Will China Legalize Gaming Consoles? Changyou.Com Ltd (CYOU), NetEase, Inc (NTES)

But, perhaps a larger looming issue is the black market and piracy.  Although China is the world’s biggest manufacturing base for Microsoft’s Xbox, Xbox and similar systems suffer from both market inaccessibility and piracy problems.  The launch of Sony’s Playstation 2 in China in 2004 resulted in rampant game piracy and of the hardware itself.  Sadly, as a result, there are a variety of counterfeit devices and boot-legged games almost everywhere you look in China.  If China lifts the ban on consoles, then companies who jump in, unfortunately, might have their profits cut into by fake games and devices.

The situation with China’s government is also cause for concern.  If China continues to become more open and free politically, then many more competitors will rush in to fill the void.  But, if China’s government becomes stricter and clamps down, then internet access will most likely be restricted and so will outside influences.  Companies won’t be able to get their products in or out of the country without paying high tariffs, and a restricted market would be anemic at best (while the illicit black market would thrive).  Thus any returns for initial investments in marketing, distribution, and production capabilities would quickly evaporate.

The Upside of Legalization

As previously noted, there is a black market for game consoles in China.  It would be a wise move for the Chinese government to legalize traditional gaming consoles if it wishes to truly take control of the industry.  By legalizing the game trade, China would open up a lucrative new source for tax and revenue.  Therefore, giving permission for such consoles to be sold legally may be the only option.

Nintendo, Sony and Microsoft could also benefit from the Chinese market being opened by teaming with local online companies like Changyou to push their own franchises.  Nintendo, Sony, and Microsoft could significantly boost sales of their consoles and their games by offering limited capability games online while providing the full version in the console.

The Bottom Line

China is a rapidly expanding and relatively new frontier for gaming companies.  If China does lift the ban on gaming consoles, then Sony, Microsoft, and Nintendo will gain much from establishing a presence in China.  But, if pirating is not kept under control, these companies will fall victim to what many other foreign companies have already felt by doing business in China.  Also, Sony, Microsoft, and Nintendo will have to compete with well-established online and mobile gaming companies like Changyou.com and NetEase.  Overall, I believe it is likely that China will legalize gaming consoles, which presents a great opportunity for gaming companies like Sony and Nintendo, as well as investors of those companies.  Mario will “supersize” in popularity!

The article Will China Legalize Gaming Consoles? originally appeared on Fool.com and is written by Evan Buck.

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