China Opening Up to Console Makers

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Although by now no longer regarded as ancient or, for that matter, Chinese, the curse "May you live in interesting times" seems quite relevant today. Interesting things are certainly happening in China. A new Pilot Free Trade Zone in Shanghai's Pudong district has been designated as a testing area for a looser government stance on foreign investments and products. This may indicate that China's leadership is becoming more open to social reform. Sources familiar with the matter say that the ban on consoles may be lifted, opening up the world's largest consumer market to console-makers.

Interesting times
Not particularly big, covering some 29 square kilometers, or 11 square miles, the Shanghai Pilot Free Trade Zone looks like it will be the staging ground for a thorough reform of China's financial sector. Yet the experiment seems to be broader than that, including the introduction of certain Western products that were previously restricted by the government.

Supporters of the plan claim that this may be a first step toward a loosening of the government's grip on the economy, and with it, supplying a greater amount of social freedom. The opening of the free trade zone follows a similar project during the '80s in Shenzhen, just north of Hong Kong, which helped turn China into the major industrial player it is today. The plans are scheduled to be rolled out over a three-year period, although details on what exactly is to be done in this time are still murky.

Opponents of the plan argue that the small-scale testing of these liberalizations would only serve to slow down the process of reforms, and that the government's lack of clarity regarding the details and timeline of the plan shows that even its architects don't really know what's going to happen. In any case, it seems as if foreign firms operating in the area will be able to sell video game consoles for the first time in over a decade.

Gaming for the masses
In what might be a game-changer for Sony (NYSE: SNE  ) , Microsoft (NASDAQ: MSFT  ) and Nintendo (NASDAQOTH: NTDOY  ) , the Chinese government has for the first time in 13 years approved the sale of videogame consoles, provided that these companies set up a base of operations in the new free trade zone and manufacture the products in China. Yet entering China's gaming market, typically dominated by free-to-play games, may prove to be a daunting challenge for these companies. Adapting to a free-to-play model, while complicated, may prove to be a crucial measure.

With the PS4 and Xbox One both scheduled for release in November, the opportunity to do business in China relatively freely is enticing. However, the question is whether much will change with this liberalization. Hacked versions of many gaming consoles are already available in China, where piracy is common. Pirated games can be bought for as little as $0.50, which raises the question of whether Chinese consumers will be willing to buy the more expensive legitimate consoles and games.

The market for video games has not been completely liberalized, however. All products will still have to pass through a government screening process, which will probably have the power to censor games and demand changes. This means that Nintendo will probably have to set up separate manufacturing facilities for the Chinese market. However, despite these hurdles, the news that console makers will soon have access to a market of over 1 billion people sent Sony and Nintendo shares flying.

Probably in anticipation of these concerns, Microsoft recently announced a partnership with BesTV New Media to form a $79 million gaming joint venture to develop games for the Chinese market. This type of partnership should allow them to provide games more palatable to the Chinese government's censors. So far, Sony has announced no such plans. It probably should get into something similar, though, and probably will, with its cheaper console scheduled for release soon. 

The bottom line
There are some interesting things happening in China at the moment. In a move that may speed up a reform of China's economy, the new free trade zone in Shanghai will give foreign companies an easier time selling their products. At the same time, the expected lifting of a long-standing ban on video game consoles may prove to be a huge opportunity for console makers. However, they will still face a number of challenges in trying to enter China's gaming market.

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Daniel James

I'm primarily a value and fixed-income investor with a background in cultural anthropology. As a writer for the Fool, I focus mainly on the consumer goods sector, also dabbling in technology occaisionally. When not pouring over the world's stock markets, I like to read, travel and make music.

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