Microsoft Late Again To Gaming Market With JV

By newsdoug on September 26, 2013

Microsoft in gaming tie-up with Shanghai’s BesTV

After years of being locked out of China’s lucrative gaming market, US software giant Microsoft (Nasdaq: MSFT) may have finally found an opening through a new joint venture with BesTV (Shanghai: 600637), the digital arm of the nation’s second largest media company. On the one hand I should congratulate Microsoft for its tenacity in pursuing China’s electronic gaming market, which is one of the world’s largest. But on the other hand, I have to return to one of my common refrains about the world’s biggest software maker in observing that this effort looks a bit late and will have difficulty finding an audience in China’s highly competitive gaming market. I also have my doubts about the selection of BesTV as its partner, but I’ll come back to that later.

First, let’s start with a quick look at the headline news, which will see Microsoft invest up to $237 million in the gaming joint venture with BesTV, the digital TV arm of Shanghai Media Group (SMG). (English article; Chinese article) BesTV will hold 51 percent of the venture, while Microsoft will hold the remaining 49 percent. There’s not much detail on what the venture will do, beyond the official announcement that it will develop family games and related services.

Microsoft, Sony (Tokyo: 6753) and other gaming console makers have been locked out of China for the last decade due to strict government controls. Beijing ended the ban in July, saying foreign-made consoles could be allowed into the market if the companies set up operations in a new free trade zone being launched later this month in Shanghai and agree to let Chinese censors vet their games.

While this new joint venture could indeed open the door for Microsoft to sell its Xbox consoles in China, it’s far from clear that it has such plans with this venture. For starters, BesTV provides digital video services over traditional cable TV networks and has little or no experience with gaming consoles. That means we’re far more likely to see the pair modify some of Microsoft’s existing Xbox titles for use over BesTV’s existing pay TV networks. That would make far more sense anyhow in China, since offering games online helps to minimize the potential for piracy that is rampant in China.

So if the joint venture ends up offering games over BesTV’s cable networks, the question becomes: What are its chances for succeess? My answer to that question is “Not very much”. The main reason is that China’s online game market is already quite crowded with strong players like Tencent (HKEx: 700), NetEase (Nasdaq: NTES) and Shanda Games (Nasdaq: GAME). Furthermore, many of the big global game developers like Electronic Arts (Nasdaq: EA) and Activision Blizzard (Nasdaq: ATVI) that make titles for Xbox are also already quite active in China through separate tie-ups with local partners.

At the same time, BesTV doesn’t really look like the best partner for Microsoft or anyone with serious national ambitions in China’s online entertainment. Despite announcing numerous tie-ups over the last 2 years, including one this year with national broadcaster CCTV (previous post), BesTV has yet to have a real impact on China’s national pay TV market. Instead, the privately owned Internet giants like Tencent and Baidu (Nasdaq: BIDU) seem to be making more inroads into the market through creative tie-ups and acquisitions of other private sector players.

This latest Microsoft venture follows other late arrivals by the US company into other highly competitive online spaces like search and e-commerce in China. This new tie-up seems to repeat that pattern, with the result that I’d give this new joint venture only a very small chance for success in China’s electronic and online gaming market.

Bottom line: Microsoft’s new gaming joint venture with BesTV is likely to fail due to its late arrival to a highly competitive sector dominated by local players.