- PS4 & XB1 legal console install base to hit 1 million in 2016
- Grey Market console install base to fall short of 2 million in 2016
- PS4 continues to be the console leader in China
- New Chinese consoles won’t have a huge impact in the market
- Console gaming to remain niche overall as mobile continues to grow
With more than 400 million gamers on Mobile and 130 million gamers on PC, 2016 is the year where China shows its dominance in the worldwide games market by surpassing the U.S. to become the undisputed number 1 games market in the world. The march has been led in recent years by mobile, which has seen explosive growth and is on track to generate upwards of $7 billion this year. Client/Web PC games have been around much longer and have solidified their popular position among core gamers in the country, now generating upwards of $12 billion each year. China’s game market is on track to see revenues of over $24 billion this year (according to Newzoo) thanks to Mobile & PC . The two different categories are set to continue growing into the future. The U.S. market has also seen explosive growth from mobile and PC. but unlike China, the country has a huge console playing population of more than 70 million (according to EEDAR) and generated over $7 billion in revenues from Console game software at retail and via digital download (according to NPD & DFC – CY2015). The number of PS4’s & XB1’s now installed in the US is over 26 million with the number increasing every month. This is a huge contrast to China where the amount generated from console/tv games in 2015 didn’t even hit $100 million and where the install base of PS4 & XB1 is considerably low, despite a huge gaming population.
Shanghai Oriental Pearl, the distributor of PS4 & XB1 in China announced at the end of 2015 that the install base of both consoles in the country had hit 500,000. Please note that the figure quoted here refers to legal console sales in the country via official channels. It’s impossible to know how many consoles have been imported into the country, but having looked at some data from Niko Partners, spoken to retailers and others in the industry, I’m confident enough to say that the grey market will have accounted for an additional 1.5 million unit sales leading to a total of 2 million PS4’s & XB1’s installed in the country. The number is considerably low for a country with hundreds of millions of gamers and a population of over 1.3 billion.
It all stems from the fact that consoles have been banned in China for the past 14 years. The only way to buy a console in the country prior to 2014 was through the grey market and many just didn’t bother. Instead it was Internet Cafe’s that drove gaming back when consoles were originally banned. Many who wanted to game either couldn’t afford a PC or weren’t allowed one by their parents and so would go to an Internet Cafe where they’d pay a small fee to play online games. This led to games like Warcraft becoming hugely popular and more recently it’s free games like League of Legends that have dominated in China. Mobile has led the more recent gaming revolution in China as smartphones have become increasingly affordable, widespread and replaced PC’s at their jobs. Users in China use smartphones for everything, from paying for goods, to watching live content, to games. The fact that smartphone games are free means that everyone can play and there are now 400 million gaming on smartphones in the country.
Consoles have faced numerous challenges in the country. The first is simple brand awareness. Whilst many will have heard of Sony, through electronic devices, and Microsoft, through Windows PC’s, the PlayStation and Xbox brands are still relatively unknown across the country. Censorship is imposed on foreign games which means that a lot of popular console games in the West, like Call of Duty and Grand Theft Auto, are banned on console in China due to going against Chinese cultural values. Whilst some games can edit out 1 or 2 scenes in order to get around the censor, a game like Grand Theft Auto would need to be rebuilt from the ground up and be a completely different game to be approved for sale in China. This has discouraged many publishers from taking the risk to publish their games in China and so far there are less than 100 official games available for PS4 & XB1 today due to this as well as due to the long approval process that console games have to go through. It can take months for a game released in the West to be localised and approved to go on sale in China.
The next challenge is actually getting consumers to buy the console. Gamers in China are used to paying a small fee to game on PC’s or nothing at all to game on smartphones. With console the idea is flipped on its head and consumers are suddenly being asked to pay upwards of $350 for a console and at least $30 for each full game. That rules out a large portion of the gaming population in China who either can’t afford, or don’t have the will to spend that much for just a few extra games, especially when there is so much choice on Mobile & PC. With a low install base, many foreign companies are also discouraged from publishing their games there, however both Sony and Microsoft have done well in order to bring some foreign games to the market.
There are also a number of social factors at play here, the fact that Chinese gamers prefer games made for them is an important point that can’t be ignored. It’s why games like Dynasty Warriors can do well on console whilst others based on Western history may not be as successful. Many indie developers and big publishers in China continue to publish games on Mobile and PC whilst ignoring console due to the small install base and lack of opportunity there. Traditional Chinese families still have a lot of negative stigma around gaming, hence why many youngsters game away from the living room on smartphones or at Internet cafes. Many families in China only have one TV and so a games console in these households wouldn’t make sense to older parents who would block the move. That negative stigma is starting to go away but it’s something to be aware of, especially among the emerging gamer category.
All these factors combined have meant that only a very core audience has adopted consoles today. Sony and Microsoft have tried to appeal to the family and mass market through various advertising campaigns but so far they haven’t been able to have any significant impact in that market. It all comes down to the fact that the living room gaming experience just isn’t convenient for most Chinese gamers and with no familiar games on the consoles it means that they’d much rather stick to what they know. Even local Chinese companies such as Tencent, Fuze and others who have launched Android Micro-consoles are unable to find success. These micro consoles may have the same games as mobile and PC and be familiar to Chinese users, they are also considerably cheaper than a PS4, but the demand for living room gaming just isn’t there and as such it’s the TV streaming functionality that gets used more on these boxes. In fact sales of Smart TV’s and dedicated streaming boxes are outpacing games consoles and micro games consoles in China quite significantly.
It was clear from the start that console gaming would be fairly niche and after two years it’s become fairly clear that console gaming in China will remain niche. I don’t see there being a catalyst that will suddenly spike sales. But with continued promotion from Sony and Microsoft, lower cost to entry, more AAA games from Western + Japanese publishers, the introduction of more local Chinese games that take advantage of both paid and F2P models, as well as positioning the devices as home media entertainment systems for the family, Sony and Microsoft can see their games business in China grow gradually to end the generation in a good position.
Local Chinese consoles are also set to remain pretty niche. Fuze recently released their Tomahawk F1 which targets the mid core gamer. The Android console manufacturer has partnered with many AAA/AA and Indie developers in order to bring games like Saints Row 4, Dynasty Warriors and Hawken to their console in an attempt to attract Chinese gamers who want great game experiences at a low cost to entry. Whilst the concept is good on paper, Fuze are entering a market where most still do not want to pay upfront for a console and would rather only play games that appeal to them , that are found on Mobile and PC. So whilst I do expect this to have a niche level of success, this won’t have any impact on mainstream gaming in China. Tencent recently announced their TGP box in China. It’s effectively a Steam Box that runs both Windows 10 and Tencent’s Gaming Platform. However the cost of the console is not only ridiculously high, it’s also a product that already exists today with any custom built PC with the Tencent Games Platform downloaded to it. So far the console only has around 250 pre orders and this is another failed Chinese console in my opinion. It’s highly unlikely that it’ll find success and I’m not that bullish that the TV Gaming side of the console market in China will find success. Even with Fuze trying to capture the middle ground, I still believe that it’s Sony and Microsoft that will do best in China, but even then the level of success won’t be anything to shout about.
The potential for console sales growth in China hasn’t been very high this year, only a few new titles have released for PS4 & XB1, and whilst gamers can import from overseas, the majority of core gamers in China likely already own a PS4 or XB1. With a current install base of 500,000 legal PS4’s & XB1’s, I expect the total install base to double this year as more games release for the console later in the year. Final Fantasy XV is set to have a simultaneous worldwide launch in September, even in China, and this should do well in China due to the nostalgia factor there. I believe this, as well as the slew of games due to be announced at China Joy will play a strong role in maintaining PS4 & XB1 sales in the country. I’m expecting the number of PS4 & XB1 grey imports to decline this year as legal console sales finally take the lead. Grey Imports were at their highest in 2014, before the official launches of PS4 & Xbox One in China.
The current estimate of 500,000 legal console sales in 2016 and 400,000 imported console sales would take the total install base of legal consoles to around 1 million and the total install base for imported consoles to just under 2 million. The total console install base of PS4 & XB1 in China would therefore be somewhere just below 3 million by the end of 2016. New hardware due to launch from both companies should provide a boost to the install base of both in 2017 and as long as they continue to promote their products there then the overall install base of both consoles should hit 5 million (Legal & Grey Market) before the end of 2018. From what I’ve seen, legal software sales have been low in the country with the attach rate still under 4 games per console. It looks like many are still importing games from outside of China and a few online retailers show data that seems to support this notion. Right now I don’t see the console software market in China becoming a billion dollar market any time soon. With an estimated $25 billion due to be generated by games in China this year, revenue from console games software will continue to account for less than 1% of that.