Is China's new console market a walled garden?

Is China's new console market a walled garden?
Nick Gibson

By Nick Gibson

May 16th 2014 at 10:05AM

Nick Gibson debates whether the nation’s new attitude to consoles is all that it seems

I was asked to appear on a TV news channel earlier this year to discuss the “major” tech industry news that the Chinese government was lifting its 13-year ban on all games console sales and to explain to viewers the “huge” opportunity this represented for Nintendo et al. It’s easy to understand their excitement. With 1.4bn people, a burgeoning middle class and the fastest growing games market on the planet, surely this is another Chinese goldmine?

The nature of China’s ban and its subsequent lifting (which is, technically, only “temporary”) is pretty opaque. The ban began in 2000, ostensibly to protect the youth from Western immorality. More likely, it was implemented to encourage locally produced alternatives to successful Western products (as happened with Facebook, Twitter, etcetera) as the ban could be circumvented – by local companies.

Nintendo, via a Chinese partner, launched a Chinese version of the N64 – the iQue – in 2003 but only 14 games were ever permitted for release. Since then local companies Shanda, the9 and Lenovo have also launched their own consoles. In contrast, Sony launched PS2 in China in 2004 with comparatively limited local partnerships only to pull out a year later when its hardware was eventually declared illegal.

Any new entrant into the Chinese console market therefore faces two significant regulatory risks: that the government summarily decides to reinstate the ban or block specific hardware, and that few console games will ever actually be approved for release.

Diminished odds

Given the government’s track record with Western MMOs, it is likely that very few existing console games would meet the approval of the Ministry of Culture. Leaving aside government regulations, there also exists radically different tastes in content themes, gameplay, game types and even graphics styles between China and the West.

This effectively makes China an insular market, into and out of which few console games would travel successfully. As the console manufacturers will need content to sell their hardware, it will therefore be necessary for them to invest, most likely heavily, in the development of China-specific games.

Chinese gamers have been raised on a diet of games with service-based revenue models: F2P, microtransactions and variations on subscriptions. Any half-successful game that is created as a product rather than a service will inevitably suffer massive piracy rates.

The console makers would have to make significant changes to the way they deal with both consumers and content providers with a wholesale move to service-based revenue and customer support models. I doubt any of the console companies could manage such a huge transition any time soon.

These manifold barriers do not preclude the creation of a viable self-contained console games market in China but they seriously diminish the odds of success. None of the local games consoles have been successes. In fact there are probably larger installed bases for knock-off hardware such as the Vii and PolyStation and illegally imported Sony, Nintendo and Microsoft consoles, which are almost entirely chipped and used to play pirated games.

So the existing console giants cannot simply replicate their existing businesses in China. It would take local partnerships, massive strategic adjustments and significant investment for them to even have a chance, an approach Microsoft might be taking with its joint venture with Chinese internet TV company BesTV announced last September.

I never went on the news channel in the end – my take that it wasn’t a momentous development nor a huge opportunity didn’t match their excited editorial.

As for the future, I’d wait to see if the new wave of Chinese companies can prove there actually is a market. At least four local hardware manufacturers have announced forthcoming console or microconsole launches, but it remains to be seen whether they can reverse the failures of previous and much larger Chinese games firms.

Nick Gibson is a director at Games Investor Consulting, which provides commercial check-ups, strategy and data to games, media and finance companies.
www.gamesinvestor.com