China ends video game console ban with new Shanghai trade zone

Microsoft said earlier this week it will enter China's gaming market

A customer playing Street Fighter in China.

A customer playing Street Fighter in China.

China's 13-year ban on video game consoles is ending with the creation of a new free trade zone in Shanghai that will allow foreign-funded companies to sell game systems nationwide.

Rumors that the government would finally lift the ban were finally confirmed on Friday when China's State Council published regulations for the experimental zone in the country's largest city.

Under the rules, foreign-funded companies in the trade zone can sell game consoles domestically upon receiving approval from China's Ministry of Culture.

Console makers including Nintendo, Sony and Microsoft did not immediately respond to requests for comment. But the lifting of the ban paves the way for the companies to sell their game systems in one of the world's largest markets.

Microsoft may already be preparing to sell its Xbox system to Chinese gamers. Earlier this week, the company said it had formed a joint venture with a local Internet TV company in the Shanghai free trade zone.

Although Microsoft declined to reveal more details, a Shanghai stock exchange filing said the joint venture would focus on developing game-related hardware and software.

China first instituted its prohibition on game consoles in 2000 as a way to protect children. Despite the ban, however, merchants have long brought in video game systems from Japan and Hong Kong and sold them to customers in China.

The country represents a major opportunity for game console companies, said Xue Yongfeng, an analyst with Beijing-based research firm Analysys International. Console makers, however, will need to adapt their business models to the habits of Chinese gamers, many of whom are used to playing games for free, he added.

While China may have previously banned consoles from the country, online and mobile games in the country have been permitted and are raking in billions of U.S. dollars in revenue every quarter. Many of these games earn revenue by using a "freemium" model, in which the product is free to play, but includes virtual goods or content upgrades that can be purchased.

"If the companies just try to sell their game consoles without changes, I think it will be difficult," Xue said. "The price of these console games is quite high. Chinese gamers will be willing to pay for the console hardware, but they don't have a habit of buying expensive games."

To adapt, companies such as Microsoft may decide to enter China's gaming market with a console designed to play free games online, he added. Tethering the system to online services could also help Microsoft ward off piracy. Currently, many of the Xbox 360s sold in China's gray market are reconfigured by local merchants to play pirated games.

The Shanghai free trade zone opens on Oct. 1, and its regulations will be phased in over the next two to three years.

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