China lifted its 14-year ban on console devices in late 2014 to much excitement but consoles have failed to make a meaningful dent in the market in the first half of 2015. Chinese digital gaming soared in popularity from a market size of $100 million in 2001, up to roughly $18 billion in 2015. $16 billion of that comes from PC online games since consoles were banned (though grey market units were readily available) and mobile games only started a few years ago. The catalogue of available PC online titles is impressive in both quantity and quality, and the free to play (F2P) business model with revenue generation in the virtual economy is one that Chinese gamers have embraced. Gamers have also quickly adopted gaming on their mobile devices. The mobile games usage rate is even faster than PC online games now; thanks to 100 new titles released per day, predominantly free, and decreasing data costs on an ever-rising smartphone and tablet base.
What, then, will create demand for the newly legalized console segment or the TV-based gaming segment in general? There may not be great promise for such gaming in China, it may be too late or unnecessary. But we do think there is wisdom in drawing out demand for creation of the living room as a center for entertainment. Young Chinese gamers (aged 26-35) who grew up playing games on their living room TVs via Nintendo Entertainment Systems and Subor consoles before consoles were banned in the year 2000 will appreciate and lead the trend to play games through a TV. But they first need to be offered great hardware and games at the right price point. Our forecast shows the number of TV gamers (including console and smart TV and OTT gamers) will grow from a starting base to 27 million by 2019. Unless the price point and game catalog for consoles improves quickly, smart TV and OTT box gaming will capture most of that living room demand.
If TV-based gaming companies are able to attract gamers to the living room they will soon be forced to satisfy the demand for high quality games to play there. Smart TV and OTT games are casual and family friendly, but these do not satisfy hard-core gamers. The OTT boxes are cheaper than consoles making them more attainable for the masses, but they have lousy controllers because they use the TV or cable box remote control device now, and that is frustrating for gaming and mid- or hard-core gamers would not tolerate it.
These are among the findings from Niko Partners’ latest report 2015 Chinese TV-Based Gaming Report on TV-based gaming in China. While legal console sales have been disappointing to date, hampered in part by the high prices and scarce line-up of available AAA titles, TV-based gaming is showing some promise, perhaps because the games are preloaded or easily accessed for free. It will be a challenge for game developers to take part in this incremental market growth but games are sorely needed for both Android-based TV gaming and the high-end consoles. Hence, this is a ripe opportunity to develop content specifically for China and fill a void for TV-based gaming. As long as foreign game developers understand content restrictions and Chinese partnerships, there is plenty of room for these games to participate. As of this writing, the Chinese government has approved 31 games, with an additional 22 in the pipeline for this year. However the government is committed to building this segment and vows to approve a minimum of 100 games per year by 2017. This is compared to the 300+ games currently available for Sony’s PlayStation 4 and the 400+ games currently available for Microsoft’s Xbox One internationally.
If more AAA titles can make it through the approval process, and if the prices of the consoles drop, we could expect to see a rise in the popularity of console games. Chinese consumers will not pay premium prices; the developers must embrace free to play or other business models that fit the cultural reality of China.
But the regulatory process is unhurried, to put it mildly, and there is a tight 3-to-6 month window for submitting new games for approval for the year. The stated goal is to begin approving 100 console games per year by 2017 — a goal we think is not likely to be met, or at least only a few of those games are likely to be blockbuster hits. Game developers are warily eyeing the Chinese console market and have been reluctant to invest in it so far, but it could be worth the challenge.
Until there are great games and better pricing for consoles, and a wider range of games and better controllers for OTT games, Niko Partners expects that consoles and all TV-based gaming are relegated to be “nice-to-have” supplements to the bread and butter of China’s games market, PC online and mobile games. For now console games are building an incremental increase in the total spend and usage of gaming in China. These TV-based platforms need stellar, approved games. The Chinese government wants the segment to grow, and we believe that while the opportunity is not as great as that of PC online or mobile gaming, the question to foreign game developers is: “Do you want to ignore this segment in the world’s biggest gaming market, or do you want to take a chance that a hit title you develop for it may be the one that cracks it open?”