Sony Joins China Game Console Rush

May.27.14 | About: Sony Corporation (SNE)

Shanghai is quickly emerging as ground zero for the world's top two gaming console makers to enter China, with word that Sony (NYSE:SNE) has formed a new local tie-up aimed at bringing its PlayStation to the market. The company's new plan comes just weeks after word emerged of a similar plan by rival Microsoft (NASDAQ:MSFT) for its popular Xbox in partnership with another Shanghai media company. Both companies are seeking to tap China's massive appetite for electronic gaming, after Beijing recently lifted a decade-long ban on the sale of foreign consoles in the market.

I don't hold out big hope for either of these new partnerships, since console-based gaming seems almost certain to slowly decline over the next decade as online options become more versatile and attractive. But that said, both Microsoft and Sony could certainly sell millions of consoles to Chinese gamers over the next few years, potentially laying the groundwork for the inevitable transition to more online- and mobile-based products when that change finally does occur.

News of Sony's China plan came in an announcement from its new China partner, Oriental Pearl Group, which said the pair will form a tie-up to make and sell the PlayStation in China. (English article) The venture will be established in Shanghai's recently formed Free Trade Zone (FTZ), and will consist of two companies, one controlled by Sony and the other by Oriental Pearl.

I expect the new tie-up will initially import PlayStations for sale in China, but it also plans to eventually manufacture the consoles in the new FTZ for sale to domestic buyers. Announcement of Sony's plan comes three weeks after after media reported that Microsoft was also planning to roll out its Xbox in China through its existing partnership with BesTV, the digital media arm of leading Shanghai broadcaster Shanghai Media Group. (previous post)

Those earlier reports said Microsoft was aiming to launch the Xbox in China by September, and that the product would sell for 4,999 yuan, or about $800. The price is quite a bit higher than the $500 starting price for the Xbox outside of China, which is most likely due to China's high import duties. Accordingly, I suspect we'll see Microsoft follow Sony's move and set up a China-based Xbox manufacturing operation when it formally announces its product strategy for the market.

It's understandable why both Microsoft and Sony are making their moves now, since both were barred from entering the market before this year. Still, major recent changes in the market make it seem like both companies will only have a limited chance for success with the lifting of the ban.

One of the biggest new competitors on the scene is a new generation of mobile game companies that can offer compelling products that can be played over smartphones using high-speed mobile service. Another rival is a different new generation of Internet TV and set-top box products being rolled out by a wide array of Chinese companies, including Internet leaders Baidu (NASDAQ:BIDU) and Alibaba (ABABA), as well as smartphone sensation Xiaomi and online video operator LeTV.

I suspect that one reason China finally decided to lift its console ban now was because there were enough strong homegrown players to provide alternatives to globally popular Microsoft and Sony products. I've heard mixed things about the homegrown Chinese products, most of which are very new and thus quite immature. By comparison Microsoft and Sony both have more than a decade of experience in the space. Thus they now have products that are quite mature, and for that reason could enjoy some limited success in the next two years as they finally enter the market.

Bottom line: Sony and Microsoft could enjoy some success in the next two years as they enter China's gaming console market through new tie-ups, but will quickly face competition from a field of homegrown rivals.

Disclosure: None.