The Console War Has Officially Expanded Into China

Microsoft and Sony have a brought the war to a new front.

Apr 7, 2014 at 11:45AM

It didn't take long for Sony (NYSE:SNE) and Microsoft (NASDAQ:MSFT) to officially announce their entry into China's newly deregulated console market. On Jan. 7, China's State Council temporarily lifted its 14-year ban on foreign gaming consoles with one caveat: Only consoles manufactured in the Shanghai Free Trade Zone may be sold within China.

With that regulation put into place, Sony and Microsoft are in the preliminary stages of setting up a presence in the Free Trade Zone in order to expand into China's rapidly growing gaming market. 

Microsoft's move
On April 1, Microsoft officially announced that it is prepping to launch the Xbox One in China, although no specific dates have been mentioned. A senior executive stated that the company is stepping up efforts to bring the Xbox One to the Chinese market as soon as possible.

Last September, long before the State Council lifted its console ban, Microsoft set up a joint venture with China's media content provider BesTV New Media to form a new $79 million gaming venture. According to Bloomberg, BesTV invested $40.29 million for a 51% stake in the project with Microsoft filling in the remaining 49%, or $38.71 million. As of today, that venture is located within the free trade zone. 

The investment by both parties will reach $237 million, with the venture being designed to develop games and gaming-related products that cater to the Chinese market.

Sony's move
Following Microsoft's announcement, Sony announced on April 1 that its Sony Computer Entertainment branch -- the department that manages the PlayStation brand -- will be expanding into China.

With China being at the forefront of emerging markets, it will play a vital role in Sony's comeback. Kazuo Hirai, president and CEO of Sony, said China "has growth potential that far exceeds that of the United States and Japan." According to Sony China President Nobuki Kurita, sales of major Sony products increased by more than 40%, year over year, during last year's National Day sales season. 

Why you shouldn't be excited yet
While consoles had been banned for more than 13 years in China, it hasn't been hard for consumers to find stores at their local shopping mall littered with consoles from previous generations, as well as even the two latest consoles, the Xbox One and PlayStation 4.

Even with their availability, Consoles are estimated to have only accounted for $15 million of the $13.75 billion the Chinese spent on gaming in 2013. The bulk of the market belonged to client-based PC games, which accounted for 64.5% -- 8.87 billion -- of the revenue. The second-largest market belonged to browser-based games, which accounted for 13.5% -- 1.86 billion. Coming in at third, social games accounted for $890 million. 

The Foolish bottom line
It's hard to measure what impact this might have in the long run, but given how the Chinese market has grown into a $13.75 billion industry when consoles only account for a dismal $15 million, it's not hard to imagine the PlayStation 4 or the Xbox One making an impact in the short term.

With China's gaming market having grown 38%, year over year, in 2013 -- and with analysts estimating 2014 revenues of $17.61 billion, a 28% gain over the $13.75 billion from 2013 -- there might be real potential in the long run. 

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Rodmon Dehghi owns shares of Sony (ADR). 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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Jun 12, 2015 at 5:01PM

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