ZTE Joins Gaming Crowd With Console Plan

Mar.13.14 | About: Zte Corp. (ZTCOF)

I have to credit telecoms equipment maker ZTE (OTCPK:ZTCOF, HKEx: 763; Shenzhen: 000063) for chasing an interesting new idea, following reports that it's preparing to launch a gaming console later this month. Such a plan plays to ZTE's telecoms strength, since such consoles are almost inevitably connected to the Internet these days and are rapidly merging with a similar group of Internet TV set-top boxes. But that said, I have some serious doubts about the chances of success for this new foray, due to the company's late arrival to the space, and also because I question its choice of venture partner, faded online game operator The9 (Nasdaq: NCTY).

According to the latest reports, ZTE and The9 will launch their device, called Fun Box, later this month through a joint venture called ZTE9 (English article). The reports are filled with specifics about the device's hardware and also its capabilities, indicating the information is probably being carefully leaked to create some buzz before the launch. Apart from its core gaming capabilities, the device will also be able to stream video from the Internet and from files on USB drives.

Word of the launch comes after China lifted a decade-long ban on gaming consoles last year. That move has prompted Sony (SNE,Tokyo: 6753) to plan a launch for its popular PlayStation consoles in China, and many believe that Microsoft (Nasdaq: MSFT) will make a similar move for its Xbox (previous post). Many others are also piling into the space, including leading TV maker TCL (OTC:TCLHF, HKEx: 1070; Shenzhen: 000100), which is preparing to launch its own gaming console and also specialized gaming TVs. (previous post)

Such consoles are quickly becoming obsolete as improvements on the Internet make online gaming equally or more attractive. Nearly all consoles these days also include an online connection anyhow, blurring the lines between them and traditional computers that people use to play online games. Further blurring the lines are a new generation of set-top boxes for Internet TVs, which allow people to play games and also stream video over their TVs. TCL announced a separate Internet TV tie-up with leading search company Baidu (Nasdaq: BIDU) last year, and others getting into the space include leading e-commerce firm Alibaba and fast-rising smartphone sensation Xiaomi.

With so much competition already in the space, it's a bit hard to see how ZTE will be able to differentiate its new Fun Box from the rest of the crowd. As I said above, the company does have an advantage of strong experience in the telecoms space, meaning perhaps its product may have better Internet connectivity than some of its rivals. A well-designed product could have a distinct advantage over its rivals, since demand should be strong and there is currently no clear market leader. ZTE is also desperately looking for new product lines to offset the slowdown over the last 2 years in its core older business of building networks for big telcos.

But all that said, I really don't hold out too much hope for ZTE to succeed in the space. One of its biggest handicaps is its choice of partner. The9 was once a fast rising star in China's online gaming space, largely based on its "Word of Warcraft" franchise that it licensed from U.S. game designer Activision Blizzard (Nasdaq: ATVI). But The9 lost that license to rival NetEase (Nasdaq: NTES) back in 2009, kicking of an extended period of stagnation for the company's business and its New York-traded shares.

The9 has made some strategic moves since then to try and reignite its growth, but none have met with much success. All of that brings me back to my point that this new initiative, while admirable, doesn't appear to have much chance of success. Apart from its telecoms experience, ZTE lacks the proper sales channels to promote this kind of product. It also has relatively little marketing experience for this kind of consumer product. The9 can't really help in either of those areas, and a lackluster record in its own core gaming business isn't too inspiring either.

Bottom line: A new gaming console from ZTE and The9 is likely to fizzle due to stiff competition and lack of experience by this pair of second-tier players.

Disclosure: No positions.

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