In the beginning of the year, China' State Council lifted its 14-year ban on foreign gaming consoles, allowing for Sony (NYSE:SNE), Microsoft (NASDAQ:MSFT) and Nintendo (NASDAQOTH:NTDOY) to expand into a gaming market that estimated to be $13.75 billion in 2013.
Since then, Microsoft has announced its plans to release the Xbox One in Chinese this September. Meanwhile, Nintendo President Satoru Iwata told Bloomberg that the company will be releasing new products in "emerging markets," hinting at a China expansion. On Sunday, Sony officially announced its entry into China's gaming market.
Sony's new joint venture
Sony will be joining forces with Shanghai Oriental Pearl Culture Development, or OPCD, to launch its line of PlayStation products throughout China. One will manage the manufacturing and sales of the hardware and the other will manage the services, sales, licensing, distribution, and research and development of software.
Sony China will own 70% of the newly formed Sony Computer Entertainment, which will handle the hardware. On the software side, ownership will be split in favor of OPCD with the newly formed Shanghai Oriental Pearl Sony Computer Entertainment Culture Development, with Sony owning only 49%.
The deal between Sony and OPCD is very similar to Microsoft's venture with BesTV, where the two formed a joint venture in hopes of designing and developing gaming-related products that cater to the Chinese market. It's also worth noting that both BesTV and OPCD are owned by Shanghai Media Group, which allows both joint ventures to be conveniently located in Shanghai's Free-Trade Zone.
More on the free-trade zone
It's unusual for both Sony and Microsoft to form joint ventures in order to launch a console in a new market, especially since they seemingly do it just fine by themselves in other markets. But with the lifting of the console ban came a tidal wave of regulations.
After lifting the ban, a statement released by the State Council said that only consoles manufactured in the Shanghai Free Trade Zone may be sold within China. Plus, before a system can reach the shelves of retailers, it will require inspection by various cultural departments.
It's no wonder that Sony stressed in its announcement that the joint venture will "introduce quality, healthy games that are suitable to China's national conditions and the preferences of domestic players, as according to the relevant government policies." Unfortunately, this means it will be costly for both companies to release titles in China due to the additional costs in not only translating titles, but because heavy censorship will require additional work that could prove to be more costly than the average international release. The additional work will also result in delays and fewer titles overall.
The console war is heating up
Microsoft has seemingly been more aggressive in wanting to be the first in releasing a console in China. It has had more than a month lead in announcing a release date, and while Sony has recently announced its plans in establishing the PlayStation brand in China, it has yet to announce which PlayStation products will be making their way into the country and when. This comes as no surprise, given that Microsoft has reportedly only shipped 5 million Xbox Ones since the launch, while Sony has reportedly already sold 7 million PlayStation 4s, with the gap growing with each passing month.
Nintendo's silence is unsettling, given its past history in getting around the console ban in China in the early 2000s. After having posted a poor quarterly result, Nintendo adjusted its Wii U expectation for the year, with the company only expecting to sell 2.8 million units worldwide, less than a third of its earlier prediction for 9 million consoles. Nintendo has two advantages: Its games will need to be minimally censored, and the Wii U is significantly cheaper than the competition. [Source]
To put China's $13.75 billion video game market in perspective, the estimated size of the U.S. market in 2013 was $14.8 billion, down from its high of $16.9 billion in 2010. It's no wonder why it's a race to the top. Though, it might not matter so much.
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.