Microsoft is confirming details of its plan to introduce the Xbox One in China, a big, complex gaming market that just opened up to foreign consoles.
The company is announcing tonight that it will begin selling the Xbox One in China in September through a joint venture with BesTV, a subsidiary of the giant Shanghai Media Group.
Yusuf Mehdi, chief marketing and strategy officer for Xbox, called it a “historic moment.”
“Launching Xbox One in China is a significant milestone for us and for the industry, and it’s a step forward in our vision to deliver the best games and entertainment experiences to more fans around the world,” Mehdi said in a release scheduled to post at 8:30 tonight.
He noted that China has nearly 500 million game players and its game industry generated sales of more than $13 billion last year, up 38 percent from 2012.
Wedbush analyst Michael Pachter predicted Microsoft could sell up to 10 million consoles in China. If that level is reached, the hardware sales alone – aside from game software and service sales – would generate $5 billion for Microsoft.
China had banned foreign consoles since 2000 purportedly because of concerns about their effect on youth. Howeverk, the country went on to wholeheartedly embrace video games, particularly those played on the PC.
The ban also gave Chinese companies a chance to develop their own console business, but their attempts fizzled. Chinese consumers were also able to buy U.S. and Japanese consoles on the gray market.
China’s border isn’t simply opening up to foreign console makers. Games will have to pass the country’s censors, and the hardware’s arrival is intended partly to boost trade through a newly expanded “free-trade zone” in Shanghai. Governments use free-trade zones to lure manufacturers, distributors and service companies by offering them breaks on tariffs and trade restrictions, in return for the economic activity they generate.
A Chinese company will technically be the one selling the console. To gain entry into the market, Microsoft formed the joint venture with BesTV last September, giving BesTV a 51 percent stake. Microsoft also established a Chinese headquarters for its Xbox business.
Microsoft named Enwei Xie, a general manager in its Beijing offices, to lead the new Xbox China group and the “E-Home Entertainment” joint venture with BesTV.
Hints of the launch surfaced two weeks ago during a BesTV earnings call, when it reportedly disclosed plans to launch the Xbox One in July.
BesTV delivers TV services via the Internet so it’s likely to position the Xbox One as a high-end set-top box, as well as gaming machine.
Microsoft had limited success selling its previous console, the Xbox 360, as a set-top box offered by cable companies in Europe and Latin America. The Xbox One was designed to go further down this path and serve as gateway to TV and video services, but it hasn’t yet been distributed by TV service providers.
The opportunity to work with a provider like BesTV and reach the growing Chinese middle class apparently outweighs concerns about the hoops required by China’s “free trade” scheme and the rampant theft of intellectual property (IP) in the country.
“It’s a bold move. You’re tackling the largest market in the world,” noted industry analyst P.J. McNealy at Digital World Research. “It’s also the biggest challenge because of IP enforcement.”
Launching the Xbox One in China ahead of Sony’s PlayStation 4 could also help the Xbox One catch up to the PS4, which has an early sales lead in the current generation of consoles.
But that’s not the primary motivation for Microsoft, which takes a longer-term view of the competition and had all along planned on making the Xbox One a global platform, McNealy said.
“I think they view this — and rightly s0 — as a multi-year battle so just because they’re behind Sony by a million units or 2 million units doesn’t mean they all of a sudden have to launch in China to catch up,” he said.
Sony and Nintendo are also likely to pursue the market. But it may take them a year or more to launch, giving Microsoft a strong head start, Pachter said in a research note.
“The middle class in China is sufficiently large to support more than one console manufacturer, but we believe that the first mover is likely to capture disproportionate market share in the country,” Pachter wrote.
A bigger question is whether the library of Xbox One games and apps will appeal to Chinese buyers, who can already stream online video and low-fidelity games via cheaper set-top devices.
Microsoft is working with BesTV on new content and making a push to get Chinese developers to build games on the platform. Mehdi described the latter effort as “an innovation program” to help nurture local game creators.
Dazhong Zhang, senior vice president of Shanghai Media Group and chairman of the joint venture, said in a release that the companies will work together producing content for local and international consumption.
“Via our cooperation with the world’s leading team, we will continue to develop video games fused with Chinese culture and provide further distribution support for locally produced Chinese video game content to the world,” Zhang said.