just signed two deals -- one with
and another with e-commerce site
-- to launch the Xbox One in China, which recently lifted
a 14-year ban
on gaming consoles.
China Telecom, the third largest telecommunications company in
the country, will start selling the Xbox One starting in
September through an exclusive contract to its 30 million
broadband customers, according to Reuters. China Telecom has not
officially set the price yet.
JD.com, the country's
second largest e-commerce company
by market share, started accepting pre-orders for the Xbox One
from July 28 to July 30. The pre-orders will be accepted through
mobile social networks Mobile QQ and WeChat (Weixin in China).
Tencent currently holds a 17.6% stake in JD.com, which competes
Last September, Microsoft entered the Chinese market through a
joint venture with Chinese set-top box maker
BesTV New Media
to manufacture the consoles in Shanghai's Free Trade Zone.
signed a similar PS4 manufacturing agreement with Shanghai
Oriental Pearl Culture Development (OPCD). Both BesTV and
Shanghai OPCD are subsidiaries of the
Shanghai Media Group
Will Microsoft's trio of Chinese partnerships help it gain
ground against Sony's PS4 and
's Wii U, which are both outselling the Xbox One worldwide?
A massive market with massive challenges
Microsoft, Sony, and Nintendo all hope that the lifted ban on
gaming consoles will turn PC gamers into console ones.
It's certainly a massive market -- Niko Partners estimates
that the Chinese PC online games market will nearly double from
$11.9 billion in 2013 to $23.4 billion in 2018. By comparison,
Gartner forecasts that the worldwide console market will be worth
$55 billion by the end of 2015. There are an estimated 600
million gamers in China -- nearly double the population of the
However, it's not going to be easy to convert PC gamers to the
Xbox One overnight. In
a previous article
, I noted that a survey from
revealed that only 8% of early Xbox One owners and 10% of PS4
owners came from PCs. Meanwhile, the Chinese PC market is facing
a threat from domestically made mobile games, which are also a
disruptive threat to console adoption.
Meanwhile, the "government ban" was actually rarely enforced.
There were plenty of gray markets and online stores in China that
sold North American and Japanese consoles. In fact, Alibaba's
Taobao currently sells imported Xbox Ones for 3,100 to 3,700 RMB
($500 to $600). This means that most people who wanted an Xbox
One, PS4, or Wii U probably already bought one.
Microsoft knows the Xbox One will be a tough sell
Microsoft isn't oblivious to these challenges, and is tossing in
a lot of extras for early adopters in China. A recent picture on
(China's equivalent of
) revealed that the Xbox One "limited edition" bundle will cost
3,499 RMB ($565).
Chinese ad for the Xbox One. Source: Weibo
The bundle includes the console, one controller, the Kinect, a
100 RMB ($16) JD.com coupon, another 100 RMB coupon for a second
controller, a "gift pack" worth up to 1,000 RMB ($160), and three
"blockbuster" games. The contents of the gift pack and three
games are unknown, but it's a massive bundle that actually makes
the console and controller cheaper than the $399 Kinect-less
version in North America.
However, the deal with China Telecom could further reduce the
console's price, which can be subsidized with wireless and
broadband plans. This could help Microsoft gain an early foothold
with Chinese households who are signing up for new Internet plans
or renewing their contracts.
Another advantage that Microsoft has over Sony and Nintendo in
China is that it is an American brand, not a Japanese one. Due to
decades of anti-Japanese sentiment and recent riots over the
sovereignty of the Diaoyu/Senkaku Islands, many Chinese consumers
intentionally avoid Japanese brands. This can be seen in the auto
dominate Japanese competitors as the largest foreign automakers
Could piracy crush these console dreams?
The other key problem is software piracy in China, which had a
software piracy rate of 74% in 2013, according to BSA.
Since Microsoft will sell the Xbox One hardware at paper-thin
margins or a loss in China, it generally takes a 30% cut of
retail Xbox game sales to recoup its losses. But if Chinese
customers hack the consoles and load up the hard drives with
pirated games -- a routine service in gray markets -- higher
console sales would cause Microsoft to lose money instead.
Microsoft fell into this trap before. Three years ago, former
CEO Steve Ballmer complained that software revenue from China was
only equivalent to 5% of U.S. revenue due to piracy, although PC
sales from both countries were roughly the same.
The Foolish takeaway
In conclusion, Microsoft is clearly serious about launching a
pre-emptive strike against Sony and Nintendo in the Chinese
market. It knows that it has a better chance of succeeding in
China than in Japan, which it doesn't plan to enter until
September due to Sony and Nintendo's market dominance.
Looking ahead, Microsoft and BesTV will demonstrate the
Chinese Xbox One at the ChinaJoy Expo in Shanghai from July 31 to
August 3, which should give investors a better look at
Microsoft's long-term plans for expanding into China.
More from The Motley Fool:
Warren Buffett Tells You How to Turn $40 into
Will Microsoft's Deals with China Telecom and
JD.com Boost Xbox One Sales?
originally appeared on Fool.com.
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