Gray Market

While in Beijing, I visited the “gray market” in order to learn more about video game piracy in China. I’m not sure what I expected… something between an official street market in New York and those guys near Times Square who try to sell you DVD ripoffs (and who pack up their stuff the instant they spot a cop.) I couldn’t have been farther off the mark.

The gray market in Beijing is nothing less than a clean, very commercial, very visible shopping complex. It’s brimming with small stores (one might call them fancy “stalls”), each staffed by several people. The stores have no visible brand, advertising, or sales strategy to differentiate themselves from one another. They don’t need to — there are more than enough customers to go around.

I always knew you could find pirated games for pennies on the dollar. And I knew you could buy simple mod kits that turn consoles into piracy-friendly machines. But the extent of piracy in China goes beyond that. For example:

• You can buy a special cartridge for your Nintendo DS that stores pirate DS game code and enables you to play multiple games without modifying your DS in any way. In other words, without any fear of harming your device or being unable to play legitimate games.
• The special cartridge accepts t-flash memory (smaller than mini-SD; I’d never even heard of it before this trip.) The t-flash can store about 20 to 40 games (depending on their size) which you select from a menu when the DS boots up. The menu also offers mp3 player functionality — yes, it actually expands the uses of your device.
• The cartridge comes with six DVD disks, packed full of games from every region. (There appeared to be some game duplication on the disks, so I don’t think you actually get as many games as the number of DVD implies. And one store offered me nine DVD disks, which I’m guessing had even more duplicates, so perhaps I was wrong when I said stores have no sales strategy…)
• The cartridge comes with a USB t-flash reader and SD t-flash adaptor, so you have multiple ways to copy files onto it.
• And all this (cartridge, software, 1GB t-flash, reader/adaptor, and DVDs) costs approximately $45 USD, the equivalent of one or two games in the US.

Now, let’s imagine that Nintendo publicly commits to selling games for just $1 USD for the next decade (sending a very strong signal to Chinese consumers that they don’t ever need pirate hardware.) A potentially loyal customer would still be faced with the following dilemma: support Nintendo and its developers by paying low prices, or: buy even more games, plus the convenience of not having to carry around lots of game cartridges, plus the satisfaction of effectively having “backups” of your games, plus the extra functionality (mp3 player), plus the ability to play games not intended for your region. That’s asking for a lot of loyalty. But at least Nintendo currently has one advantage over Microsoft and Sony — it presumably does not take a loss on hardware that migrates to China!

Most of the people I met do not believe that the Chinese government will choose to enforce IP laws anytime in the next ten to twenty years. That said, I like to think that Chinese-developed IP might become valuable enough within the next decade that the government will choose to shut down the gray market.

Meanwhile, does the console industry have any hope whatsoever in China? Even with radically different business models, it’s hard to know for sure. Nor can we underestimate the potential downside of ignoring this market, with its rapidly growing economy, increasing regional influence, and 1.2B citizens.

Anyway, this is more reason for everyone to be thinking about games (and game platforms) as services, rather than products. Not just because it works better in China, but because someday it might work better in the West. Xbox Live has already demonstrated this, to some extent.