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
11th 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:
- Gambling-related content or game features
- Anything that violates China’s constitution
- Anything that threatens China’s national unity,
sovereignty, or territorial integrity.
- Anything that harms the nation’s reputation, or
interests.
- Anything that instigates racial/ethnic hatred,
or harms ethnic traditions or cultures.
- Anything that violates Chinas policy on religion
by promoting cults or superstitions.
- Anything that promotes or incites obscenity,
drug use, violence, or gambling.
- 8Anything that harms public ethics or China’s
culture and traditions.
- Anything that insults, slanders, or violates the
rights of others.
- 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