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As it stands now, Sony leads the next-generation console race with its PlayStation 4, with worldwide lifetime sales of 18.5 million consoles after only 14 months. The Japanese publisher is making its stand for the newest generation of consoles in a market that is expected to make $88 billion in revenues in 2015. Despite two great holiday months and a nice discount, Microsoft’s Xbox One trails, with estimates coming in at 11 million systems sold. But Microsoft was first out of the gate to jump on a huge opportunity to gain market share: China.
This time last year, China opened its market to foreign-made gaming consoles, effectively ending a 14-year ban. Under China’s new trade initiatives, sales may take place in the Shanghai Free-Trade Zone, a new test bed for economic growth. The door is now open for the first time for Sony, Microsoft, and Nintendo to get in on the fastest-growing gaming market in the world.
Microsoft wasted no time in making the first move. The company announced plans to release its Xbox One console in China just months after the ban dissolved. After minor delays, the Xbox One hit shelves at select Chinese retailers for 4,299 yuan (just under $700), paired with a launch lineup of 10 games. While Microsoft has yet to release official numbers, experts say that the launch moved about 100,00 units.
Sony followed soon after, announcing intent to enter the Chinese market with its latest, the PlayStation 4. The console was originally slated for a Jan. 11 release, but much like the Xbox One launch, it is held up due to “various factors.” Sony has yet to determine a new date of sale.
When Sony finally does launch the PlayStation 4 in China, it will sell for 2,899 yuan ($467), coming out at about $129 less than Xbox One base model, and the equivalent of $226 less than the Xbox One Kinect bundle.
Even if Sony were to enter the territory without competition, it would still face a rough road. The Japanese company is entering mostly uncharted territory by bringing the PlayStation 4 to China — one where the degrees of government interference and market challenges are unlike any it has entered before.
The gray market
In the decade-and-a-half that the communist government banned game consoles from China, gamers there learned to make do with what they had, namely computers and later mobile devices. The $18.5 billion dollar Chinese game market is more than a half a billion gamers strong, second only to North America in terms of revenue, and it consists of players that are conditioned to booting up the newest massively multiplayer online (MMO) or free-to-play action game on their PCs and phones.
But even with the grip PC and mobile have on the market, China does have console gamers. With a countrywide ban in place, figuring out the size of this player base is difficult, if not impossible. But we do have some hints.
The existing consoles come from the gray market, often supplied by neighbors like Hong Kong and Taiwan, where despite differing and constantly changing laws and regulations, all major players in the console market have been selling their wares for decades. Close proximity to mainland China provides for a steady, reliable source for supplying gray market storefronts.
Chinese gamers might point out that the opening of the market to consoles isn’t really that much of a change. Despite being technically illegal, the Xbox 360, PS3, and others and their games from outside territories have been readily available in mainland China for years, as the ban laws were not heavily enforced. People can easily purchase banned consoles online in China right now, though they’re priced much higher than they are in the West.
The release of China’s own consoles aren’t likely to push out illegal imports, either. We may find that with more games available on gray market systems, Chinese gamers have less incentive to purchase a legal console. And that’s not taking piracy into consideration.
Gray market systems in China are often sold modified so that these can play pirated games. Some include hard drives preloaded with a menu of popular titles to entice buyers. But consoles aren’t necessarily needed to enjoy the latest hits, as a combination of piracy-friendly modified PCs and unofficial localizations of games available in other regions exist and thrive. This combination seems to be serving the Chinese console player base well already.
Even without official means to measure the market, game-business research firm Newzoo feels that China already has a big console player base. This would normally be great news for Sony and other system makers, but the problem is that this market is not controlled by the original manufacturers and intellectual property owners.
Take the popular sandbox game Grand Theft Auto V, for example. While it’s banned in China, websites exist that enable gamers to download hacked, localized versions for play on modified consoles. Newzoo’s Peter Warman points GamesBeat to one example, www.ali213.net, where Grand Theft Auto V saw over 10 million downloads. Compare that to the game’s sales numbers of 33 million copies worldwide. This means that at least tens of millions of Chinese gamers are playing console games for free right now. The benefit is that they know the brand names, and they like them. This is one of the unspoken benefits of years of piracy. The burden is on Sony and others to turn them into paying customers.
The Great Wall
With the opening of their market to consoles, China rolled out new guidelines that publishers would have to meet. A newly formed panel reviews all games against these guidelines, with those receiving clearance seeing approval in as early as 20 days. Most guidelines would have the panel passing on games that go against China’s culture or rules. For example, works banning gambling or promoting drug use would receive bans.
These guidelines are certainly a step forward for the country, and dozens of publishers have expressed interest in releasing their top franchises on the PlayStation 4. But the door isn’t wide open yet. Newzoo’s Peter Warman says that he’s not fully convinced that these changes will lead to an easier entry for Western companies.
“Opening up the market for official console sales means officially agreeing to regulations set by the Chinese government and that could turn out to be more of a problem than an opportunity,” he says.
While the majority of China’s approval guidelines are sensible and easy enough for game publishers to navigate around, the government will limit the types of games they can put on the market. The guidelines are heavy-handed when it comes to violence, which would block some of the top-selling Western franchises from sale in China. Beyond this, a few of these rules are vague and could present problems in the future for even nonviolent games.
Regulation hiccups like these could relate to the delay of the PlayStation 4’s Chinese launch. Warman thinks that a power play could be taking place.
“I expect that the Chinese authorities will restrain any big launch by foreign companies until local Chinese companies have a serious competitor or two on the market, like the ‘console’ announced by Alibaba,” Warman tells GamesBeat. “Comparably, locally developed Chinese games are not hacked because local Chinese companies are very powerful and will retaliate any website that does so. This does not apply to Western games.”
These restrictions affect software just as much as the consoles themselves. They have the potential to hold back releases in franchises that are known to be system-sellers. The Xbox One’s launch lineup lacked notables such as the best-selling Call of Duty: Advanced Warfare, with its first-person war setting and multiplayer combat.
Sony’s lineup will have to deal with the same restrictions. While Ubisoft’s Trials Fusion and Rayman Legends are slated for the PlayStation 4’s launch, the publisher’s leading franchise, Assassin’s Creed, is missing.
Sony says it is applying for licenses for 30 PlayStation 4 games for China and that the list of developers for the territory is 70 strong. But its launch lineup will likely offer less than a dozen games. The company says that Sony-published LittleBigPlanet and Final Fantasy franchise games will join some Chinese-made titles for its debut, though it’s not clear which or how many will make launch day. What is clear is that some of Sony’s own top game franchises, such as The Last of Us, Infamous, and Uncharted, won’t likely make it to China.
Dr. Serkan Toto of Tokyo-based consultancy Kantan Games tells GamesBeat that while launch lineups aren’t decisive, they are critical factors in a console’s success.
“Just like anybody else, Chinese gamers expect great content,” Toto said. “A significant gaming culture evolved there over the last years. Without great content that’s not possible to get on other platforms, possibly from Chinese makers that understand the local user base best, it will be an uphill battle for Sony to make China a big PS4 market. Users there will not jump on the console just because it’s cool, a lifestyle product from Sony, or something they couldn’t officially lay their hands on for over a decade.”
And one concern trumps all of the rest: Nothing is stopping China from going back on its decision to release the ban on consoles. While the market has been opened, the sale is still limited to the Shanghai Free-Trade Zone, and approvals are on a case-by-case basis. Toto says that the delays for both the PlayStation 4 and the Xbox One could point to problems with Chinese authorities on clearing regulations. He says that “the government in China is unpredictable and could put back the ban anytime.”
Open for opportunity
No one questions that the opportunities for any console maker entering China are great. A report from Xinhua News Agency from late last year showed that China’s gaming market saw meteoric growth — a 37 percent jump in earnings over the previous year — thanks mostly to mobile gaming. If Sony were able position consoles to echo mobile’s rapid adoption and cement it as part of the country’s gaming culture, China could quickly become its top market.
Between the gray market, piracy, and China’s numerous game cafes, Newzoo estimates that close to 100 million Chinese have played console games in some form. The firm believes that Sony and Microsoft could sell several million systems with the right approach, though this will be difficult early on.
To best take advantage of this opportunity, Sony must position the PS4 to meet the needs of the Chinese gamer while taking into consideration the many challenges that the territory presents. Even with its lower price than Xbox One, Newzoo feels that the PlayStation 4’s cost works against Sony, especially when compared against the less expensive, piracy-friendly alternatives. But it feels that good official games localization and 100 percent digital distribution could help balance that out.
Lisa Hanson of Chinese and Southeast Asian market researcher Niko Partners suggests that taking the living room would be good positioning for Sony and other console makers.
“Game consoles will open up a new area of entertainment, that of living room multiplayer fun,” Hanson tells GamesBeat. “Gamers who have wanted a console have had ample chance to buy one over the past decade, so it is not going to be anything earth shattering, but with a legal launch and a devoted marketing strategy we can expect that consumers will learn about entertainment opportunities of consoles beyond what they already have considered.”
Hanson believes that free-to-play games can serve as good positioning while helping with China’s piracy problem.
“There will need to be a business solution to the piracy risks, which is what spawned the epic success of PC online gaming because publishers created games as a service rather than games in a package that can be copied. Similar digital distribution and online services will need to be in place to prevent piracy on consoles.
“I think we will see more and more free-to-play business models in games going forward on consoles, not only on the PS4 and not only in China,” says Serkan Toto. “It’s very difficult, at least for me, to imagine Chinese gamers spending $470 on a console to mainly play free-to-play titles like they do on PCs and mobile. But I would expect Sony to come up with a mix between paid, free-to-play and possibly subscription-based business models — provided China will allow Sony to run online services like Playstation Plus and connection speeds aren’t a hurdle.”
The first step
China has shown a willingness to open up recently with the launch of its Shanghai Free-Trade Zone in late 2013 — a set region where the government has loosened regulations to promote trade and boost economic growth. It will establish three similar zones this year in Tianjin, Guangdong and Fujian to further stimulate the world’s second largest economy. The release on the ban of foreign-made consoles is just one part of this larger study, and the Chinese government will closely watch the Shanghai test bed. It’s the first step in opening up, but the country has a long way to go to catch up.
Prior to this month, China has never permitted wholly foreign-owned companies to operate freely, and even now plenty of limitations are in place on what kind of companies are permitted in the free-trade zone. As for Sony and Microsoft, their only way into China was through joint ventures with Chinese business partners, as regulations on foreign tech companies still hold strong. This enables China to protect its market as well as heap benefits on homeland companies.
What’s interesting about this situation is that the Sony’s and Microsoft’s efforts have them related in a way: Sony’s partner, media company Shanghai Oriental Pearl Group; and Microsoft’s partner, Internet and television service provider BesTV, are both subsidiaries of the state-controlled Shanghai Media and Entertainment Group. The new potential for a merger could make the situation even more interesting in the near future.
“It is indeed interesting that both BesTV and OPCD are owned by SMG, and in fact the rumor is that the two companies will totally merge,” says Niko Partners’ Hanson. “I have been told that SMG is 50 percent owned by the government, and also invested in by government-backed investment funds. One such fund is run by the former head of SMG. The government is also heavily involved with the console sales because of the strong regulatory structure, and that is handled by multiple government agencies and ministries.”
Sony and Microsoft are essentially sister companies here, tied together by the Chinese government.
If Sony can sustain and eventually advance, its reward will be at least a small foothold in a giant market. And it could be that Sony’s initial intent is to start small, playing this entry cautiously. Bloomberg found a FTZ filing that said that the company only plans to make 200,000 consoles annually, just a fifth of Microsoft’s goal of selling a million consoles in China.
Microsoft has slogged it out in Japan for years with the Xbox One. Despite limited sales — the Xbox One has already sold more in China than Japan — it maintains a presence because it is a strategic market.
With that small start, Sony will have to push to continually climb to make it to a point where it is relevant in a market that the PC and mobile have dominated for 14 years. If it is not able to bring Western blockbusters over, Sony will have to work hard to create compelling content that can draw the attention of a country used to playing games like League of Legends on their PCs. It will also have to bring a collection of games that will seem worth the $467 outlay.
If this works, everyone could benefit. Expanding China’s strong and rapidly growing game market with new consoles would be a win for both gamers and hardware manufactures, and this would certainly help further Chinese game development. Ideally, both the PlayStation 4 and the Xbox One would do well in China, creating a market for Chinese studios to develop new, exclusive titles that would eventually their way around the world — something that would benefit everyone who plays video games.
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