AMD To Benefit, Over Time, As China Lifts Its Ban On Game Console Sales

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AMD: Advanced Micro Devices logo
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Advanced Micro Devices

Owing to a decline in PC shipments, market share losses to Intel (NASDAQ:INTC), and a late entry in new emerging markets, AMD (NYSE:AMD) saw its revenue base shrink in 2012 and 2013. The company completed its restructuring phase in 2013, which helped it regain its growth momentum in 2014 by successfully ramping up a diverse set of new products. AMD witnessed a 4% annual growth in revenue last year; combined with an 11% reduction in operating expenses, the revenue growth helped the company deliver its first full year of non-GAAP profitability since 2011. An important part of AMD’s restructuring strategy was to derive 40%-50% share of its revenue by 2015 from high growth markets, including semi-custom and ultra-low power processors, professional graphics processors, as well as processors for dense server and embedded solutions. The company claims to be on track to achieve this goal.

AMD devised a unified gaming strategy in March 2013 that addresses its plan to drive the gaming market across consoles, cloud platforms, tablets and PCs. The company powers all major next generation consoles, including Sony’s PlayStation 4, Nintendo’s Wii U and Microsoft’s (NASDAQ:MSFT) Xbox One. 2014 was the first full year of semi-custom game console shipments, and this was an important factor in AMD deriving approximately 40% of its revenue from high growth markets. The company supplied significant amount of products to Microsoft and Sony in Q3 2014 as these companies ramped up production to support the holiday demand spike. More than 30 million Sony and Microsoft consoles have been shipped since their launch, which helped AMD ship more than double the number of semi-custom chips in 2014, compared to 2013.

After a 14 year ban, China legalized the sale of home video game consoles early last year. Microsoft has already started selling the Xbox One in the country. In this article, we discuss how legalizing the sale of game consoles in China can benefit AMD.

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Our price estimate of $3.76 for AMD is at a considerable premium to the current market price.

See our complete analysis for AMD

Background

China banned the sale of video game consoles back in 2000, as the government considered it to be a corrupting influence on the nation’s children. On January 6, 2014, the State Council of the People’s Republic of China announced that it had officially lifted a ban on video game consoles which are produced in Shanghai’s new free trade zone. According to Bloomberg, though, that restriction will soon be lifted and game companies will be free to make and sell their consoles anywhere in the Middle Kingdom. [1] However, the Ministry of Culture’s restrictive content rules mean that most of the global gaming world’s top console hits will never make it to Chinese systems. And at the same time, the most popular game genres and titles in China (mostly PC-based multi-user online) just are not compatible with consoles.

Analysts at PricewaterhouseCoopers LLP estimated that console makers could be looking at a $10 billion video game industry in China, opening the doors for an entirely new market for Microsoft, Sony, and Nintendo. [2] Even gamers who own previous generation consoles will appreciate the new opportunity to connect to other console users in the new legal market segment. Being the most populous country in the world, China is now the biggest market in the world for consumer electronics. According to Microsoft’s Yusuf Mehdi there are more than half a billion gamers in the country.

Microsoft’s Xbox One, which was released last fall, starting selling in China from day one. After its release late in Mainland China, the Xbox One sold over 100,000 units. But since then the console has faced criticism from Chinese consumers, as well as government interference with its online video streaming partner. [3] In September 2014, Microsoft invested $240 million in a joint venture with BesTV, a domestic technology company [4]

The PS4 is expected to launch in China in the near future, but Sony has yet to make an official announcement. Nintendo is planning to launch a custom console specifically intended for the Chinese market.

Game Consoles Now Account For A Minuscule Part of The Chinese Gaming Market

According to Reuters, China is the world’s third largest video game market in terms of revenue and the vast majority of the money in China’s gaming market comes from PC games. The absence of consoles has left PC games with almost two-thirds of the market, according to data released at the annual China games industry conference in December. Browser gaming accounts for just over 15% and mobile gaming nearly 14%. [5] Revenues from console gaming made up just 0.1% of China’s total gaming market in 2013. ((China will allow game consoles to be made and sold nationwide, but don’t get excited, Techinasia, January 30, 2015))

With consoles still to establish a mainstream presence, Microsoft’s entry gives it the chance to make its Xbox brand synonymous with console gaming and living room entertainment. Lisa Hanson is the founder of Niko Partners, which specializes in analyzing the Asian video games market.  She believes that consoles may become popular if there is strong marketing to promote the merits of console gaming. However, the high cost of game consoles can be a deterring factor. More than 70% of Chinese gamers earn less than 4,000 yuan ($634) a month, according to Hong Kong-based brokerage CLSA. The new Xbox One sells for nearly $500 in the United States, while Sony’s PlayStation 4 sells for approximately $400. New games for each console cost around $60. ((China suspends ban on video game consoles after more than a decade, Reuters, January 7, 2014))

AMD Is Already Reaping The Benefits Of Game Console Sales In China

Despite the ban, game consoles were available for sale illegally in China through the grey market for many years. Between 2002-2009, an estimated 1.2 million units of consoles were sold illegally every year in the country. Although these sales have benefitted console makers they have been missing out on not only a higher volume of unit sales, but on additional revenue streams which bolster profits in other markets. Now that consoles are legal to own, the manufacturers will be able to make more money through advertising, promotions, marketing to foster sales of legally distributed games, which also offer the ability to connect to other consoles online. Once console sales ramp in sufficient numbers, AMD’s APUs and GPUs will ship in volumes far exceeding the millions of illegal consoles sold in the Chinese gray market.

In sum, the Chinese console market is an untapped opportunity, and its opening should significantly spur global game console sales in the future. If consoles gain popularity among Chinese gamers, and are able to capture even 10% of the gaming population in the country (that is, 10% of 500 million gamers), it will still be a significant jump from the current level. AMD will benefit from higher revenues from console sales without increasing its R&D or marketing costs.

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Notes:
  1. China will allow game consoles to be made and sold nationwide, but don’t get excited, Techinasia, January 30, 2015 []
  2. China legalizes video game console sales, Silicon Angle, January 30, 2015 []
  3. Will Xbox One succeed in China?, Eurogamer.net, November 23, 2014 []
  4. Xbox One to be the first game console sold in China in 14 year, but the PS4 still rules the West, ExtremeTech, April 30, 2014 []
  5. China suspends ban on video game consoles after more than a decade, Reuters, January 7, 2014 []