After years of hovering at the edge of China’s gadget and app markets, Japanese mobile instant messaging giant Line and Microsoft’s (Nasdaq: MSFT) Xbox gaming console are both reportedly preparing to enter the market. Line’s plan looks the most exciting to me, as the product has quickly gained a major following in Asia and could find a receptive audience in China with its new partnership. Meantime, I’m less optimistic about Xbox, as its China entry comes after its consoles have been available on the local gray market for years, and it will face competition from a new group of homegrown products. Its choice of the struggling Shanghai Media Group (SMG) as its partner also doesn’t look too exciting to me.
Let’s start off with Line, which reportedly has partnered with the up-and-coming app store operator Wandoujia in its play for China. (English article) Line’s potential entry to China was rumored several times over the last 2 years, with potential partners including software security specialist Qihoo 360 (NYSE: QIHU) to dominant wireless carrier China Mobile (HKEx: 941; NYSE: CHL).
These latest reports of a tie-up with Wandoujia seem to be credible, as I’ve noticed quite a few advertisements for Line have appeared here in Shanghai over the last few weeks, indicating an official service launch is coming. The choice of Wandoujia looks like a good one, especially compared with the stodgier China Mobile and Qihoo 360, which is often accused of underhanded business practices.
Wandoujia, by comparison, is a fairly popular app store operator whose chief executive is a former Google (Nasdaq: GOOG) China executive. The company also boasts a list of big-name backers, including Goldman Sachs, which participated in a funding round totaling $120 million earlier this year. (previous post) Other reputable backers include Japan’s Softbank, and Innovation Works, the tech incubator founded by former Google China chief Lee Kai-fu.
Line will certainly have a lot of catching up to do in China, where Tencent’s (HKEx: 700) WeChat now dominates the mobile messaging market and Alibaba is also making a play with its newer Laiwang service. What’s more, US-based Whatsapp could also be eying the market following its purchase last year by Facebook (Nasdaq:FB). But Line’s strong audience in other parts of Asia, combined with its strong partners in China, could give it a good chance to quickly carve out a place in the market.
Meantime, I’m far less optimistic for Microsoft’s plans to launch its Xbox game consoles in China, following Beijing’s recent decision to lift a decade-old ban on such imports. According to the latest reports, Microsoft will sell Xbox Ones in China through a joint venture it formed last year with BesTV (Shanghai: 600037), the digital entertainment arm of SMG, Shanghai’s main broadcaster. (Chinese article) The consoles will debut in September, and will retail for 4,999 yuan ($800). That’s quite a bit more than the $500 starting price for the US, though such mark-ups aren’t unusual for China due to high import tarriffs.
I expect we’ll see Sony (Tokyo: 6758) make some similar announcement for its PlayStation, as the company has also indicated it wants to enter the market. Both of those will have to compete with a growing group of Internet TV products being rolled out by domestic firms, many of which include a gaming component. I also question Microsoft’s choice of BesTV, whose state-run roots and limitations to the Shanghai market don’t make it look like the best partner.
Microsoft has never been very good at finding strong China partners, with the result that most of its non-software products have largely flopped in the market. I see a similar muted reception for the Xbox, and wouldn’t expect the partnership to sell more than a few thousand units in its first 12 months in China.
Bottom line: Line could quickly gain a following in China through its smart new partnership with Wandoujiang, while Microsoft’s Xbox China launch is likely to flop due to competition and poor choice of partner.