China Lifting Its Gaming Consoles Ban Is Huge for Microsoft and Sony

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When the Chinese government banned the sale of video game consoles in 2000, Microsoft’s (MSFT) original Xbox wasn’t even on store shelves yet. Fifteen years and three Xbox generations later, that ban is being lifted.

Playstation 4 leader
Source: Sony

Now Microsoft, as well as Sony (SNE) and Nintendo (NTDOY), suddenly have a huge new market to fight over, as video games are big business in China in spite of its past console drought.

We’ve seen what China has done for Apple’s (AAPL) bottom line: In just a few years, the country has gone from an afterthought to becoming Apple’s second largest market, even surpassing the U.S. in iPhone sales.

And NetEase (NTES) and Tencent (TCEHY) have taken advantage of the rising demographic of tech-hungry middle-class consumers for years now.

The China effect has the potential to seriously boost sales of all three major consoles: Xbox One, PlayStation 4 and Wii U.

According to figures published by video game research firm Newzoo, the U.S. video game industry was worth just over $21 billion in 2014. The country that placed second when it came to spending money on video games?

China.

China’s gaming market is pegged at $22 billion this year (23% growth over the previous year), and such market opportunity is nothing to sneeze at.

In 2014, China softened its ban on gaming consoles by allowing limited sales on devices manufactured within the tiny Shanghai Free Trade Zone, pending government inspections, of course. This made the prospect of the Chinese market less than appealing for the big three console makers. So for many Chinese gamers, the black market remained the primary way to buy an Xbox, PlayStation or Wii.

Microsoft made the leap to China last September, and Sony began selling the PS4 as well, but under the restrictions, sales of gaming consoles in China remained disappointing. Research firm Niko Partners was predicting combined Chinese sales of the Xbox One and PS4 of just 550,000 units in 2015 under the terms of the limited ban.

The complete elimination of the China gaming consoles ban changes the equation significantly.

Now that Microsoft, Sony and Nintendo no longer need to open new manufacturing facilities, or submit to government inspections and regulations, the world’s second biggest market for video games is completely open for business.

A Sony spokesperson was quoted in The Wall Street Journal as saying “This is great news for us.

No kidding.

The PlayStation 4 is already part of Sony’s turnaround plan, and a market like China’s is obviously a huge win for Sony to continue growing its already incredible PS4 sales.

Nintendo, however, remained ambivalent toward the idea of manufacturing gaming consoles specifically for China under the country’s partial lifting of the ban in 2014. But the Wii U is struggling, and the prospect of cracking an untapped market nearly as big as America’s should have any reasonable company reconsidering.

The Xbox One is nowhere near as critical to Microsoft’s success as the PS4 and Wii U are to Sony and Nintendo, respectively; but the prospect of millions of gamers who never had the chance to (legally) buy an Xbox One could prove an unexpected bonus for MSFT’s entertainment & devices division, and subsequently to Microsoft’s bottom line.

While China continues to have much lower per capita gross domestic product than the U.S. — $8k versus $52k in 2015 — its massive population consumed over $13 billion of pricey Apple gear last quarter, accounting for a quarter of the Apple’s total revenue.

In other words, the cost of gaming consoles aren’t likely to prevent determined Chinese consumers from buying them, despite their lower purchasing power.

That doesn’t mean the sales of video game consoles in China will be an immediate slam dunk. There are still issues around the import of violent video games that must pass regulatory scrutiny. Having been shut out of the country for a decade and a half, the manufacturers lack distribution facilities and sales channels. Then there’s the lead that PC and mobile gaming have built up, in the absence of consoles.

Still, the news that the Xbox One, PlayStation 4 and Wii U gaming consoles can now be legally sold in China without restrictions is good for the manufacturers.

Now it’s up to Microsoft, Sony and Nintendo to take advantage of the opportunity.

Game on!

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.


Article printed from InvestorPlace Media, https://investorplace.com/2015/07/gaming-consoles-china-ban/.

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