Little chance of a gaming revolution in the Shanghai FTZ

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Little chance of a gaming revolution in the Shanghai FTZ

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Youngsters in the West and Japan have enjoyed experiencing the evolution of computer games consoles from simple platforms into powerful machines capable of rivalling cinema in terms of digitizing reality.

Their Chinese counterparts have been left out. Consoles have been banned outright in mainland China since the year 2000.

So when the Chinese government recently lifted the ban as part of economic reforms being piloted in the Shanghai Free Trade Zone (FTZ), executives from Tokyo to Seattle jumped for joy. Finally, an opportunity to penetrate the world’s most populous nation at a time when console sales in existing markets are on the decline.

Unfortunately the hard work will only just begin, and there is no guarantee China will be the next big market for the industry.

Blackout

Beijing pulled the plug on consoles in order, as officials at the time noted, to protect the youth of the country from unwanted cultural influences.

Such sensitivities apply to all media products, and not just those of foreign companies. In the past couple of years regulators have, for example, ordered local TV producers to stop making programs showing time travel.

So why is a loosening of the rules underfoot? Speculation of the ban being lifted has been constant for several years and reached a peak in January of this year. Lifting the ban now is part of a broader effort to stimulate investment in new industries.

The political forces “involved in this [Shanghai FTZ] would like to see ‘new’ media and entertainment such as computer games growing in China,” Johan Olausson, a manager with consultancy Bamboo Business Communications, told China Economic Review.

This could mean a potentially huge new market for console and game makers alike.

There are some 180 million gamers in China, creating a gaming market excluding consoles that is projected to reach US$13.1 billion in value this year, according to research house Niko Partners. The US gaming market recorded sales of US$20.77 billion in 2012, including consoles. China offers a lot of potential growth.

It could even be a saviour for some. Japan’s industry pioneers Nintendo and Sony in particular have felt a sharp decline in their computer gaming business. Consumers in developed markets are playing more games for free online and on mobile devices, a trend partly driven by austerity among gamers during a time of economic uncertainty.

Uncertain potential

Tapping that potential remains a dream for now. Piracy, regulatory approval and a home-grown gaming culture all stand in the way of success.

One of the aims of the Shanghai FTZ has been to slice through China’s notorious bureaucratic red tape, making it easier for companies to do business. Still, restrictions remain. If foreign-funded console and games companies want to be able to sell in China, they first must set up a domestic operation in the zone.

“At the moment there are a lot of uncertainties related to the FTZ and it's hard to know how long things will take, what kind of business licenses will be needed, if you would have to locate hardware production to the actual FTZ,” said Olausson.

Companies such as Foxconn, which makes consoles for Nintendo, could be forced to build factories inside the zone itself for devices to be shipped within China. Rising production costs due to high wages in Shanghai would be just one extra problem.

All consoles made will still need to be cleared by regulators. The Ministry of Culture will also need to approve the games themselves. Its Byzantine decision making processes won’t make this an enjoyable process for executives.

Piracy is another factor that companies will have to take into consideration. It is possible to buy consoles in China on the grey market, but it is almost impossible to find original games. Lax enforcement of intellectual property allows street vendors to hawk pirated copies that retail for up to US$60 in the US for a couple of dollars.

The biggest challenge is luring existing Chinese to consoles from existing devices that have become de-facto gaming platforms in the absence of consoles. Although console games have the potential to be successful, the penetration created by PCs over the past 13 years means online PC games will continue to dominate the local market, said Lisa Hanson, managing partner at Niko Partners.

A new model

The prospect of tapping a market that contains more gamers than the population of Japan means Sony, Nintendo and Microsoft won’t be easily deterred. 

In order to be successful “they will need to create compelling content that is appealing to the local gamers, and devise a business model that is appropriate for the Chinese market,” said Hanson. This could see companies distributing games digitally for free but charging for in-games upgrades and services, similar to the online PC model.

It also means that console makers and game developers cannot simply take the same approach to the Chinese market as they do in the West or in Japan, noted the China head of one of the world’s largest games publishers, who asked not to be named.

To ensure that local gamers buy consoles, the right games will need to be marketed. Localizing content is a strategy employed across cultural industries in China and should be considered by foreign companies.

“Look at Hollywood – it has found that by sending movies to China it can make a lot more money. It sees a lot of potential in the Chinese market. I think the same is true, or will one day be true, for games,” said Louis Bedigian a senior tech analyst and features writer for investment website Benzinga.

Flexibility on pricing, as well as selling older consoles and titles at basement prices, are also key considerations. Most analysts agreed that attempting to charge the same retail prices for games in China as in developed markets just won’t work.

“There is no reason why Developer X can't make a Chinese-specific game and sell it for US$5 or US$10. Developers are not opposed to low prices,” said Bedigian.

Despite the uncertainty surrounding the development of consoles and computer games in the Shanghai FTZ, there is already some industry movement. Microsoft has announced a deal with local media firm BesTV to develop "family games and related services" with a total investment of up to US$237 million. The US-firm makes the X-Box games console, which it could promote through this new venture.

How that project progresses could influence the entrance of Sony and Nintendo – neither of whom have announced plans related to the Shanghai FTZ – into China. They of all interested parties should be hoping for a big success.