With software piracy endemic in southeast Asia, Microsoft's launch of its heavily subsidized Xbox console is a bold move. Although software sales and online gaming in Singapore and Taiwan should bring some returns, the real story is that Microsoft is paying heavily now, to gain a foothold in a market that will be lucrative in several years' time.
Microsoft has announced the launch of its Xbox gaming console in Hong Kong, Singapore and Taiwan. The console will be available in late November, retailing at US$205-218 - around the same price as in the US and Europe. It will also launch in South Korea by the end of the year.
Making money in the Asia-Pacific console market is challenging, due to the region's high software piracy rate. Console makers sell their devices at a unit loss, expecting to make the money back on games sales; where games are copied rather than sold, this business model takes a knock.
South Korea is a good market for Microsoft, with high levels of home PC Internet usage - the Xbox has strong online gaming capabilities and is closer to a PC than its rivals. Korea's animosity towards Japan should also boost the Xbox over Sony and Nintendo; Datamonitor expects 1.4 million Xboxes in Korea by 2005. Taiwan and Singapore are similar, but without the cultural advantage.
Piracy rates are 90% in South Korea and Taiwan - while high, this still means significant revenues for legitimate software. With additional online gaming revenues for Microsoft, the launch in these territories should bring in some cash - although whether it will cover costs is another question. But the piracy rate for Hong Kong and mainland China is 98% - and Internet penetration is low, so the scope for returns is near-zero. What's the story here?
Simple. Microsoft doesn't need or expect to make money on this incarnation of the Xbox. Instead, it wants to establish a strong installed base, to convince Asia-Pacific developers to create Xbox games - and then Xbox 2 games. This will allow it to build its Asian base still further, convincing more developers...
At some point, the prevailing intellectual property regime in southeast Asia is certain to toughen. If Microsoft is in a key gaming position by then, it will start to make serious money in the region.
Related research: Datamonitor, "Global Online Games" (DMTC0844)
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