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China May End Ban on Videogames, but So What?

Katie Holliday | Writer CNBC Asia
Tuesday, 29 Jan 2013 | 1:26 AM ET
The Nintendo Wii U is a new video game console that was unveiled during Nintendo’s press conference at the Electronic Entertainment Expo 2011.
Source: Youtube
The Nintendo Wii U is a new video game console that was unveiled during Nintendo’s press conference at the Electronic Entertainment Expo 2011.

Hints at a removal of the Chinese government's decade long ban on video-gaming have excited technology investors over potential gains for the industry, but analysts have warned the impact could be muted.

The China Daily's report Monday of the potential rule change sent the share price of major game console developers Sony and Nintendo soaring in Tokyo trade. Sony's share price jumped 8 percent and Nintendo also saw gains of close to 4 percent.

The removal of the ban would allow most game consoles and products to officially launch in China, opening up the market for providers including Microsoft, Nintendo Co, Sony and Activision, but analysts argue that the black market for these products is prevalent, stunting the potential for new providers.

(Read More: China Considers Ending 13-Year Ban on Videogaming)

Technology analyst at Standard Chartered Equity Research Don See said the impact of a scrapping of the ban would be insignificant because China's gaming industry is already booming despite the restrictions and described the rise in Sony and Nintendo's share prices as a short-term reaction.

"Changes to the ban on video gaming are unlikely to have a significant impact on global demand for consoles. There will be some improvement ... but as PC gaming is already huge in China through laptops and mobile devices, this has meant China already has 300 to 400 million gamers. There is not a huge amount of pent-up demand here. Many users can get round the rules and are able to import the consoles illegally from other countries. The law has become irrelevant anyway," he added.

Eric Piermont | AFP | Getty Images

A Barclays' analyst note published Tuesday supported this view, playing down the impact of looser restrictions on gaming behavior.

According to the note, the impact would be limited by four factors. Firstly, such a decision could take up to two years to finalize, secondly many Chinese gamers already purchase pirated copies of game software making the software already widely available, thirdly Chinese gamers seem to prefer the social interaction of Massively Multiplayer Online (MMO) games rather than consoles, and finally, language barriers could prove detrimental to distributors.

However, despite Chinese gamers' preference for MMO games, the rule change could put downward pressure the revenues of Chinese MMO companies, said Barclays.

"User dilution/distraction away to console and mobile may continue to weigh on investors' concerns about the longer-term growth trajectory of the traditional MMO market," read the note.

(Read More: China Spin Doctors Have a New Tool — Combat Video Games)

Other industry commentary commentators viewed the news more positively, however. PJ McNealy, founder and CEO of Boston based consultancy firm Digital World Research Centre, said Nintendo and Sony would benefit the most from the rule change long-term, despite the already prevalent gaming market in China.

"Nintendo and Sony stand best to benefit from such a change. The reality is that there might not be much software sold legally, but I'm certain both Sony and Nintendo would be happy to sell more hardware," he said.

However, McNealy pointed out that other developers could face challenges: "In my opinion, Microsoft would have a hard time selling Xbox consoles in China. There is likely very little content on the Xbox today that would appeal to a Chinese audience, but this could change if there was a reasonable assumption of a developer being compensated properly."

(Slideshow: The Most Anticipated Video Games of 2013)

Separately, McNealy added that the removal of the ban on video-gaming could provide a boost to the TV industry.

"The TV market is booming in China as the middle class expands, and China surpassed the United States in consumption of new TVs last year. Consoles could help spur on utilization within China, which would benefit the TV upgrade cycle from cathode-ray tubes (CRTs), supporting all of the Chinese TV factories that are ramping up. It would be a win-win," he said.