Console makers seen playing a losing game in China
With mainland games fans spoilt by piracy, the lifting of a ban on consoles is unlikely to make winners of the industry big names that have been shut out of the action
For the past five years, Zhang Yang has sold Xboxes, Wiis and PlayStations at his Beijing shop, but the merchant is a thorn in the side of video game console makers now allowed into the world's third-biggest market.
The consoles that Zhang sells are smuggled into the mainland because they are illegal, although that may change after the government lifted a 14-year-old ban on the devices this week.
But most have been modified, or "cracked", to play pirated games that can sell for less than 10 yuan (HK$12.60) compared with US$60 for the latest licensed titles.
The proliferation of these bootlegged games, along with the mainland's reputation for weak intellectual property rights, means console makers Microsoft, Sony Corp and Nintendo will lose out on lucrative royalties from software sales.
Combine that with the fact that most Chinese gamers prefer to play free games on their PCs and mobiles anyway, and the decision to lift the ban on console sales presents a challenge, rather than a big opportunity.
"Console vendors will need to incorporate a business model for a piracy-rich environment," said Lisa Hanson, a US-based managing director at Niko Partners, a research firm focused on the Asian games market.
"They need to understand who the gamers are, what they demand, what are they not getting out of the current PC game experience that they could from a console game."
The mainland banned video game consoles in 2000, citing the games' negative effect on the mental health of its youth. That has resulted in a whole generation growing up without a PlayStation, Wii or Xbox and fuelled the popularity of alternative ways to play.
The absence of consoles means PC games dominate two-thirds of China's video game market, which saw revenue growth of almost 40 per cent last year and which trails the United States and Japan in size. Mobile and browser games are also extremely popular, in line with a global trend that has seen the console market shrinking.
To get around losing revenues to rampant piracy, video game providers on the mainland offer a free-to-play, or "freemium" business model, where players get games for nothing but are offered to buy in-game items such as weapons and extra lives.
"It's a business model China basically championed and invented and it basically eradicated the risk of piracy: just give away everything but if you want to do well you got to pay," said David Gibson, senior research analyst of games and IT at Macquarie Securities in Tokyo.
Console makers, however, operate differently and that makes piracy an even bigger concern. Sony, Nintendo and Microsoft all declined to give details about how they would tackle video game piracy in China.
Sony PlayStations, however, have better security than their competitors and are more difficult to modify for pirated games.
Companies get, on average, a 30 per cent cut from game developers, industry analysts say. Software, services and royalties accounted for about 40 per cent of the sales revenue of both Nintendo and Sony's video games division in the 2012 financial year, the companies' financial statements shows.
Microsoft does not break down its Xbox revenues, but said it generates money from its Xbox Live, which allows online multi-player gaming, as well as games sales.
The consoles themselves make little profit. Sony and Microsoft sold their older PlayStation 3 and Xbox 360 models at cost price for years, and firms only cut down costs later in a console's life cycle to bring down the price.
When asked about China, Nintendo's public relations manager, Yasuhiro Minagawa, said the company had no plans to enter the market now.
Sony also sounded a note of caution. "We do recognise that China is a promising market, and we will continue to study the possibility," spokesman Satoshi Nakajima said.
Beijing is cracking down on piracy, but counterfeiting of everything from luxury goods to software remains rife.
The mainland's illegal software market was worth nearly US$9 billion in 2011. In the same year, 77 per cent of personal computers on the mainland had pirated software installed, according to a May 2012 report by the Business Software Alliance, a trade group that monitors intellectual property rights infringement.
Microsoft has battled Chinese software piracy for years. In 2012, state media reported Microsoft had lodged an official complaint against a number of large government-owned corporations, saying as much as nine out of 10 of their Windows service client software was unlicensed.
The lifting of the games console ban should not affect Zhang's business, said the Beijing game merchant, adding that he barely gets any customers anyway.
"We don't have very big profits, so the business isn't too successful," said Zhang, playing a game at his stall in the starkly lit basement of tech mall Bainaohui. "It's my passion, not my most important business."