On September 27, the State Council of the People's Republic of China announced the reversal of a policy that has been in place since the year 2000: the ban on the sale of game consoles in China. Earlier this year there were rumors that the ban would be overturned, but since we’d been hearing those rumors for the past 13 years we were skeptical.
In January 2013 the China Daily published an article saying that the ban would be overturned, which the Ministry of Culture (the chief regulator for consoles, internet cafes, and most of the games industry) quickly denied.
In July 2013 the government announced that they would form the Shanghai Free Trade Zone, similar to other free trade zones such as the one in Shenzhen. The difference would be that the Shanghai zone would allow certain businesses not permitted currently in the rest of the country or in other free trade zones. Rumors began to circulate that consoles would be legal in this zone, but again we were skeptical.
Then we visited BesTV in July in Shanghai and it became clear that given the company's dedication to building a TV-gaming business around games very similar to casual console games, with chat in the games, played on Internet-ready TVs, at some point consoles were going to become legal in China. That visit definitely helped us overcome some of our skepticism. And earlier last week BesTV announced a JV with Microsoft to build a console technology business.
What we remain skeptical about is whether this will actually change the games market significantly. Already, there are more than 1 million consoles sold in China every year. At the peak of the most recent console cycle (including PS3, Wii and Xbox360) there were 1.7 million units sold in a year on the grey market: in clearly marked stores with bold signage. Any Chinese gamers who wants a console has had ample opportunity to buy one already.
The big difference is that if the market is legal there will be advertising, promotions, marketing, legally distributed games that are approved by the government as all legal games must be, and the ability to connect to other consoles via networks or the Internet. As it exists now consoles are restricted to local use only, no connecting via Xbox Live or PSN. We are only beginning to learn what may come of the new policy, but assuming that the new policy allows for nationwide sales of consoles manufactured in Shanghai's free trade zone, other console companies will enter the zone and also try to sell their game machines and related games throughout China.
Lifting the console ban after 13 years could spark new life into an already huge games market, one that will reach more than $13 billion for PC online and mobile games alone in 2013 per Niko Partners research. Most of that revenue is generated by large, publicly traded online game operators. These companies should benefit from the sale and distribution of console games, as it’s highly likely that these games will be offered using the same online game services model as PC online games rather than packaged software that is victim to China’s rampant piracy. Active marketing, legal games that are localized and culturalized, and the ability to connect to the internet and to friends on other consoles will all be very good for both the console companies and the Chinese games market. We'll continue to provide updates at www.nikopartners.com.