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The latest video game in Electronic Arts' $900 million FIFA franchise should be a hit in Brazil. "FIFA World Cup 2014 Brazil" features all 12 Brazilian stadiums built for the World Cup, and it hit shelves in April just two months ahead of the opening ceremony in Sao Paolo in June.
But EA has another trick up its sleeve: The publisher now produces all its titles domestically. With no product to import, EA is putting a dent in the gray market for blockbuster games, making its product more attractive to retailers.
It's one more sign that premium game publishers and eSports companies are ramping up investment in Brazil. It's not an easy market. High taxes and import policies inflate game prices, suppress legitimate sales and encourage piracy and smuggling. But by investing in the country, some companies are finding ways to tap Brazil's potential.
Brazil is home to the world's fifth largest population, one that is incredibly wired. Nearly half of the country's 200 million people have access to the Internet. Analytics firm SuperData Research projects that revenue from digital games—the lion's share of sales—will grow to $2.4 billion in 2015 from $1.4 billion last year, making Brazil the fifth largest digital games market in the world.
Mobile gaming attracts the most spending by a mile, but the market for higher-priced, premium games for PC and consoles remains underdeveloped, in part because Brazil heavily taxes consoles and games. New console games can cost up to $150, compared with about $60 in the United States. In October, Sony announced on its blog that its new PS4 would cost more than $1,800 in the country because of local taxes and import costs.
Analysts say many Brazilians would pay a fair price for legitimately sold games and consoles. Instead, bootlegged copies meet pent-up demand.
"The market is ready for games as a major form of entertainment, but the tax laws still prohibit it being a viable market for traditional games," said James Portnow, CEO of Rainmaker Games.
Console makers have reduced prices significantly by producing their machines locally. Microsoft began making Xbox 360s in Brazil in late 2011. Sony followed suit with domestic production of the PS3 in May of last year.
Even with domestic production in full swing, various taxes put EA's new releases at about $90.
With console game prices stubbornly high, massively multi-player online games—better known as MMOs—are dominating the premium segment. These games are mostly free-to-play, but generate revenue when users make small purchases on virtual goods.
These micro-transactions add up. In 2013, MMOs generated 25.7 percent of game revenue in Brazil, while consoles accounted for 5.3 percent, according to SuperData Research.
"I would argue that free-to-play—because it got there first, was able to allow many people to play—that's going to be a standard moving forward," said Joost van Dreunen, CEO of SuperData Research.
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Riot Games, publisher of the free-to-play battle-and-strategy game League of Legends, is one company investing in local infrastructure to improve the experience for gamers.
By setting up servers in Brazil, Riot was able to significantly reduce latency—the lag gamers experience while playing online games—from 200 milliseconds to 40. Riot does not release analytics for Brazil, but Roberto Lervolino, the Brazil country manager for Riot, estimates the initiative and other investments have helped grow the Brazilian user base four to five times over.
"That investment is paying off," said van Dreunen. "If you can increase frame rate by 10 or 20 percent, you get a smoother, more responsive experience. Because the emphasis is on multi-player, latency is a big deal."
Riot is moving on to the second phase of its investment, working with local companies to integrate popular local payment services and devise marketing strategies. Riot is also building up its Brazil-based team to develop services and apps for the local market, such as a tool to organize tournaments on college campuses.
Yet another investment is a hallmark of Riot's global strategy: eSports, or competitive gaming. The company already operates a professional league in Brazil, and is planning to host large-scale events in four major cities across three regions.
Riot will soon have company on the competitive circuit. Earlier this year, MLG—Major League Gaming—announced its first international tournament franchise in Brazil, a joint venture with Grupo Aguia, the country's largest sports and hospitality group.
"Brazil looked very much like 10 or 12 years ago in the U.S. when we started," said Mike Sepso, MLG co-founder and president. "There were a lot of small things happening but no big movement behind it."
MLG hopes to spark that movement by leveraging its experience operating eSports tournaments and producing streaming video. The launch will give MLG a new market for its eSports streaming platform, MLG.TV, which has been driving growth since its launch in November.
As the consumer market for high-end games develops in Brazil, Sepso said eSports can play a key role in increasing engagement.
"That's what eSports really drives better than anything else," Sepso said. "When a game comes out, the competitive core of those players are the ones standing in line. What eSports can do is to continue to keep that engagement really high."
The transition to a formal market is underway, said Jonathan Harris, EA's publishing business manager for Brazil. As local production erodes the gray market, retailers are showing greater interest in the games category and more consistently carrying premium product. The Brazil Game Show, the largest video game convention in Latin America, has grown from about 4,000 attendees in 2009 to more than 150,000 last year.
The real antidote, say analysts and game advocates, is an overhaul of Brazil's tax and import policies. But with no sign of reform in sight, publishers will have to play the game on Brazil's terms.
—By CNBC's Tom DiChristopher.