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Xbox One will launch in China in September, but challenges lie ahead

Microsoft will launch the Xbox One in China in September this year, marking the first time a video game console from a foreign firm has legally been available for sale in the country since it imposed a ban on consoles in 2000. But the venture won't be without challenges.

Microsoft is teaming up with Chinese entertainment business BesTV to bring the console to the Chinese marketp. The venture is the first of its kind after the Chinese government recently lifted the console ban and allowed foreign firms to produce and sell hardware within the established Shanghai Free Trade Zone.

"Launching Xbox One in China is a significant milestone for us and for the industry, and it's a step forward in our vision to deliver the best games and entertainment experiences to more fans around the world," Microsoft's corporate vice president of marketing, strategy, devices and studios, Yusuf Mehdi said in a statement. "BesTV has a rich history of delivering innovative entertainment content. It is the ideal partner with which to bring the Xbox Business to China."

"Ideally, it will be the largest market over time. Realistically, it won't be..."

Speaking to Polygon, Digital World Research analyst P.J. McNealy said Microsoft's move into China with the Xbox One marks a recognition of the growing Chinese middle class that is spending more on technology and entertainment. As part of that technology consumption, set-top boxes and consoles "will absolutely ride that coat tail."

"For Microsoft, if you're building a global strategy for console, you have to include China in the roadmap," McNealy said. "Ideally, it will be the largest market over time. Realistically, it won't be because there are certain inherent challenges with respect to intellectual property that will probably make things challenging. That said, it doesn't mean this isn't the right time to take a shot at selling the box in China."

The Chinese video game industry boasts nearly half a billion people playing games, with the local gaming industry generating more than $13 billion in 2013, mostly from PC, mobile and online gaming. According to McNealy, more and more companies will experiment with selling in China now that the ban has lifted, but he doesn't believe anyone is going in with huge expectations.

Console and content creators have to deal with the cultural challenges of a foreign market, the regulations the Chinese government has put forth regarding the sale of video game consoles, piracy and localization.

"I think at launch, the biggest challenge for the Xbox One will be the launch lineup. To make it regional specific is a significant investment," McNealy said.

He believes that in order for the Xbox One to succeed in China, it will have to focus on local content at the right price point.

"[Microsoft] has to convince the Chinese market of the Xbox One's value proposition," he said. "It's not clear to me what they're doing on the other verticals — it's not clear what they're going to do for music offers, or TV contents or movie services."

Analyst Piers Harding-Rolls of IHS Technology believes the main challenge Microsoft will face in entering the Chinese market is educating a gaming audience that has no entrenched understanding of consoles. "I don't expect sales fireworks at launch," he said. "But with its partner BesTV, which has access to local entertainment content, a large addressable market of existing IPTV users as well as marketing and distribution expertise, Microsoft is giving itself a good opportunity to gain some advantage over both Sony and Nintendo."

Microsoft has not yet announced the price of the Xbox One in China.

The console ban was introduced 14 years ago as part of the Chinese government's concerns over violent content and the "potential for moral decay". Talks of lifting the ban started in June 2013, with the Shanghai Free Trade Zone launching on Sept. 29, 2013. In March 2014, Chinese telephone network equipment maker ZTE Corp and online game developer The9 Ltd. partnered to make a native gaming console, the Fun Box.

"I congratulate BesTV and Microsoft on their joint announcement that the home entertainment system Xbox One will be available in China this September," director of the Shanghai Municipal Press Office Zhu Yonglei said in a statement. "This is a major achievement for the Shanghai Free Trade Zone, and the collaboration between these two leading brands will bring an unprecedented entertainment experience to consumers in China."

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