On 24 June 2015, the Ministry of Culture (“MOC”), the top regulator for cultural and artistic affairs in China, issued a notice[1] completely lifting a ban on the production and sale of video game consoles nationwide.  To provide further guidance over the content review process as regulated under this notice, MOC in the meantime published the Administrative Measures for Content Review of Video Game Consoles (“Administrative Measures”) as an exhibit of the notice.

This is the second step the MOC has taken in the last 20 months to liberalize the video game console market in China. The initial step was in April 2014 when the MOC lifted the ban within the boundary of the Shanghai Free-Trade Zone (“Shanghai FTZ”). Console manufacturers (“CMs”) such as Microsoft and Sony Computer have taken advantage of the initial step to launch the official sale of their X-Box and PS4 consoles in China. Further, since the establishment of the Shanghai FTZ, the MOC has approved 31 console-based games for distribution in China.

Is this really a game changer?

A primed market in place

No one questions whether the removal of the ban by the MOC will create a bigger market for game consoles as well as console-based games. But just how big? In the U.S., around 51% of households own at least one of the game consoles manufactured by three major CMs, Sony, Nintendo and Microsoft[2].  This percentage could have dropped in recent years because more gamers have moved to tablets and smartphones to play video games. However, there is still a fairly strong demand for console-based games because video consoles offer a more authentic and interactive gaming experience, as well as more appealing visual effects.

Such demand is not as strong in China as Chinese gamers have been excluded from the game console market and thus development of console-based games has lagged. Therefore, there are obvious opportunities for console-based game developers if they can create content attractive to Chinese gamers. The total revenue of the Chinese game industry amounted to RMB 123 billion (USD 20.5 billion) in 2013[3]. This is about 4 times larger than China’s movie box office receipts for the same year. What’s more, Chinese gaming revenue increased in 2014 by 23 per cent, totalling approximately RMB 152 billion (USD 25 billion) in 2014[4]. The question now is how much further can the Chinese market be developed? Unfortunately, there are significant challenges that console game developers face in China.

Competition in a favourable market

A common challenge console game developers and publishers anywhere face is fierce competition from other games, in particular mobile games. It is no different in China. However, we consider console game developers and publishers face a relatively favourable market in China. Mobile gaming, which is now well established in China, has created a population of long-term game consumers who are accustomed to paying for and playing video games. This population’s adoption of mobile-based video gaming should give hope to console game developers/publishers that these Chinese gamers will, in some significant number, spend considerable time and money on console games once game consoles are readily available in the Chinese market.

Chinese regulatory hurdles

In addition to market competition, game developers and publishers face the unique challenge of overcoming China’s cumbersome regulatory requirements for publishing and distributing games. For example, the publication of foreign-developed video games is subject to the approval of the General Administration of Press and Publication (“GAPP”) and possibly the review of the MOC. A licence issued by the MOC is required for the provision of online games and online gaming services in China[5].

Transparency is another issue. The criteria employed by the GAPP and MOC in content review are not yet officially codified, and are different from that of the U.S. and European countries. Chinese regulators place more emphasis on the political, racial, moral, and religious content of a game. Furthermore, the rejection of console games is not in the public record so no precedent can be followed.

We will closely monitor how the liberalization of game consoles plays out in practice, and look forward to helping more CMs and game developers and publishers develop their China strategy. Liberalization undoubtedly changes the game—just how much is still to be seen.

Best practice recommendations for console game developers

Monitor local conditions

CMs and console game developers and publishers, especially foreign developers and publishers, should familiarize themselves with the local market and regulatory conditions before entering the Chinese market. This includes entering into any development, licence or distribution agreement covering China.

Develop a comprehensive IP protection regime

IP ownership and protection should also be a primary consideration, especially when working with a third party to localize a game. For example, confidentiality, license and assignment agreements should be in place to protect proprietary code or other works or information. Data protection, privacy, and cyber security should also be considered if the game stores gamers’ data regardless of whether the game server is hosted in or out of China. Of course, passing-off and pirating games have always been problem areas in China and will need to be considered when CMs and game developers/publishers are developing their China strategy.