It's official: following the end of a 13-year ban on video-game consoles in China, Microsoft Corporation's (NASDAQ:MSFT) Xbox One this week became the first gaming console available for pre-order in the country of more than 1 billion people.
In fact, because the original Xbox wasn't introduced until late 2001, this technically marks Microsoft's first direct foray into the Chinese video-game industry, which PricewaterhouseCoopers LLP estimates will generate at least $10 billion in sales next year.
Specifically, the orders are arriving through Beijing-based JD.com (NASDAQ:JD), which is initially allowing users of Tencent's (NASDAQOTH:TCEHY) WeChat and mobile QQ messaging software to reserve the Xbox One with a deposit of 499 yuan, or just under $81. That might not sound impressive at first, but it's a huge start, considering QQ and WeChat collectively boasted nearly 1.2 billion monthly active users as of the end of 2013. As for the Xbox One, Microsoft has previously stated that the consoles are expected to ship in September.
How did we get here?
To explain the ban, Chinese officials pointed to violent and otherwise questionable content as potentially fostering moral decay in China's youth. Even so, the ban did little to prevent immense growth in China's mobile, online, and PC gaming markets, considering the number of Chinese gamers easily surpassed 500 million earlier this year -- or more than the entire population of the United States.
So when China created a new free-trade zone in Shanghai last September with the intention of easing those restrictions -- and noting that the deregulation still required foreign companies to have domestic partners for their console sales -- Microsoft unsurprisingly jumped at the chance by quickly forming an Xbox One-centric joint venture with Shanghai Media Group subsidiary BesTV. Through that partnership, Microsoft and BesTV confirmed in April they have worked feverishly to ensure that the Xbox One would "be the first system of its kind to launch in China."
At the same time, it's also safe to expect Microsoft's primary competition won't be far behind; in May, Sony set up a similar joint venture with China's Shanghai Oriental Pearl Group to produce and market its PlayStation 4 consoles in the country. As it stands, however, Sony still hasn't confirmed a definite time frame for its entry into the China gaming console market.
Meanwhile, Nintendo recently opted for a different approach: rather than launching existing hardware in emerging markets including China, Nintendo is instead building a lower-cost console from the ground up "that most of the middle class can afford." That system could be ready for the mass market as early as next year.
Difficulties, opportunities remain
Keep in mind that today's news does come with a few big caveats.
First, note that China's Shanghai free-trade zone was originally instituted on an experimental basis, all with the aim of allowing businesses within its boundaries to operate without many of the previously strict regulations the government had employed. As a result, there are no long-term guarantees that the lifted ban on video-game consoles will stick.
In addition, the content on these systems will almost surely still be subject to some form of regulation. That said, Microsoft's collaboration with BesTV also involves an "innovation program" aimed at helping Chinese creators build, publish, and sell their games on the Xbox One platform. And that's not to mention any future game-derived partnerships with Tencent, which purchased a 15% stake in JD.com earlier this year and already boasts a significant presence in the online gaming market.
In the end, challenges or not, I can't blame Microsoft for diving head-first into the new China gaming console market -- especially given the sheer magnitude of this opportunity. After all, you can't win if you don't play.