Can Microsoft Make the Xbox One Successful in China?

Microsoft will bring its console to the potentially huge Chinese market, which has a growing middle class and a hunger for video games.

May 1, 2014 at 7:33AM

While Microsoft's (NASDAQ:MSFT) Xbox One has so far lagged behind Sony's (NYSE:SNE) PlayStation 4 in global sales, the company plans to introduce it to a massive source of new customers that could help it catch up. Microsoft will begin selling Xbox One in China in September, making it the first video game system to be introduced in the country in over 10 years as until very recently a ban kept Western consoles out of the country.

Not an easy road to China

To bring Xbox to China Microsoft last year formed a strategic joint venture with Internet TV company BesTV, a subsidiary of Shanghai Media Group, after China created the Shanghai Free Trade Zone. The creation of the zone allows for the sale of video game consoles and other entertainment devices. BesTV, according to a Microsoft statement, has a rich history of delivering innovative entertainment content and an extensive catalog of content to share with future Xbox One owners in China.

The releases of Xbox One won't just be about bringing high-end video games to the Chinese people. The device will also be the first game console to provide streaming Net TV services in China, said E-Home Entertainment Development Co. Ltd. chairman Dazhong Zhang in a statement released by Microsoft.

"The launch of Xbox is a milestone for our company in the family entertainment market and will create profit growth opportunities," he said. "Furthermore, we will continue our investment and support into research and development for gaming content together with Microsoft."

Microsoft is pretty happy about the deal as well. Yusuf Mehdi, corporate vice president of marketing and strategy for Microsoft's devices and studios, wrote about the historic deal in a post on news.xbox.com.

[W]e are incredibly excited to bring Xbox One and the next generation of games, entertainment, online education, and fitness to China. Launching Xbox One in China is a significant milestone for us and for the industry, and it's a step forward in our vision to deliver the best games and entertainment experiences to more fans around the world. 

The market is potentially huge

Launching Xbox in China gives Microsoft a chance to dominate a a market that has no competing products and a surprisingly large number of households that can afford to purchase the console.

"There are 100 million 'middle class' households in China (and) 700 million play games on Tencent's (NASDAQOTH: TCEHY) QQ network, so there are likely a lot of people who like games and can afford a console," Wedbush Securities analyst Michael Pachter told USA Today. It's likely that "about 10% or so of the middle class households will buy one. However, also keep in mind that Apple (NASDAQ:AAPL) is marketing very expensive iPhones and iPads there, and they sell well, so likely the Xbox One will as well."

The biggest challenge facing Microsoft may in fact be Apple and the fact that there has been a global trend toward playing games on phones and tablets instead of consoles. That trend might not hold in a country that has not had the exposure to consoles the rest of the world has and the novelty of the Xbox One may make it a hit.

There's also a pretty large market of PC gamers in China -- Chinese gamers spent $12.3 billion on games in 2013 with the overwhelming majority (89%) being on PCs, Piers Harding-Rolls of research firm IHS Technology told USA Today. The remaining 11% of spending is on mobile and tablet devices.

Moving from PC games to the better gaming experience offered by consoles is a logical leap and Microsoft should be well positioned to capitalize.

You still have to make the sale

Entering a huge but largely unknown market like China comes with risks. Will Microsoft face issues with censorship? Will the rampant theft of intellectual property that has plagued China cut into software sales? These are issues that Microsoft will have to handle. But as a company that already has a large global footprint it should be able to navigate any potential problems. 

Being the first modern video game console in China gives Microsoft a huge leg up when it comes to becoming the standard for the nation. While it's expected Sony will also make the move into China at some point, nothing has been announced and every month Microsoft has to itself is a chance to gain market share and build a potentially dominant first-mover advantage. 

In moving into China Microsoft is showing that it has a total global view and the vision to try to build a foothold in a country with an emerging middle class. Eventually the launch of Xbox One in China should help Microsoft sell PCs, smartphones, and other devices, especially with all Microsoft devices now sharing the same Windows 8 experience.

The move could also help Xbox One sales catch up to PS4 globally and ultimately decide who wins the console wars.

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Daniel Kline is long Microsoft. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple and 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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