If consoles can't crack China, their future is limited

The launch of Sony's PS4 and Microsoft's Xbox One consoles in China hasn't attracted much fanfare, perhaps because both firms were aware from the outset of what an uphill struggle this would be, and how much potential for disappointment there was if expectations were set too high. Last week saw the first stab at estimating figures, from market intelligence firm Niko Partners, who reckon that the two platforms combined will sell a little over half a million units this year; not bad, but a tiny drop in the ocean that is China's market for videogames.

These are not confirmed sales figures, it's important to note; market intelligence firms essentially make educated guesses, and some of those guesses are a damn sight more educated than others, so treating anything they publish as hard data is ill-advisable. Nonetheless, the basic conclusion of Niko Partners' report is straightforward and seems to have invited no argument; the newly launched game consoles are making little impact on the Chinese market.

There are lots of reasons why this is happening. For a start, far from being starved of a much desired product, the limited pre-existing market for game consoles in China is actually somewhat saturated; the country is host to a thriving grey import market for systems from Hong Kong, Taiwan and Japan. This market hasn't gone away with the official launch of the consoles, not least because the software made officially available in China is extremely limited. Anyone interested in console gaming will be importing games on the grey market anyway, which makes it more likely that they'll acquire their console through the same means.

"China is the largest marketplace in the world, with a fast-growing middle class whose appetite for luxury electronics is well-established... So yes, the failure of consoles to engage strongly in China would be a big deal"

Moreover, there's a big cultural difference to overcome. Game consoles are actually a pretty tough sell, especially to families, in countries where they're not already well-established. Their continued strength in western markets is largely down to the present generation of parents being accustomed to game consoles in the home; cast your mind back to the 1980s and 1990s in those markets, though, and you may recall that rather a lot of parents were suspicious of game consoles not just because of tabloid fury over violent content, but because these machines were essentially computers shorn of all "educational" value. I didn't own a console until I bought a PlayStation, because my parents - otherwise very keen for us to use and learn about computers, resulting in a parade of devices marching through the house, starting from the Amstrad CPC and ending up with a Gateway 2000 PC in which I surreptitiously installed a Voodoo 3D graphics board - wouldn't countenance having a SNES in the house. That's precisely the situation consoles in China now face with much of their target audience; a situation amplified even further by the extremely high-pressure nature of Chinese secondary education, which probably makes parents even more reluctant than mine when it comes to installing potentially time-sucking entertainment devices in their homes.

Besides; Chinese people, teens and adults alike, already play lots of games. PC games are enormously popular there; mobile games are absolutely huge. This isn't virgin territory for videogames, it's an extremely developed, high-value, complex market, and an expensive new piece of hardware needs to justify its existence in very compelling terms. Not least due to local content restrictions, neither PS4 nor Xbox One is doing that, nor are they particularly likely to do so in the future; the sheer amount of content and momentum that would be needed to make an impression upon such a mature landscape is likely to be beyond the scope of all but a truly herculean effort at local engagement and local development by either company - not just with games, but also with a unique local range of services and products beyond gaming - and neither is truly in a position to make that effort. It's altogether more likely that both Sony and Microsoft will simply sell into China to satisfy pre-existing local demand as much as possible, without creating or fulfilling any expectations higher than that.

Is this important? Well, it's important in so much as China is the largest marketplace in the world, with a fast-growing middle class whose appetite for luxury electronics is well-established. Apple makes increasingly large swathes of its revenue in China; companies with high-end gaming hardware would like to do something similar, were the barriers to success not raised so high. Without building a market in China, the global growth potential of the console business is fairly severely limited - the established rich nations in which consoles are presently successful have a pretty high rate of market penetration as it is, and growing sales there is only going to get tougher as birth-rates fall off (a major factor in Japan already, but most European and North American states are within spitting distance of the Japanese figures, which is worth bearing in mind next time someone shares some moronic clickbait about sexless Japan on your Facebook feed). So yes, the failure of consoles to engage strongly in China would be a big deal.

The deal looks even bigger, though, if you view China as something of a bellwether. It's a unique country in many regards - regulations, media environment, culture, sheer scale - but in other regards, it's on a developmental track that's not so different from many other nations who are also seeing the rise of an increasingly monied urban middle class. If the primary difficulty in China is regulations and content restrictions, then perhaps Sony and Microsoft will find more luck in Brazil, in India, in Indonesia, in the Philippines and in the many other nations whose rapid development is creating larger and larger audiences with disposable income for entertainment. In that case, China may be the outlier, the one nation where special conditions deny consoles a chance at market success.

If the problem with China is more fundamental, though, it spells trouble on the road. If the issue is that developing nations are adopting other gaming platforms and systems long before consoles become viable for launch there, creating a huge degree of inertia which no console firm has the financial or cultural clout to overcome, then the chances are that consoles are never going to take root in any significant degree in the new middle class economies of the world. Games will be there, of course; mobile games, PC games, games on devices that haven't even been invented yet (though honestly, Niko Partners' tip of SmartTV games as a growth market is one that I simply can't view from any angle that doesn't demand instant incredulity; still, who knows?). Consoles, though, would then find themselves restricted geographically to the markets in which they already hold sway, which creates a really big limit on future growth.

"You can't spend vastly more money making something unless your audience either gets bigger, or more willing to pay, and there's little evidence of either of those things in the console world right now"

That's not the end of the world. The wealthy nations which consume consoles right now aren't likely to go anywhere overnight, and the chances are that they'll continue to sustain a console audience of many tens of millions - perhaps well over 100 million - for years if not decades to come. Moreover, the future of games is inevitably more fragmented than its present; different cultures, different contexts and different tastes will mean that it will be a truly rare game which is played and enjoyed to a large degree in all quadrants of the globe. There'll still be a market for a game which "just" does great business in North America, Europe and so on; but it'll be an increasingly small part of an ever-growing market, and its own potential for growth will be minimal. That, in the end, is a fairly hard cap on console development costs - you can't spend vastly more money making something unless your audience either gets bigger, or more willing to pay, and there's little evidence of either of those things in the console world right now.

The real figures from China, if and when they're finally announced, will be interesting to see - but it's unlikely that Niko Partners' projections are terribly far from the truth. Whether any console company truly decides to put their weight behind a push in China, or in another developing country, over the coming years may be a deciding factor in the role consoles will play in the future of the industry as a whole.