INSIGHTS | No country for console gamers

Long-suffering Chinese console gamers were disappointed yet again when the global hit game Animal Crossing vanished from Taobao a month ago.

With only three Nintendo Switch games licensed for sale in China, gamers have long relied on the grey market for imported consoles and game cartridges. 

Using sales volume data from market analyst firm Niko partners and public price information, TechNode estimates that Nintendo sold $32 million worth of the Switch console in 2019. We estimate that sales of consoles in China on the grey market amounted to $183 million.

For all consoles, the grey market is also believed to be much larger than the legal one. Niko Partners estimates that 60% more consoles were sold illegally in China in 2018 compared to legal ones. Based on TechNode’s observations, imported consoles sell for 1.5 times the price of domestic ones. Multiply this out and you get a grey market 240% the size of the licensed one.

Bottom line: Much like news and films, Chinese authorities are keen to regulate imported console games. The approach is very similar: A frugal licensing regime approves very few games. But content controls haven’t stopped fans from tracking down the latest Japanese releases. Chinese developers are facing an uphill battle to compete with billion-dollar incumbents that have nursed the console industry. So far, they haven’t come up with a game or console to compete with blockbusters by Sony and Nintendo. With tacit support from Japanese console makers, it’s unlikely that the grey market will ever die out.

Banned but tolerated: Owning a forbidden title won’t get you in trouble, but selling them might land you in jail. 

• In 2000, Chinese authorities banned foreign consoles, citing potential harm to users’ physical and mental health.
• To get around these restrictions, thousands of consoles and discs were imported in people’s suitcases. They were traded online and in electronics shops around the country.
• The government didn’t pay too much attention to this relatively small market. 
• In 2014, the government allowed Microsoft to release the Xbox One and created a pilot free trade zone in Shanghai for foreign console makers and game developers. 
• In 2015, the ban was lifted and stringent licensing requirements took its place. 
• Brick-and-mortar shops often carry unlicensed imported consoles under the counter—try asking.
• Authorities appear to tolerate this grey market trade.

“If the door’s locked, isn’t there a window? And if the window’s shut, isn’t there a doggie door?”

A Weibo user commenting about attempts to restrict gamers’ options (our translation).

Playstation: Sony’s digital store is divided into regions, but it’s easy to jump regions.

• Sony’s massively successful Playstation console is regionalized, much like smartphone app stores. Users have to log into a country-specific store through which they can only download games approved for this region.
• Playstations sold outside China allow you to log into any country’s store. But those sold in the China market only allow the China store—unless you know the (semi) secret code.
• Mainland Playstation owners have found a code that allows them to switch stores, breaking out of the China silo. The particular combination of button presses doesn’t work for consoles sold in other countries, TechNode has confirmed. 
• Many Chinese Playstation owners choose to create accounts in the Hong Kong store, where 4,633 titles were available as of Monday compared to 124 in China. Playstation’s Hong Kong store offers a version in simplified Chinese and accepts Aipay payments. 
• This week, the Chinese Playstation Store was suspended for ambiguous reasons. The button hack still works. 
• Other than this digital means of directly accessing another country’s store, gamers can head to Taobao to buy imported or pirated discs of unapproved games. 

Switch: Nintendo has tried harder to comply with regulations, driving fans away from China market consoles

• Nintendo has worked with Tencent to release a China-only model of the Switch console that complies with local regulations in December 2019. 
• The rest of the Switch network is not regionalised, meaning that non-China console owners can download games regardless of their location. 
• When the $300 Switch was released in China, there was only one game for download: New Super Mario Bros U Deluxe, released globally in November 2019. In March, Super Mario Odyssey, and Mario Kart 8 Deluxe, both of which were available around the world since 2017, were added to the list. You’d better really like Mario.
• The Switch does not have a digital backdoor, but imported Switch cartridges work fine. Online and offline, there are plenty of imported consoles and cartridges that grant access to unapproved games, primarily sourced from Japan, South Korea, and Hong Kong.
• Despite a brief purge, these are mostly tolerated.
• The Switch has found great success in China due to its portability, social nature, high quality of games and language localization. Niko Partners expects official sales to match Playstation by 2023.

Weak local competition: China doesn’t have competitors to Japan’s titans. Independent Chinese studios have released a few well-liked console games, but no blockbusters, while attempts at a Chinese console have gone nowhere. Titles in series like Call of Duty, Tomb Raider, or Grand Theft Auto cost tens, often hundreds, of millions of dollars to make. 

• Hardcore Mecha, developed in Beijing for Playstation by studio Rocket Punch, has won eight awards. It was backed by Sony as part of a project to encourage Chinese developers (in Chinese). 
• Rocket Punch was actually backed by Sony in terms of tech and funding. In 2016, the Japanese conglomerate picked ten Chinese developers to support under its China Hero Project.
• In 2016, a Beijing startup backed by prominent tech investors like IDG capital promised a market-shaking domestic console. It turned out to be a copied Playstation, except for the controller. That was a rip off from Xbox. It did not sell well. 
• A 2018 collaboration between US chipmaker AMD and Chinese hardware designer Zhongshan Subor for a new console didn’t gain much traction either, despite a reported $60 million investment. 
• The Subor Z+, as it was called, never saw the light of day. The developers missed the 2018 ship date and the team was reportedly disbanded due to financing issues.

Other priorities: China has a world-class games industry, but consoles are not its priority.

• Tencent, one of the world’s biggest game companies, is just starting to pay attention to consoles. Next Studios, a Tencent-backed original game developer known for its indie PC games, has released just two titles on Playstation: Death Coming in 2019 and Biped in April 2020.  
• This is in part because it’s a smaller market than mobile and PC gaming—where all the domestic industry’s money is going.
• With little investment, Chinese developers have not managed to escape the indie category and break into blockbusters.

Tough crowd: Gamers tend to demand the biggest, latest thing, and Chinese gamers want the same titles as their peers in Seoul and Cincinnati. It’s hard to get between them and a popular title. Restrictions on popular titles are met with staunch resistance. 

• Perhaps it’s something about the nature of gaming. It’s an identity, not merely an activity. People call themselves “gamers” but not “news readers.” 
• One Weibo user said the people who reported Playstation to the authorities should seek police protection, implying that gamers could try to physically hurt them.

Shocked, shocked! Ultimately, censoring the market would require console makers’ cooperation. With not much legal market to lose and big money in grey market sales, they don’t seem to care.

• The grey market consoles sold in China are legally bought elsewhere. Sony and Nintendo get their share of their pie.
• Sony complies with Chinese regulations on paper, but have kept the China-specific backdoor that enables users to bypass censorship by switching countries, based on our observations.
• Sony recently took down the China Playstation Store, but the backdoor still works. This won’t stop most users from buying games, but it signals increasing attention from authorities.
• Nintendo tends to be more cooperative. There’s no button cheat codes that circumvent country restrictions, and they have developed a China-only model of the Switch. The only option is to acquire physical cartridges via the grey market.  
• In 2003, Nintendo even released a line of consoles limited to China to get around censorship restrictions.
• But Switch cartridges are widely available on Taobao—and most of these are originally bought from Nintendo.

Admitting defeat? Authorities may be coming around to a more lenient stance on console releases. The Nintendo Switch Lite, PlayStation 5 and Xbox Series X are expected to see legal releases in China in 2020. With a lighter hand, regulators could finally get control over the market.

• Official console releases seem to quench gamers’ demand, at least in part. In 2019, when the Nintendo Switch was released in China, two years after the worldwide release, the illegal/legal sales ratio was cut in half. 
• With more legal consoles flooding the market, popular titles are facing increasing scrutiny, as is the case of Animal Crossing. 
• With more launches of official consoles and games in the mainland, as well as a growing supply of domestically-developed high-quality console games, perhaps the government stands a chance against the Lernean Hydra that is China’s illegal games market. 
• Niko, the research firm, predicts that by 2023 the grey market for consoles will shrink by 50%. 

Censors and console makers are in an intricate negotiation process. As consoles are rising in popularity among Chinese gamers, this is a story to watch.