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 South American countries currently all enjoy top-tier GDP growth rates. From Venezuela to Uruguay, passing through Brazil, Argentina, Peru, Colombia or Chile, the Latino subcontinent is on the verge of booming economically, yet [legal] video gaming is still not getting anywhere over there. As any emerging market, it deserves the video games makers’ attention. I happen to live down there for the last two years… Let me show you around.

 
 State of Affairs 

It’s pretty simple, manufacturers and third-party publishers have no official representation south of Mexico. Small-time independent distributors have been contracted here and there but they are irrelevant so far. The area is seen as a piracy hotbed, fed only through parallel import of consoles and flooded by bootleg games, either shipped from China through Paraguay in the case of cartridges, or burnt to disc locally. There doesn’t seem to be a strategy in place to change this situation at the time of writing these lines. 

Worse, gaming executives may be underestimating the potential of the continent, as illustrates the remark that Scott Steinberg (VP of Product Marketing at Sony America) thought clever to be made about the price Microsoft paid for the exclusive DLC of GTA IV: “[Microsoft] spent the GNP of several small Latin American countries to get the downloadable content.” Hum. The price MS paid to Take-Two was reportedly 50 millions. The GNP of all Latin American countries, no matter how small, is counted in billions. So, not only is this comment disrespectful to hundreds of millions of people, it’s also completely wrong and misinformed. But hey, maybe Scott had seen a report in the news the day before about the Venezuelan GNP, which is about 50 billions. Let’s hand it to the man, he didn’t err by much: just one letter at the beginning of the word or three little zeros at the end of the number. But the sole fact that he dared to say that in the media shows the distance there is between the South American market and him; geographically and metaphorically. It’s all the more surprising when you know that SCEA announced its intentions to establish a firmer presence in the region during their last E3 press conference… 

For lots of economical reasons that we will explore below, the two top-selling systems are still the Gameboy Advance SP and the PlayStation 2 (probably the reason why Sony is thinking about coming down). Nintendo DS slowly starts making head ways, but nextgen home consoles are only scarcely available at prohibitive prices on supermarkets’ shelves. 

However, a few South American cities have grown and developed in recent years to the point that they offer a reasonably well earning middle-class. Panama, Santiago de Chile, Buenos Aires (Argentina), Montevideo (Uruguay), Sao Paulo and in some measure Rio de Janeiro (Brazil) are slowly but surely becoming stable enough so that regular video games trade starts to seem viable. By “regular video games trade”, I mean, sell consoles at a loss, then recoup the marketing and logistics investments through huge profit margins on original software sales. A large enough crowd could afford to sustain the practice in the cities listed above. Theoretically.

 Customs Taxes and Tariffs 

I said “theoretically”, because there is a huge burden for who deals in electronics over these here parts. In South American lands, prices are dramatically hiked by customs taxes and import tariffs on this category of goods. Furthermore, the fact that there is no solid distribution arm increases the number of intermediates involved in the logistic chain and that always pushes the price up too. At the end of the road, Xbox 360, PlayStation 3 and Wii are all about double the stateside price tag down here. 

Unfortunately, that’s not only true for hardware but also for software. As an example, an original copy of Smash Bros Brawl for Wii will set you back around 110 US dollars at retail across Colombia. When you know that the minimum (and most commonly paid) wage in the country is about 260-280 US dollars monthly, you understand the problem. People do play pirate games rampantly indeed, but that’s because the “legit” alternative is a mirage at best. 

When I was at Lik Sang, we had significant recognition in Brazilian gaming circles. Yet, this never translated to the same sales levels as in, say, Eastern European countries (I am not comparing with markets like USA, UK, Japan, South East Asia or Continental Western Europe because it would make absolutely no sense). The core reason was simple: when a Brazilian ordered something electronic from Hong Kong, he was sure to be stung an extra 60% by the customs duty bee later down the process. Out of the 105 countries Lik Sang has delivered to, South American shores were among the most costly destinations to reach with our shipments. 

Bottom line: you could achieve some success in these cities if games were priced the same as in the western world. But since they are not because of political externalities, scrap that. 

The good side of piracy 

The entertainment industry tends to see piracy as the devil’s creation and spends a bit of time every now and then calculating how much money it “lost” to the activity by accounting at full retail cost every single copy they estimate obtained illegally. I am one of those who think this practice is for the least inaccurate, if not completely aberrant. For many reasons that would represent too long of a digression to be tackled in this article… 

When it comes to Latin America, the topic at hand, I think this form of calculus is simply absurd. People do massively buy bootleg versions of games, the copyrights of which do rightfully belong to “western” or Japanese publishers. I reckon that. But since the publishers in question did not spend one dollar producing anything with the region in mind, did not care about seriously distributing or marketing their products locally, where are the “real” losses? This specific market just happens to be virgin of any serious game marketing effort, so gamers had to grow their hobby through informal roads. That’s about what it is. In order to lose, you have to compete first. 

I’ll go one step further in my claim. The ongoing piracy wave, though a transitional problem to deal with when you will direct your appetite towards these forgotten worlds, has actually helped the video games companies developing their fame free of charge for decades in countries like Brazil, Venezuela, Colombia, Paraguay… or China, the world’s piracy hotbed of all hotbeds. 

Let me explain this extravagant statement… We established above that they are not spending high amounts of marketing dollars in the area. Still, Nintendo and PlayStation are quite powerful brands over here. Everybody knows what it is, what it stands for. Most people who wanted to play them have played them. Mario is famous. Street Fighter II is well-known, even by girls. Any soccer fan (which almost amounts to every male in the region) knows what the acronym PES means. The Latino gaming culture is pretty much at level with the rest of the world, no matter if the nextgen consoles tend to arrive slightly delayed. So, the marketing is pretty much on sync despite the fact no officially endorsed effort has been made to spread the vibe. 

This weird phenomenon is only due to the ghost effect of piracy, if you ask me. Because, when an 8 dollar cartridge full of 10 Nintendo games changes hands, it still bears the Nintendo logo everywhere in and on it. Pirates don’t waste time re-branding the stuff. Why would they anyway? So, industrial piracy in China or Paraguay helped making Nintendo famous even in regions where they should normally not be (yet). Same goes for PlayStation: under-the-coat CDs and DVDs gave a taste of Sony’s magic tricks to the people living in non-zones. By the time you’re ready to capitalize on it with a good plan, this pre-acquired brand appeal will of course help. 

Where is the money? 

If cars and television sets became mass consumption products when poor people around the world went out to buy their own, then you can trust my globe-trotter word that nowadays cell-phones, computers AND video games are definitely mainstream too… and beyond. It’s ubiquitous. I’ve played Pro Evolution Soccer on PlayStation 2 in a bamboo house in Thailand, as well as in so many modest homes across Latin America that I can tell you the gaming hobby is now part of the daily routine just about everywhere. Sure not every Colombian citizen owns the 300.000 pesos PlayStation 2 with 2000 pesos pirate games at home. But then he goes to the corner of the street with 5000 pesos, where he can play the PS2 on-site for an hour. Something many people do here. I tend to believe this is where the immediate money is, for whom wants to cater gaming to the region: paid try-outs. 

Note: 1 US dollar = approx. 1700 Colombian pesos 

If, surfing on its existing popularity and on the novelty feeling of its latest console, Nintendo would start to open Wii Centers in all major cities, then franchising the idea to second class cities later down the road, I’m convinced it would be a major success. Meaning it would steadily bring in millions of dollars. 

The Wii Center would simply be a location where several Wii consoles with controllers, games and screen can be played for say 5 dollars an hour. 5 dollars is about twice the street price asked for one gram of cocaine or half a liquor bottle, both being your toughest competition in the instant entertainment sector. Since your designer drug is newer, healthier, innovative and legal, 5 dollars, dividable among up to four friends, seems to be the right price level. 

As far as opening such gaming rooms goes, there are some “youth protection” laws in place to pay attention to in most of these countries, but it’s nothing a good legal team can’t deal with. I’m opening one such center myself in Pereira this coming September. I’ll update you about how the trial phase played out in a couple of fiscal quarters. Or maybe I’ll shut up and open a dozen more centers in silence… 

PlayStation 3 centers, and in a lesser measure Xbox 360 centers, probably would draw crowds and good numbers too, even though probably not as great as those from a Wii Center, due to the fact you could visit the latter in family or on a date. 

The Nintendo advantage 

Opposite to its current generation counterparts, Nintendo is not losing money on every system it produces. At current price points, Nintendo makes a profit on every system it ships. Be it a DS Lite or a Wii. Therefore, pushing the pure hardware installed base, even at the risk of losing the user to pirated software sales right out the door, still makes business sense. Big N already realized it’s an affordable gamble to make in big China. After strange experimental trials over there under the iQue umbrella, the flagship Wii is now poised to be launched officially in all major Chinese cities this coming Christmas. I say bring it to Latin America too then. 

Streamline the logistic and optimize the distribution channel. Try to bring the Wii massively to stores everywhere at an approximate level of 300 US dollars while still making a slight profit to recoup your structural investments. It will get the ball rolling. A percentage of your customers will buy legit software and accessories. No matter how low the initial rate may be, there will be some additional profit made this way. More importantly, on the long run, because of the favorable economical situation I described above, and because maybe the tariffs on electronics will one day be sensibly brought down to reasonable levels, the attach rate of legal software can only increase. In other words, your little snowball will grow proportionally with the macroeconomics improvements on the ground. 

If you do that in parallel with the rental concept explained above, you have yourself a two-weapons strategy that will pay out on short term, during the transition from the pirate era towards fully-efficient ecosystem. By the time the local market fully matures, the built network will prove to be an extremely valuable asset. There’s your head-start, to put it plainly. Gaming companies only gained fame so far in South America, time has come for them to start making a bit of money while setting the foundation for their future fortune. 

Must be noted if only for the sake of being exhaustive that, because the production cost of the nextgen systems they make is tremendously higher, this option is not available profitably to direct competitors, Sony and Microsoft, at this point in time. Sony could play the PS2 card if it wanted to though…