This week China announced that it was opening the door for video game consoles, which have been banned in the country since 2000. The government will allowed consoles and other video game equipment to be produced and sold within the Shanghai Free Trade Zone. The news was seen as a boon for console makers — Nintendo’s stock jumped 11 percent on the Tokyo Stock Exchange after the announcement.
It’s not hard to see where the excitement comes from. The statistics on China’s gaming industry are enough to make any gaming executive excited. A state-run trade organization estimates that in 2013 there were 490 million people in China who actively played video games, up over 20 percent from the previous year. The industry brought in nearly $14 billion in revenue in 2013. The potential for console makers to get a slice of the pie is obvious — but the companies remain cautious, understanding that market factors may actually work against them.
Charlie Custer notes on Games in Asia that “the vast majority” of China’s gaming revenue comes from computer games. Of the $13.8 billion in Chinese gaming revenue in 2013, $8.7 billion came from PC games. Speaking with Bloomberg Businessweek, Custer noted that the game “Chinese gamers like the most” are typically “massively multiplayer online role-playing game[s],” an area where consoles can’t compete. Also, even though the consoles were technically banned, it wasn’t difficult for gamers to find them — both smuggled and counterfeit versions are readily available. The upshot might be that, in China, what little demand there was for consoles has already been met. The hard-core gamers who wanted consoles probably already have them, while more casual gamers might not see any need to buy an expensive piece of hardware.Enjoying this article? Click here to subscribe for full access. Just $5 a month.
In addition, consoles face competition from another up-and-coming gaming sector: mobile devices. Mobile games represented $1.8 billion of China’s total gaming revenue in 2013. Chinese companies have already set their sights on this sector — tech giant Alibaba (most known for its role in e-commerce) just announced plans to create its own mobile gaming platform. Even in the West, where consoles have a strong following, there’s speculation that the platform might be on the way out, with mobile gaming representing the future of gaming.
Even if Chinese gamers flocked en masse to buy the new consoles, companies like Microsoft, Sony, and Nintendo might still be in trouble. Currently, console makers rely on games sales to make profit, with sales of the actual console usually resulting in a net loss. However, piracy is a rampant concern in China, making it difficult for console platforms to recoup profits. Hypothetically, even if console sales spike, the parent companies might actually lose money if consumers buy pirated versions of console-based games. It doesn’t help that Chinese gamers are also used to playing online games that are (at least initially) free. Given this expectation, it will be hard sell to convince gamers to buy expensive, authentic versions of console games — especially if pirated (and far cheaper) versions are readily available. Reuters reported that pirated games can be had in China for as little as $1. Until China solves its piracy problem, console makers are unlikely to ever find China truly profitable.
Finally, there’s the issue of censorship. As in the film world, getting games past Chinese censors can be incredibly difficult and even arbitrary process. In fact, Peter Warman, the chief executive of the video game research firm Newzoo, told the New York Times that China’s new rules might actually be a crackdown in disguise: “The fact that consoles and most probably individual games will have to go through an approvement process could give the government a bigger stick to regulate console and console game sales,” he said. As one example of what game producers might be in for, China recently banned the game Battlefield 4, which featured a Chinese villain. Even mentions of the game’s Chinese name are censored on social media.
Activision Blizzard’s World of Warcraft also ran into problems when it tried to release an expansion set titled Wrath of the Lich King in China in 2010. For release in China, the game had to remove any visual evidence of skeletons (difficult in a game with “lich king” in the title) as well as toning down the violence. This process delayed the China release by two years, providing ample time for pirated versions to flood the market. Meanwhile, Western games that are watered down and altered to suit censor’s tastes often are less appealing than games originally designed for the Chinese market — which is why China’s domestic game market hauled in over 56 percent of total gaming revenue in 2013.
Still, despite all these reservations, the room for growth is still tantalizing. Last year console gaming accounted for only $15 million of China’s $13.8 billion gaming pot — providing room for massive growth even if (as expected) consoles never challenge computers as the Chinese gamer’s platform of choice. As in the film industry, video game producers may come to see China as an important source of revenue, even an indispensable one. As I wrote earlier, companies trying to profit from China’s entertainment market will need to change their approach to make games more appealing for a Chinese as well as Western audience.