touches like a seven-foot tall Joker from the Batman universe and a dancer in a skin-tight, black-leather nun outfit smoking a cigarette while hanging from a cage.

The strategy centered on Xbox Live isn’t clear in China, where Internet access is regulated and censored. Chinese gamers will have to download updates to the console in order to play. But the dimensions of multiplayer are unclear. Xbox Live will be available on Xbox One, but some content will be deleted. People will be able to download indie titles. But some issues need to be worked out before companies can sell their gaming products.

No one knows what kind of impression Microsoft is making with these stunts. But Chris Charla, head of the ID@Xbox indie-game program, said he was pleased with the turnout and the interest of the Chinese in making titles for the Xbox One.

So far, Microsoft said it will release exclusives such as Forza Motorsport 5: Racing Game of the Year, and Kinect Sports Rivals. Electronic Arts and Ubisoft will also release games, and Chinese developers will also launch “premium content.”

Through the partnership with BesTV, Xbox One will offer free access to hundreds of thousands of hours of entertainment content including blockbuster movies, sports, documentaries and on-demand TV programs — all in high-definition. It will offer two free movies per month; access to premium sports games such as English Premiere League – free for the first year; free access to Xbox Live Gold through March 2015; exclusive locally-developed apps, led by Tencent’s QQ Music, Douban FM, GameFY and Karaoke Master; full Xbox Fitness library including a new fitness experience, Tai Chi, which is coming first to China.

After the free access offer expires, Xbox Live Gold subscriptions will be available for $32 a year. The console will be region-locked for China.

Microsoft and Sony faced off with competing booths at ChinaJoy.

Above: Microsoft and Sony faced off with competing booths at ChinaJoy.

Image Credit: Dean Takahashi

Serious competition

But the competition for attention will be intense in China. For starters, Sony will likely launch this fall too. It has held back on making announcements, as it is likely letting Microsoft test the waters and make mistakes first. The Japanese firm is reportedly setting up a joint venture with another subsidiary of the parent company of BesTV to make its consoles in the Chinese market.

“They’re very careful,” Luan said of Sony. “They tried to bring the PlayStation 2 to the Chinese market several years ago, and it failed. They’ve become more cautious. They want to gather enough information before they make a decision.”

He added, “It seems like since Microsoft’s here, they have to be here. I’m not sure [if Sony has] made a total commitment already. One thing we can be sure of, though, is that they’re very serious about their strategy for the Chinese market. China is the last undiscovered country for console gaming. Both Microsoft and Sony are serious about the market.”

In addition, games are launching on smart TVs. Companies like TCL and BesTV are introducing game services on top of their digital-video offerings. Android microconsoles are also being introduced into the Chinese market by TV makers in hopes of disrupting $60 console titles.

Microsoft hasn’t said what it will charge for games in China. If it launches them at a discount, say $30, then it will run the risk of having other territories argue for the same lower pricing, and that could prove disastrous.

Xiaofeng Zeng, a senior analyst for the Chinese game market at research firm Niko Partners, said that the initial price of the Xbox One is clearly expensive for Chinese gamers, who are accustomed to paying nothing for a lot of pirated or free-to-play offerings.

Microsoft confirmed that prices will be ¥99 RMB ($16 U.S.) to ¥249 RMB ($40 U.S.). The games will include free-to-play online games, digitally distributed indie releases, and full-packaged retail options. Zeng thinks the initial allocation of Xbox One consoles will be relatively small at the Chinese launch. And mobile games are likely going to grow at a huge pace over the next five years in China, possibly bypassing the consoles, he said.

The Xbox One Forza Motorsport demo at ChinaJoy

Above: The Xbox One Forza Motorsport 5 demo at ChinaJoy.

Image Credit: Dean Takahashi

An outsider’s advantages

Of course, Microsoft has some advantages going into the market. It has built a global brand for Xbox, and it has a lot of unique and exclusive content — so long as the censors approve it. That could differentiate Microsoft’s products from the me-too Android microconsoles and smart-TV games.

As an American company, Microsoft doesn’t have the same natural barrier that Japanese companies like Sony and Nintendo face in China, which was occupied by Japan in World War II. On the other hand, Japanese offerings like anime videos and the Final Fantasy series are very popular in China.

Gamers attending ChinaJoy flocked to Microsoft’s booth, where models posed with the black Xbox One console and fans watched a giant panda wiggle and jump on stage in a Kinect motion-sensing dance demo.

But it’s going to take a lot more than that to win the console war in China.

“I believe that Microsoft already understands the situation here,” Luan said. “Microsoft has been in China for decades, and they know the country here very well. They also have links to other developers here in China, like Perfect World, to develop local game products for Xbox. They know they’ll have to rely on local developers to build their business in China.”

Xbox One nun at ChinaJoy party.

Above: Xbox One nun at ChinaJoy party.

Image Credit: Dean Takahashi