First Legal Xbox Sales Test Maturity of Game-Savvy China

TAIPEI (TheStreet) -- Microsoft (MSFT) has scored a landmark license to sell the Xbox One game console in China, where several million machines are expected to move in the first quarter or so. Stage two: More difficult.

China's nod to its first legally available gaming console such as the Xbox effectively lifts a 14-year-old ban on the high-end electronic toys. The country had prohibited the sales of most consoles to protect the mental health of young people, who may otherwise find the deliciously violent game content addles their attention to what Beijing cares about -- mastery of hard sciences and socialist ideology.

But Chinese gamers had already learned to order foreign-made console illegally on local e-commerce sites, says Gu Haoyi, game market senior analyst with the consultancy Analysys International in Beijing. A lot are content playing on PCs and smartphones instead. Is the game for consoles over before it starts?

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Microsoft has cozied up to China since last year with an out-of-the-way research and development center, and Shanghai-based manufacturer BesTV New Media said in April that it will bring Xbox One to China in September. Microsoft got an elusive China Compulsory Certification from the government, valid until 2019, the official China Daily newspaper said on its website.

Any measure of success will beckon rival game console makers such as Sony (SNE) and Nintendo (NTDOY), which had also been blocked from selling in China, the paper noted. Chinese developers may start to make their own consoles, Gu said, though so far the Xbox One is peerless in China.

Microsoft sold 7.4 million Xbox consoles to retailers in the fourth quarter last year, including 3.9 million Xbox One consoles.

An old hand at forming partnerships in China, Microsoft will take Xbox One pre-orders through popular Chinese Internet icon Tencent Holdings (TCTZF) and online retailer JD.com, China Daily noted.

The console stands to rack up a high score in China given the 1.3 billion population country's fast-growing $13 billion gaming market. Several million Xbox Ones will sell in China during the product's first few months, Analysys International predicts.

Still, Microsoft's license, comfort level in China and pre-order channels do not necessarily mean that Xbox will win the console sales game.

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Beijing may have suddenly signaled more confidence in its young people's mental health. Why stage an antigovernment protest when you have a console at home, the authorities probably figure.

But gamers have taken their minds into their own hands for 15 years with PCs, mobile devices and illegally obtained consoles.

As far back as 1999, men in their late teens and early 20s packed Beijing cyber-cafes -- conveniently located near universities -- to play shoot-em-up games as they smoked cigarettes and shouted swear words to punctuate wins and losses.

Smartphones and tablets now allow for play during class as well as after, likewise during sultry trips on China's public transit. Try to get your Xbox on the Beijing metro.

"The culture of games and entertainment is rapidly expanding in China," Microsoft wrote in an April news release, estimating half a billion gamers.

Perhaps in light of gaming's shady image, it adds that the Xbox One will also offer "entertainment, education and fitness experiences."

It could still turn out that the Xbox's novelty value has worn off before arrival.

"Overseas, the markets are more developed. Ordinary people can more easily accept these products," Gu says. China is more frugal and more discriminating. Whether the same consoles are accepted in China depends on price (possible $800) and how many games are available in country for download, he says: "If the games are limited, then no one will want it."

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At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates MICROSOFT CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate MICROSOFT CORP (MSFT) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, solid stock price performance, reasonable valuation levels and good cash flow from operations. We feel these strengths outweigh the fact that the company has had sub par growth in net income."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MSFT's revenue growth has slightly outpaced the industry average of 10.5%. Since the same quarter one year prior, revenues rose by 15.6%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share.
  • MSFT's debt-to-equity ratio is very low at 0.25 and is currently below that of the industry average, implying that there has been very successful management of debt levels. To add to this, MSFT has a quick ratio of 2.31, which demonstrates the ability of the company to cover short-term liquidity needs.
  • Compared to its closing price of one year ago, MSFT's share price has jumped by 38.92%, exceeding the performance of the broader market during that same time frame. Regarding the stock's future course, although almost any stock can fall in a broad market decline, MSFT should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
  • Net operating cash flow has significantly increased by 61.17% to $9,514.00 million when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of 39.30%.

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