

Chinese buyers are getting their first chance at playing a (legal video-game console in 14 years. Courtesy: Microsoft.)

It has been 14 years since China officially banned console video games, worrying the living-room boxes would dumb down or deprave the brains of Chinese youth. But this week, after the government relaxed its restrictions, Microsoft scored the first major game debut in one of the world's biggest gaming economies, launching its new Xbox One in 37 Chinese cities and 4,000 retail sites.

It was a coup for the Redmond-based tech giant, which is struggling in its gaming sales battle against Sony’s PlayStation 4 and Nintendo's Wii U, and "a significant milestone for us and for the industry," said Yusuf Mehdi, the company's chief Xbox marketing and strategy officer.

But to succeed, Microsoft will have to not just win over a new generation of gamers but navigate unpredictable Chinese regulators, outwit its installed rivals, and prove to buyers that China's cheap, accessible gray market is less appetizing than the real thing.

China had 490 million video-game players at the start of this year, a Chinese state gaming-industry group said, and is predicted to overtake the U.S. as the world's biggest video-game market by 2016, generating more than $25 billion a year in revenue, according to game-industry researcher Newzoo. But since China's Ministry of Culture banned consoles in 2000, its gamers have grown up playing mostly on cellphones, computers, pirated consoles and black-market knockoffs, such as the Mini Poly Station 2004 and the Chintendo Vii.



China is expected to overtake the U.S. as the world's biggest video-game market in 2016. Courtesy: Newzoo.

China's gaming culture has been dominated by free-to-play, online multiplayer games, which analysts say share little in common with Western game studios' higher production value, action movie-style blockbusters. The Xbox's flagship franchise, "Halo," is a decidedly Western shooter, in which a gravel-voiced supersoldier blasts his way to freedom through an oppressive alien alliance.

That franchise and some of the Xbox One's biggest expected hits, including "Destiny" and "Call of Duty: Advanced Warfare," will be blocked by the Chinese government’s censorship restrictions, analysts said. Chinese ministries have long blocked games with political themes and realistic violence, leading to some strange substitutions: Video-game blood that looks black or purple, instead of red, and skeletons replaced by tombstones or bags of sand.

"Content regulation has been the primary barrier to success for all foreign game companies, for all platforms," said Lisa Cosmas Hanson, a managing partner with Niko Partners, which researches China's video game industry. "The big wait-and-see factor is which games will make it to market."

The Xbox One launched with 10 games, nearly all of them devoted to racing, sports, dancing or zoo management. About 70 more are in the pipeline. The sole Chinese exclusive so far is "Naughty Kitties," a game that premiered first on iPhones, in which the player controls cats repelling invaders of a spaceship with cartoonish weaponry.

Microsoft will also have to contend with a number of specific rules that could hamper their launch, including that every game receive government approval. The consoles will also have to be made in China, meaning Microsoft had to shift some of its manufacturing into a free-trade zone in the megacity of Shanghai, where it is working with a company controlled by the Chinese government, BesTV New Media.

"Opening up the market for official console sales means officially agreeing to regulations set by the Chinese government," said Peter Warman, the chief executive of game researcher Newzoo. "That could turn out to be more of a problem than an opportunity."

The biggest challenge for establishing a newly official gaming industry, analysts said, could be China's sprawling gray market of illegal gaming. Warman expects 100 million Chinese gamers have played or already play console games via hacked, "homemade" computers. Millions have downloaded the biggest budget triple-A games, which local amateurs have copied and localized, from easy-to-find websites.

"Many consumers in China have been trained that the value of intellectual property is very low. Instead of a Blu-ray for $20, you can get a disc that has 5 movies on it for a dollar," said P.J. McNealy, a founder and analyst of Digital World Research. "If you're Nintendo or Microsoft or Sony, the challenge to compete against free is brutal."



A screenshot of one of the free console-game download sites popular in China. Courtesy: Newzoo.

The selling point for official games will be that buyers can play them with other gamers on the firms' official networks, said Hanson of Niko Partners. They'll include more professional translations and come with better customer service if something goes wrong.

But analysts said that will still be a tough sell given the price of hardware. The newest version of Xbox One is selling for $700 (4,299 yuan), about $200 more than the same model in the United States. Buyers can also visit China's biggest online marketplaces to buy an Xbox One -- some that have been smuggled into the country -- for about $550.

"There are enough Chinese consumers that have the budget and love to show off new devices," he said, "but it is a big step from a $100 'homemade' Xbox with unlimited free games to a $500 Xbox with paid games."

Though strict regulations and widespread counterfeiting once scared many businesses away, China's booming middle class has made the country an irresistible stop for international technology launches. Apple recently received approval to offer its new iPhone 6 in China, the largest smartphone market in the world, and will sell them on Oct. 16 starting at about $860 (5,288 renminbi).

For Microsoft, analysts said, the debut is important to far more than just the fate of its video games. A successful launch there could persuade Chinese buyers to pick up its phones, tablets and software, too, further establishing its lucrative ecosystem in the most populous country on Earth.

"This is the art of the long view when it comes to a big launch," McNealy said. "This isn't simply about the next three months. This is about the next five, six years."