In addition to the larger economic issues like piracy and pricing, a dozen small issues are at-play on the street level--the legacy of China’s grey market, for instance or the hunger for luxury goods. Any one could spell trouble for prospective contenders in the console market, but cracking the Chinese market’s code is too lucrative not to take the risk.
Shanghai Free-Trade Zone: A Big Chip in the Economic Game
China loosening its laws on foreign consoles is actually part of a larger economic project called the Shanghai Free-Trade Zone (“Shanghai FTZ”), and it has consequences and opportunities far beyond video games.
The Shanghai FTZ is an eleven square mile section of the city with liberalized economic and financial policies aimed to attract foreign investment. Foreign companies with branches in the FTZ can invest in a wider range of industries than are currently allowed, take advantage of liberalized interest rates, and manufacture products they previously couldn’t import into the Chinese market. The PRC is particularly eager to woo financial firms and banks, hoping that foreign firms and looser monetary regulations can make the Chinese renminbi (also known as the yuan) easier to trade across borders--and ultimately establish it as a reserve currency rivaling the U.S. dollar.
What’s particularly exciting about the Shanghai FTZ is what it reveals about the government’s economic plans. Historically, efforts like the FTZ are how the Chinese government experiments with economic liberalization. During the 1980s and 1990s, it created similar areas of the country called Special Economic Zones, mostly aimed at high-tech manufacturing. When these programs proved successful the government rolled them out nation-wide as economic reforms. This means that, should the Shanghai FTZ work as intended, its looser monetary and financial regulations may usher in a new economic frontier for the whole country.
This relates to consoles because there’s one major caveat in ending the ban: for a foreign game console to be sold legally in China, it has to be manufactured in the Shanghai FTZ. What this indicates for future game policy is anyone’s guess, but it suggests the PRC is interested in foreign tech investment and establishing a consumer economy within the country. China’s growth has been so explosive lately that the government has worried about a hard slowdown for years (harder than the one already happening, that is), but a consumer market would sustain steady growth without pushing them into bubble territory.
But the immediate benefit for China is clear. Foreign companies have to use Chinese workers during the manufacturing process, creating jobs. They’re required to partner with Chinese firms during distribution, ensuring Chinese companies get a slice of every sale. And of course, Chinese companies get unofficial access to intellectual property – a goal China aggressively pursues both governmentally and in the business sphere.
The Legacy of the Grey Market
China has large retail chains like Toys “R” Us and Suning Appliance, but these heavyweights don’t monopolize the game market as they do in western countries. In addition to the large shops, Chinese gamers can also get consoles and games from a swarm of small independent shops and “electronics malls." Picture an indoor storage facility where a miniature store sits behind every roll door. This retail environment arose and flourished directly as a result of the console ban.
Well before Xbox One went on sale in China, you could already buy one. PlayStation 4s and Nintendo Wii Us are also available, even though they’ve technically never been released at all. The reason for this boils down to a loophole in the country’s game policy: because Hong Kong has a separate legal system, video game consoles were never illegal there. The combination of geographical proximity and easily attainable contraband led to what’s called the “grey market,” an arrangement where illegal imports flowed from Hong Kong to mainland China, where shopkeepers sold them openly. Police and customs officials had more important things to do than seize video games, and generally turned a blind eye.
This created a wilder sales environment than most console makers are used to, especially since most shops that flourished during the ban offer pirated games and DRM-circumventing mods. Dealing with, and policing, that kind of environment will prove particularly difficult for anyone entering the market. It’s a hydra of small players, so once you stamp out one small shop, two will grow in its place.
Censorship
Every foreign game released in China must pass an arduous government inspection process to make sure it doesn’t contain banned content. The problem, of course, is that the government’s list is so long that a broad interpretation would disallow almost anything, while a narrow interpretation would allow most through. It disallows, for instance, any game that “promotes or incites obscenity, drug use, violence, or gambling” or promotes “cults and superstitions.”
However, the new FTZ laws streamlined the certification process, which may simplify matters for everyone involved. Now rather than the national Ministry of Culture, the local Shanghai government culture department will perform the reviews, games will be accepted or rejected within twenty days with clear reasons provided, and resubmissions will be accepted. That’s far less difficult than the old system, which involved several government agencies which were not always known to agree. Back in 2009, for example, two government departments had an ugly public feud over who got to administer MMOs. Meanwhile World of Warcraft: The Burning Crusade was caught in the middle, and subsequently had its approval held up for four months.
But there are also indications that some of the content standards may be relaxing. Captain America: The Winter Soldier was a massive hit in the People’s Republic, despite having a plot that argued patriotism is not the same thing as supporting the government--a fairly subversive message that wasn’t lost on local moviegoers. Media censors also permitted several award-winning Chinese films last year despite themes like prostitution and government corruption that usually would’ve put them on the ban list.
Another prime reason that foreign films and games are getting by the censors more nowadays is simply that studios have realized that releasing in China is in their best interest, and it’s therefore better not to tangle with the authorities. This is why Transformers 4: Age of Extinction (a Chinese co-production) portrayed all its Chinese officials as hyper-competent and honest, and Homefront cast North Korea--not China--as the invading enemy, despite the scenario being geopolitically absurd. All this paints a picture of a censorship system that, while still restrictive, is evolving to match the global media market.
China’s Lagging Internet
When Microsoft announced that the Xbox One would be an always-online console there was a lot of thought for soldiers and people in rural communities, but not much for the non-western world.
Though Microsoft has since backed off on that stance, it’s no secret that many next-gen games require fairly robust internet access--Imagine Titanfall with a slow connection--and there’s a real question whether the country’s internet speeds can make the grade.
China’s internet partially owes its sluggishness to the Great Firewall, the network of internet blocking tools that cuts off any site the government deems a threat, from Facebook to Google. Unfortunately, it also slows the network considerably, which could have dire consequences for consoles that offload their computing power to the cloud, even during single-player games. This slow internet speed, and the fact that Chinese gamers couldn’t connect to Xbox Live or PSN with grey market consoles without routing through Hong Kong, has meant that online multiplayer isn’t something most Chinese players have experienced outside the PC. But legal consoles and dedicated servers wouldn’t be sufficient if the basic internet speed isn’t fast enough.
However, this issue seems to be on the mend. According to a report by China Cache, the country’s internet speeds jumped 33% last year, with Shanghai’s connectivity averaging 5.4 Mb/s and the average speed clocking in at around 3.45 Mb/s. That still puts China well behind the blazing-fast networks of their neighbor South Korea (22.1 Mb/s on average in Q3 2013) but the PRC is also launching an aggressive campaign to bring 20 Mb/s speeds to major cities by 2015.
Adapting to the Market
While popular knowledge suggests that $600 is far too steep a price for the Chinese market, there are other factors that may work in Microsoft’s favor. The rising middle class has shown an almost insatiable hunger for luxury goods, particularly electronics. Each new iPhone launch spurs lines out the door, and not everyone standing there are part of the nouveau riche.
This behavior isn’t mere gadget, but a shrewd purchase that people save toward. Chinese buy these goods to raise their social status, meaning that even people who make as little as $24,000 a year will purchase iPhones, Gucci handbags and designer clothing. Displaying these objects bring real social benefits, from landing a higher-profile job to marrying a richer spouse (in Beijing, people joke that BMW stands for “Be My Wife”). While an Xbox One may not fulfill the same social function as an iPad or laptop because it’s not visible in public, next-gen share features could go a ways toward fulfilling the attention-getting role. It’s likely that Microsoft and Sony have plans to integrate consoles into the local social networks like Sina Weibo--a sort of Twitter/Facebook hybrid for a country that has neither--the same way they stressed “share” features in the U.S. market.
Another strategy would be to try and push next-gen as part of the eSports scene. This area is a growing sector in Asia, and while everyone currently thinks of South Korea as the capital of electronic gladiatorial warfare, Major League Gaming is currently building a dedicated eSports arena on Hengqin Island just outside Macau. The arena would be the centerpiece of “V-Zone,” a destination complex entirely devoted to video game tourism. If the new consoles can embed themselves into this scene, it could give them a significant boost.
And of course, there’s also the possibility that firms my retool their products drastically to the Chinese market. While Xbox One only launched in China with ten games available, that doesn’t mean Microsoft won’t partner with local studios to produce downloadable or F2P titles that are more familiar to Chinese consumers. After all, with this generation of hardware the biggest hurdle is actually releasing the console, since companies can always add downloads to the marketplace later. Nintendo seems headed in this direction as well, since it has talked about creating a console specific to the Chinese market. Sony has plans for a factory in the Shanghai FTZ, and while it is releasing the PS4, it may also push the PlayStation TV as a lower-cost option in the cost conscious market.
The caveat, of course, is that PCs and smartphone games have had a long time to entrench themselves in the market. Ultimately while the big three eye each other, their most formidable competition isn’t a console at all.
