China: Updated forecast for the Chinese games industry: mostly sunny with a high chance of clouds

Last Updated: 5 May 2015
Article by Mark Schaub and David Hong

China has loosened its ban on the sale of video game consoles and games to domestic consumers. Under new policies of the Shanghai Free Trade Zone, video game manufacturers will be allowed to produce both consoles and games for sale to Chinese consumers for the first time since 2000.

This relaxation of the ban does not mean that controversial games like Grand Theft Auto will be released in China anytime soon. New regulations were released on April 21, 2014 which described the approval process for video game manufacturers and also the categories of video game content that remains off limits.

As the Head of the Ministry of Culture recently stated, "We want to open the window a crack to get some fresh air, but we still need a screen to block the flies and mosquitoes." While this "screen" may block out many of the world's best-selling video games that contain violence and other controversial content, there is still plenty of reason for optimism on the part of video game manufacturers and fans alike.

  1. New regulations

On April 21, 2014, the Shanghai Municipal Administration of Culture, Radio, Film and TV (Administration) released the Rules for the Implementation of the Program for Opening up the Cultural Market in the China (Shanghai) Pilot Free Trade Zone (Rules). Highlights from the Rules include:

  1. Foreign companies may produce and sell video game consoles and games in China, provided they pass the content review process of the Administration. It should be noted that foreign companies are still required to partner with a Chinese company and operations must be located in the FTZ.
  2. The standard for content review will be Article 13 of the Entertainment Venue Management Law. Off limits video game content is broadly phrased and covers expected topics such as violations of China's constitution and threats to China's national unity, sovereignty, territorial integrity, reputation, security, or interests. Anything that instigates racial/ethnic/religious hatred (including promoting cults or superstitions). Content that promotes anti-social behavior such as obscenity, drug use, violence, or gambling.
  3. According to the Rules, the review and approval process should take 20 workdays. Games not approved will be returned with the reason for rejection clearly stated.
  4. Any material change to game content, including any new downloadable content, must be submitted for review and approval even if the parent game has already been approved.
  5. In-game text and instructions must be in simplified Chinese.

There are a number of reasons the Rules will be welcomed by video game makers, including that the application review will be conducted by the Shanghai Municipal Administration of Cultural, Radio, Film, and TV, and not the Ministry of Culture in Beijing. At least as a matter of perception, the Ministry of Culture is thought to be a stricter censor.

The process has been greatly streamlined from the previous 80-day process for online games. Furthermore, the undertaking to provide reasons for rejections should facilitate game makers re-jigging questionable content and resubmitting for approval.

The vague and expansive categories of restricted content that are contained in Article 13 of the Entertainment Venue Management Law, however, will likely complicate matters for many video game developers. Many of the most popular video games are "first-person shooters" which would be clearly seen as something promoting violence. Other listed prohibitions are sufficiently vague and unclear.

Game developers will need to wait and see some applications reviews before an opinion will be able to be formed as to how liberal or otherwise the authorities will be.

The requirement that games must be in simplified Chinese is not unexpected and, to be fair, mirrors broad consumer law requirements within China. The provision will prevent game makers from reselling games released for sale in Hong Kong or Taiwan without first making changes to the in-game text, but this issue is unlikely to be considered major.

  1. Gaming console giants enter Chinese market

Following the lifting of the ban on video game consoles and games, the three major console manufacturers (Microsoft, Sony, and Nintendo (the Big Three) have already announced plans or have expressed heavy interest in entering the Chinese market.

Microsoft appears set to become the first of the Big Three to launch in China. In late 2013, Microsoft entered into a $237 million joint venture with the Chinese company BesTV. The companies recently announced that the Xbox One will be released in China in September of this year.

While the Big Three undoubtedly see the nearly half a billion Chinese who play video games as a tremendous opportunity, it will be important for them to temper expectations due to existing competition from cheaper, popular alternatives in PC and mobile gaming and an existing black market for consoles.

Sony will likely be close behind Microsoft as the Japanese company announced on May 21 that it was forming two joint ventures with Shanghai Oriental Pearl. One of the joint ventures will be responsible for the console's hardware, while the other joint venture will focus on software.

While a Nintendo console release is not as imminent, Nintendo has stated that the company plans to expand into emerging markets with new devices starting next year and the company is currently studying regulations regarding market entry into China.

  1. Domestic challengers

The Big Three gaming console manufacturers are not the only ones trying to cash in on the new opportunities for video game consoles in China. Like many multinationals are finding to their chagrin, Chinese companies are moving from making products for others to making their own and often these products provider equivalent or better functionality at a much better price point. ZTE, the Chinese telecommunications equipment supplier, formed a joint venture with The9, a Chinese video game company, to release a new microconsole called the FunBox. The Android console, along with a controller, is selling for only RMB 698 ($112) which is significantly less than the $399 price tags for the Xbox One and PlayStation 4 in the United States.

Huawei has also announced plans to enter the video game market. The company recently unveiled its new console, the Tron, and intends to begin sales in China in the second quarter of this year. While the company has not finalized a price, Huawei believes the Tron will likely cost less than RMB 1,000 ($160).

Chinese electronics maker TCL is also planning its own video game console for the Chinese market, but a launch date and sale price have yet to be released.

While ZTE, Huawei, and TCL do not yet have the same global reputation for video gaming like Microsoft, Sony, or Nintendo, these domestic companies may prove to be very successful with more budget-minded consumers, especially those accustomed to the cheaper options of PC/mobile gaming and pirated consoles.

  1. To the cloud

As discussed in our February 2013 article 1 , the gaming industry appears to be advancing from traditional console-based systems to cloud-based systems and this evolution will likely occur even more rapidly in China. China already has a strong and growing cloud industry. According to the China Information Industry Net, the Chinese cloud market was worth USD $1 billion last year. Currently, Alibaba's Aliyun dominates much of the cloud market but foreign companies are seeking to establish a presence in the industry.

Microsoft officially launched Microsoft Azure this past March, making Microsoft the first foreign company to offer a public cloud service in China. During their trial period, the Azure platform accumulated over 3,000 customers, including several large Chinese businesses like Coca-Cola China and China Network Television.

Amazon has also been successful in luring Chinese companies to its cloud system, Amazon Web Services, during its limited preview for its new Beijing region. IBM has announced that it will join Microsoft and Amazon in this increasingly crowded market.

Sony's cloud-based gaming platform, PlayStation Now, will enter open beta testing for the PlayStation 4 on July 31. PlayStation Now allows users to stream older and current PlayStation games on a variety of devices.

Sony will test a number of different pricing models for this new service, including short-term rentals priced as low as $2.99 and long-term rentals ranging from $2.99-$19.99. Subscription models are also being considered and will likely be implemented in the future. Amazon has its own cloud-based system, Fire TV, which also allows users to stream games at an average price of $1.85. However, it is too early to tell if these models will be implemented (or if they will even work) in China.

While the potential for cloud-based gaming is significant, the technology is still largely unproven. Internet speeds have increased considerably over recent years which enable video game streaming, but video games that require fast reflexes may still be unplayable due to lag times from insufficient internet speeds. The potential for system outages also could create difficulties for gamers who are accustomed to the reliability of console and PC-based systems.

  1. Conclusion

All in all, the recent changes in regulations greatly improve the opportunity for video game companies to build their businesses in China. From first glance, some of the new regulations seem to place restrictions (i.e.content guidelines), but actually, such regulations are less in the manner of restrictions and are an indication that the Chinese authorities are building an infrastructure to deal with video games that are sold in China. Given its affordable pricing model and also the difficulties in pirating games, cloud based gaming is likely to be attractive to consumers and video game companies alike. However, success will largely depend upon how China's infrastructure will continue to meet demands for quicker, better access. Over time it seems a safe bet that cloud based gaming will have a very bright future in China.

Footnotes

1 Free Trade Zone has Silver Lining for Gaming Companies, see http://www.chinalawinsight.com/2014/02/articles/corporate/freetrade-zone-has-silver-lining-for-gaming-companies/

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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