Sony's (NYSE:SNE) PlayStation 4 is the top selling console of the eighth generation, with 7.7 million units sold worldwide, but it's been struggling back home in Japan.
Sales figures from Famitsu revealed that Nintendo's (NASDAQOTH:NTDOY) 3DS LL, Sony's PS Vita, and even the PS3 all outsold the PS4 for the week ending on May 18.
The PS4 hasn't been faring well in terms of software sales either. Not a single PS4 title was among the top 10 best selling games in Japan -- which includes seven 3DS titles, two PS Vita titles, and a single PS3 game.
In a previous article, I discussed the PS4's rough launch in Japan. A comparison between the PS4 and Wii U's first three weeks in Japan (in March 2014 and December 2012, respectively) revealed how quickly demand for the PS4 declined.
Sales of the PS4 fell 79% in its second week on the Japanese market -- a record low for Sony, compared to a 59% decline for the Wii U's second week, according to research firm Media Create. At the end of the third week, the PS4 sold 410,083 units, compared to the 557,901 Wii Us sold during the same period.
What happened to the PS4 in Japan, and what does this mean for the console's upcoming launch in China?
Why have Japanese gamers shunned the PS4?
Japanese gamers are clearly losing interest in Sony's consoles. Japan accounted for 19% of Sony's original PlayStation market, 15% of its PlayStation 2 market, and 12% of its PlayStation 3 market.
The enduring popularity of Nintendo's 3DS, which has sold 15.6 million units in Japan, reveals that the Japanese market favors portable games over home console ones. This also indicates that Sony's efforts to capture a Western audience with triple-A titles like Killzone and Infamous: Second Son aren't working on Japanese gamers.
Whereas many Western triple-A games try to awe gamers with movie-like special effects, Japanese game makers focus on making handheld games cute and addictive -- as seen with anime-style RPGs, puzzle games, party games, and "monster battle" titles like Nintendo's Pokemon and Capcom's Monster Hunter franchises -- two of the most popular IPs in the country. Simply put, the Western gaming market demands gritty realism, while the Japanese one demands saccharine cuteness.
More mature Japanese games like Square Enix's Final Fantasy and Capcom's Resident Evil resonate well with both audiences, but neither franchise has arrived on the PS4 yet. Final Fantasy XV is scheduled to arrive in March 2015, while the release date of Resident Evil 7 is still unknown.
On the bright side, Sony is faring better in North America, the largest video game market in the world. The PS4 has sold 3.5 million units in North America, compared to 0.57 million units in Japan, according to Vgchartz. The North American video game market accounted for 37% of the original PlayStation market and 34% of its PlayStation 2 and PlayStation 3 markets.
Will launching the PS4 in China offset poor sales in Japan?
However, decent sales in North America shouldn't undermine the importance of the Japanese gaming market. Although the Japanese market is a much smaller one for Sony, it represents a microcosm of the wider Asian gaming market, which also favors Japanese-style gaming over triple-A Western titles -- which could make or break its efforts in China.
Both Sony and Microsoft (NASDAQ:MSFT) recently announced plans to launch their new consoles in China, after the Chinese government lifted a 13-year ban on imported video games and consoles earlier this year.
Sony will launch the PS4 via a joint venture with Shanghai Oriental Pearl Culture Development (OPCD). Microsoft is entering the market through a similar joint venture with China's BesTV. Both Shanghai OPCD and BesTV are subsidiaries of Shanghai Media Group.
Four big problems for Sony in China
If Sony believes that expanding into China will offset the importance of its ailing Japanese market, it could be in for a rude awakening.
The Chinese gaming market is entirely dominated by a $13.5 billion market for online PC games. The PS4's current lineup of titles favors Western audiences, while sales of its Japanese titles -- which are more likely to succeed with Asian audiences -- have bombed. Widespread piracy has also turned the Chinese gaming market into one that relies on free-to-play titles with microtransactions instead of full-featured, easier-to-copy titles -- a market that more closely resembles the mobile gaming one than the console gaming one.
Consoles have also been available for a long time in China, despite the supposed ban on foreign consoles. Grey market stores have sold imported consoles for years -- so any sales boost from China has likely already been realized through sales from other regions.
Last but not least, Nintendo's cheaper "emerging market console," which it announced earlier this month, will take aim at China and other markets with a much lower price tag than the PS4 or Xbox One. That's a clever tactic considering that the average monthly minimum wage in China is between 1,010 yuan ($162) to 1,620 yuan ($260) -- which makes the Xbox One and PS4, which both cost $399, luxury items for younger citizens.
If Nintendo's console turns out to be a cheap handheld, and it can replicate its Japanese success in China with puzzle, platformer, RPG, and monster-collecting titles, it could be a much bigger hit than either the Xbox One or PS4.
The bottom line
Sony might not be terribly worried about the PS4's poor performance in Japan, since the shrinking Japanese market is waning in importance compared to the North American one.
However, Sony's weakness in Japan highlights key differences between the Asian and Western gaming markets and reveals the challenges Sony could face in the Chinese market. If Microsoft and Nintendo can exploit these weaknesses, the upcoming console battle in China could play out much differently than it has in North America, and Sony could squander its early lead in the eighth generation console wars.
Leo Sun 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.