Microsoft's Xbox Will Face Fresh Challenges in China

It’s now official: Microsoft will begin selling the Xbox One in China later this year. The move presents a sort of mirror image of the challenge Microsoft faces in the U.S., where it has been working to convince gamers not to abandon consoles. In China, where the devices have been banned for over a decade, Microsoft will have to convince people to start buying them in the first place. To do so, the Chinese Xbox will have to be significantly different than the American model.

Microsoft has been eyeing China since the country lifted its ban on gaming consoles late last year. In September the Xbox maker formed a $79 million partnership with BesTV, a local entertainment company. It’s clear why Microsoft is interested: About 500 million Chinese people play video games, and the industry produced about $13 billion in revenue last year.

Like many Western companies trying to get into China, Microsoft will face a problem on price. The company hasn’t said how much it will charge for its game console there, but the Xbox One was priced at a premium in the U.S. In China, where per capita income is about $6,000, this could pose a more serious barrier. The devices will seem even more expensive when compared to black-market consoles already for sale throughout China. “It’s not like there’s no incumbency,” says Joost van Dreunen, chief executive of gaming analytics firm SuperData. “There is a market they’ll have to compete with.”

Microsoft will also face a challenge in adapting the Xbox to the local game market. About 80 percent of video-game revenue in China is generated from games played on PCs. Such games are fundamentally different from console games, both in terms of how they’re played and how they make money. Major developers for Xbox in the U.S. are used to selling games on discs for about $60, whereas in China the market has developed much more around online games that eschew large upfront charges in favor of smaller, periodic payments. This is a response both to the Chinese economy, in which consumers have less money, and to the prevalence of piracy. If your business is based on selling discs, you are very vulnerable to competitors who can counterfeit them.

“Usually the hackers always win, but where the hackers don’t win is server-based games,” says Adam Lang, Shanghai studio manager for Crytek, which makes games for consoles, PCs, and mobile devices. The company recently released a free online version of its game Warface for Xbox 360, but Lang says it will be tough for Microsoft to make a broader shift in this direction. “From what I know, they’re trying to take their Western console business and relocate it to China,” he says. “How does a company like Microsoft move away from retail?”

Still, Microsoft could have an easier time doing this in China than it would in the U.S. because it will probably be starting from scratch. Few American game studios are active in the country. Western games won’t necessarily translate to a Chinese audience, and even if they do, the Chinese government has to approve games before they can go on sale. The restrictions exist ostensibly to protect Chinese citizens from inappropriate content, but Lang says they have been an effective protectionist tool.

In any case, censorship is likely to leave Microsoft without a major part of the Xbox’s appeal: its catalog of titles. “I get the sense that a lot of games today on consoles would simply not qualify, based on those restrictions,” says Brian Blau, an analyst at Gartner.

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