China Lifts Ban on Video Game Consoles

by Adam Benjamin | September 27, 2013 3:19 pm

If China is the holy grail of growth potential, then Nintendo (NTDOY[1]), Microsoft (MSFT[2]) and Sony (SNE[3]) just hit the jackpot.

Mere days after reports that China would lift a ban on social media sites like Facebook (FB[4]) and Twitter, the country also announced that companies would be allowed to sell video game consoles, provided they have a sales and production presence in China’s newly established Shanghai Free Trade Zone.

Game consoles had been banned for more than a decade amid concerns that video games could be harmful to China’s youth.

China did not say when console sales will resume, but Microsoft and Sony must be celebrating the announcement, which comes less than two months before the release of the Xbox One and PlayStation 4. Unless this is drawn out several years (and it shouldn’t), those companies should eventually see a boost to sales soon after the ban is officially lifted. Given the size of the potential market, that upside could be significant.

But the real lottery winner here could be struggling Nintendo. The lifted ban means a whole new market for its Wii U system, which has seriously lagged sales expectations. Not that there’s any guarantee that Chinese consumers will be any more impressed with the Wii U than the rest of the world has been, but it’s a glimmer of hope for the beaten-down gaming giant.

The Wii U launched a full year before the next-generation Xbox and PlayStation consoles, yet has only sold roughly 3.5 million units[5] in its first nine months. By comparison, the Xbox 360, which also launched ahead of its competition, sold 5 million[6] units in its first three quarters. So if Nintendo can even scratch the surface of China’s 1.6 billion potential customers, the console would take on a second life.

Investors shouldn’t rush to play a huge video game resurgence in these console makers, however. MSFT and SNE are huge, diversified businesses, for whom video game revenue is just one of many components. And besides, we also don’t know how soon the ban will be lifted. It could be months before any of those companies see revenues from China.

Plus, quite frankly, we have no idea how interested Chinese gamers will be in consoles. They haven’t been (legally) available since 2000, so it’s possible that there’s pent-up demand … but that has given consumer tastes plenty of time to adapt to computer and mobile gaming.

In short, the lifted ban presents some amount of opportunity, but the market is far from able to determine the size and scope of China’s actual console potential.

Adam Benjamin is an Assistant Editor of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. NTDOY: http://studio-5.financialcontent.com/investplace/quote?Symbol=NTDOY
  2. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  3. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  4. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  5. roughly 3.5 million units: http://www.ign.com/boards/threads/wii-u-sales-start-slowly-picking-up-%E2%98%86-wii-u-sales-update-9-%E2%98%85-now-even-longer-than-before-%E2%98%80-pikmin-3.453336361/
  6. 5 million: http://vgsales.wikia.com/wiki/Xbox_360#Xbox_360_sales_figures

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