Can China Change The Game For Microsoft’s Xbox One And Sony’s PS4?

Looking at the potential impact that China lifting its console ban could have on Microsoft and Sony

Jan 9, 2014 at 2:45PM

At least according to official edict, it's been illegal and impossible for a Chinese consumer to get his or her hands on Microsoft's (NASDAQ:MSFT) Xbox One or Sony's (NYSE:SNE) PlayStation 4 in the Middle Kingdom.

This is nothing new for the Chinese gaming market. More broadly, it's actually been illegal to import any foreign video game console into the People's Republic of China since 2000.  

However, in a recent ruling the Chinese government reversed course, saying it will allow video game console producers like Microsoft and Sony to make and sell their respective gaming devices in the Shanghai free-trade zone, effectively opening the Chinese market to the likes of Microsoft and Sony.

China is, of course, one of the fastest-growing major emerging economies in the world. So just how significant an impact could this news have on Microsoft and Sony as the two competitors vie for video game dominance?

The show has gone on
Current estimates peg the market size at around $10 billion in annual sales. So in terms of addressable market, the Chinese gaming market certainly presents an attractive money making opportunity for both Sony and Microsoft.

However, cracking into the Chinese gaming market might be easier said than done for Microsoft and Sony. Because despite their undeniably strong gaming brands, the Chinese gaming industry has largely evolved beyond the kind of console gaming that Sony and Microsoft offer.

This is largely a byproduct of the same ban that China recently repealed. By isolating and localizing the market to such a high degree, the Chinese government created a industry climate where home-grown domestic gaming names like Tencent could thrive. It's the business equivalent of the Galapagos Islands, a place that gave rise to its own distinct set of species as a result of its isolation. 

And rather than use consoles like the Xbox and PlayStation 4, Chinese gamers prefer to use either desktop computers or mobile devices like smartphones and tablets. So given that gaming platforms on other devices are already the mainstream norm, getting Chinese consumers to shell out the additional several hundred dollars to buy a console seems a high hurdle indeed.

The nature of the market isn't the only reason that Microsoft and Sony might find breaking into the Chinese gaming space problematic though.

Unofficial presence
Although it's certainly harder to quantify, it seems that, legality aside, Chinese consumers have always been able to get their hands on a Xbox One or PlayStation 4 if they so desired. According to reports, a robust black market had developed around such banned goods offering ample availability of Microsoft's and Sony's leading consoles. By some accounts, these illicit vendors would go as far as even advertising that they sold Xboxes and PlayStations.  

And while it appears Chinese consumers have had access to Microsoft's and Sony's devices, bringing their sales channels out of the shadows and into the mainstream could have two benefits for the tech giants though.

The first is the possibility of lowering prices. It's no secret illegal markets allow prices to be set by those that take the risk of selling such wares. And since illegal vendors at least in theory faced possible legal retribution for selling black market goods, it's certainly possible Xboxes and PlayStations were sold with some kind of markup above what their retail prices would be. The second potential win for Microsoft and Sony comes on the distribution front. Legalizing their sale should allow Microsoft and Sony to tap into much broader distribution and sales channels as well.

Foolish bottom line
Although the two aforementioned advantages are nothing to sneeze at, it's hugely unclear whether or not a Microsoft or Sony have a meaningful market opportunity in China.

After so many years of evolving without their presence, it could easily prove fruitless for either company to break into this space. This is only an emerging storyline at this point. However, it's at least clear that the deck is stacked against Microsoft and Sony in the Chinese gaming market today.

A better way to invest in China's growth
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Fool contributor Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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