The Chinese Video Game Market

This semester I’m taking a class called, ‘China in World Politics,’ where we’ve obviously been considering China (and its history) in the context of global affairs. After a few sessions I got to thinking, “what about video games in China?” As a passionate follower of events in the video game industry I feel it’s my duty to investigate know everything I can about the industry. Though, up until I did a few Google searches recently I didn’t know much about the state of video games in China other than the ban which was lifted in early 2014, while I was studying abroad in Tokyo.

The Ban

Arcades used to be a huge thing in the United States. As their popularity was being slowly eroded by the presence of new home consoles in the U.S., the popularity of arcades was growing in China. The rise of arcades was accompanied by an increase in the numbers of vocal parents worried that arcade games would have a corrupting influence on the minds of young people. This ostensibly led to a government effort to crack down on video games. 

Branches of government including the Ministry of Culture, the Ministry of Public Security, the State Economic and Trade Commission, the Ministry of Industry and IT, the General Administration of Customs, the State Administration, and the Ministry of Foreign Trade and Economic Cooperation came together to limit the power of video games. In 2000, a bill called “Feedback regarding the launch of special operation on video games arcades” was passed into law.

Here are two main sections of the law.

“As of the day this report is released, the manufacturing and selling of any electronic gaming equipment plus its parts and accessories headed to China are stopped immediately. No company or individual can partake in the manufacturing and selling of electronic gaming equipment plus its parts and accessories headed to China.”

“With the exception of processing trade, the import of electronic game equipment plus its part and accessories through other forms of trade is strictly limited.”

Originally meant to curb arcades, the bill’s influence extended to video games. Foreign import of video game consoles was banned, but it’s important to note that although the ban existed on paper, it was rarely enforced (especially in the case of internet cafes) and there were ways to get around it. 

Since the ban

As a result of the ban on video game consoles, the PC market took off and internet cafés along with them. PC (and increasingly mobile) hold a comfortable share of the video game market in China. Online gaming has also exploded since the ban, leading many to believe that the ban didn’t help the problem, but instead added fuel to the fire. 

Above is a chart of depicting the revenue of the Chinese video games industry in 2013. If you look at revenue from video game sales (taken from Chinese gaming website 17173) you can see a healthy upward trend. According to techinasia.com, 64.5% of the revenue in 2013 came from client-based PC games. I’m not sure what the revenue s made up of because I don’t read Chinese and can’t get the tidbits from the source article, but the trend is clear: Chinese markets have been expanding as more of a middle class emerges and they desire more expensive, ‘luxury’ goods. 

Relatively expensive consoles like the Wii U and PS4 are already on sale in China, despite them not being officially out yet. Why? The answer lies in Hong Kong. Due to its legal system, Hong Kong enjoys a space where video game consoles are perfectly legal. Retailers in other parts of the country will buy consoles from Hong Kong and sell them in their stores. From what I’ve read there seems to be no reaction from the police for this offense, as they have more important things to worry about.

Not only are there plenty of banned consoles on sale, piracy is rampant. The black-market for video games in China is quite large, fueled by high prices for legitimate items, lack of policing, and obviously lower prices. There are also a number of knockoff consoles like the PS Vita knockoff, the iReadyGo. 

Game makers realize that their games will be pirated within hours of release, causing many to hold off on any attempts to penetrate the Chinese market. In recognition of the problem of piracy, many developers have turned to towards a free-to-play business model. Through F2P, players are encouraged by low barriers to entry while developers can generate a steady cash flow. 

According to research firm Niko Partners, “publishers in the region have reportedly made over $9 billion in sales using free-to-play models…Niko Partners also reveals there are approximately 192 million mobile games in China, while only 150 million play on PC.” I can’t confirm because I don’t have the complete understanding of the data (I have no time frame to attach this info to), but it’s interesting to note that there are more mobile users than PC users in China. This becomes noteworthy if you consider the graph I talked about earlier and particularly the techinasia.com statement that 64.5% of revenue came from PC users. PC users, although smaller than the population of mobile users, bring in more revenue. (Note to self, if you ever go on to make video games in China, look toward the F2P PC market).

High import tariffs also deter foreign companies from releasing their products within China. There is however, one bright spot for foreign investment: the Shanghai Free Trade Zone. A government effort to promote foreign investment while at the same time control the types of products that enter the country, the Shanghai FTZ is a bright spot because policies that are tested in the area have the potential to eventually become practice in the rest of China. 

The existence of the Shanghai FTZ is pivotal to the console ban conditions. That’s because in order for a console to be legally sold it must have been manufactured in the free trade zone of Shanghai.

This is a big plus for China. Because of the huge untapped potential, foreign companies can’t ignore the Chinese market. As a result of the wording of the lift in the ban China reaps all of the benefits. If a foreign video game company wants to manufacture consoles in China, it must pay to build a manufacturing facility in China, hire Chinese workers, and divulge the know-how of its processes to the Chinese. China is in inheriting the know-how of its international competitors. One day China will use this knowledge to create and ship successful IPs catered specifically for the Chinese audience.

Microsoft, Sony, and Nintendo in China today

Microsoft officially launched the Xbox One in September of 2014. They sold 100,000 units in the first week. The sticker price for the Xbox One was around $700 with the Xbox motion control peripheral, the Kinect (~$600 without Kinect). If you consider that the GDP per capita in China is $6,807 (compared to the U.S. $53,042) and a significant amount of the population is below the poverty line, you understand that high-middle/high-end customers make up the target market. A sales figure of 100,000 units all of a sudden doesn’t that bad, though it’s not very good either. If there’s one positive note, it’s that Microsoft has the first-mover advantage of the big three international console makers and that has and will certainly count for something as the Wii U (or not the Wii U) and the PS4 hurry to join the market. 

Sony had plans to release the PlayStation 4 in China January 11^th of this year, but pushed back the release reportedly due to “various reasons” (specific I know right?). According to techtimes.com “included in the delay are the console’s various accessories and gaming software” and also the new product launch date will be announced in the future. 

There are 2 things that I think will determine success in the region. One is the security of the X1 and PS4 against piracy (either through hardware or aggressive firmware). Creating a legitimate market will no doubt be tough, but the companies have to create a reason to buy the systems. Otherwise there’s little reason to enter the market. I’m interested in whether or not Xbox One knockoffs have entered the market. I haven’t been able to find in information on the subject. The second condition for success is to focus on creating content for the Chinese market. With the rise of the F2P business model, companies should obviously take note. With a base that’s large enough with a F2P, it might afterwards make more sense to introduce pay-to-play titles. 

One obstacle for success (aside from the numerous barriers mentioned elsewhere in this post) will be the Chinese rules of censorship. The following types of games are banned:

1. Gambling-related content or game features
2. Anything that violates China’s constitution
3. Anything that threatens China’s national unity, sovereignty, or territorial integrity.
4. Anything that harms the nation’s reputation, or interests.
5.  Anything that instigates racial/ethnic hatred, or harms ethnic traditions or cultures.
6. Anything that violates Chinas policy on religion by promoting cults or superstitions.
7. Anything that promotes or incites obscenity, drug use, violence, or gambling.
8. 8Anything that harms public ethics or China’s culture and traditions.
9. Anything that insults, slanders, or violates the rights of others. 
10.  Other content that violates the law 

In short, there are a lot of ways that a game could fail inspection. A lot of titles that immediately come to mind would probably fail to meet these standards.

Sony and Nintendo will have a difficult time in China as escalating tension has caused anti-Japanese sentiment and ultimately the boycott of Japanese goods. This is difficult territory for the companies. Though, tension has died down in weeks so now might be a good time (for Sony) to get its PS4 into the hands of the Chinese. 

To sum everything up, there are a lot of barriers to success for foreign video game companies in China. The dominance of the grey/black market undermines the efforts of companies that try to put out games legitimately and right now, the market that can potentially purchase home consoles is relatively small. Yet international companies cannot afford to ignore the growing popularity of video games in China, especially given the new opportunity that’s been afforded to them by the lifting of the ban. 

Who knows what 2015 will have in store for the Chinese gaming world. I’m eager to observe and I’ll certainly be along for the ride.

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Sources
https://www.techinasia.com/chinas-game-market-took-in-13-billion-in-2013-pc-games-generate-way-more-than-mobile/
http://www.hollywoodreporter.com/news/china-2013-video-game-market-668542
http://metro.co.uk/2014/10/11/the-truth-about-video-games-in-china-readers-feature-4901435/
http://kotaku.com/the-future-of-gaming-in-china-according-to-an-industry-1425638334
http://www.forbes.com/sites/lisachanson/2014/01/21/chinas-console-ban-is-lifted-but-what-does-it-mean/
http://www.techtimes.com/articles/25388/20150109/playstation-4-china-release-delayed-due-to-various-factors.htm
http://www.shacknews.com/article/87589/the-great-wall-consoles-in-china