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The vast majority of Video Games are made in America and Japan. These two countries use NTSC TVs, and so games are naturally optimised to work with this technology. Europe, however, uses PAL TVs, which the games are not optimized for. Therefore, many games are poorly converted from NTSC's 480-line, 60Hz video system to PAL's 576-line, 50Hz video system, with the result that they were slowed down by a sixth and squashed into a bar in the middle of the screen. The result of this is that many games never get released in Europe, and if they do, there is a considerable delay. This is particularly aggravating in the case of story-heavy games, as Americans and Japanese gamers casually spoil major plot points in forum posts before European gamers even get to touch the game.
A further delay results from the need to translate games into, at the very least, French, German, Spanish, and Italian for the European release. This delay varies depending on the amount of text and story in the game, with the result that story-heavy games take longer to be released, thus adding even more time between the NTSC debut and the PAL release — more time for European gamers to end up spoiled. The problem is even worse in Australia, which is very low on the list of game designers' priorities and ends up getting games several months after even the European release (and when they do, the translation is in American English).
In addition, the PAL versions of some games may be censored or edited to comply with local laws. Germany, for example, has strict laws about violence in video games. Some games, such as Fire Emblem: Path of Radiance, have features inexplicably cut from the international release, and importing is the only way to get them. And then, of course, some people simply can't wait a few months to get their hands on a shiny new game that is going to have a PAL release anyway.
Finally, foreign gamers may be deliberately given an inferior version of a game. This mostly occurs with the American releases of Japanese games, as in Japan, games are so expensive that, even when factoring in the costs of overseas shipping and currency exchange, it is usually cheaper to import the American version. Therefore, to squeeze more money out of Japanese consumers, the developers cut various features from the American version of the game (particularly the Japanese audio track and subtitles) so as to make importing from America seem like less of a bargain.
The solution here is to get the NTSC versions of the games from America or Japan. This practice presents several obstacles. First of all, you need to get an NTSC console and compatible TV to play it on. A power converter or two may also be necessary to account for the voltage differences between America and the rest of the world. Furthermore, NTSC consoles tend to be region-locked so that an American console won't play Japanese games and vice versa. To account for this, you can either get two consoles, pay someone to modify your NTSC set to be multi-region compatible, or modify it yourself and void your warranty (and risk trashing the console; after all, there's a reason why chipping consoles is a viable enterprise).
In some cases, importing a game can actually be cheaper than just buying the PAL version. This is due to the practise of taking the US price and replacing the dollar sign with a pound sign, and then converting this into the local currency despite the fact that the pound is worth almost twice as much as the US dollar. When you add tax, this can result in some outrageously priced games (case in point: Rock Band). Interestingly, this trend seems to have been slightly reversed since 1999, when the price was calculated by converting the US price into euro instead.
Things have improved markedly since the end of the Play Station 2's generation, but there's still a 3-month time lag for most titles to be translated and subtitled. Two-year delays for low-priority titles are still not much of a surprise, and Nintendo of Europe are still going strong, having announced two separate release dates for 2005's Wario Ware Twisted but never actually following through.
So, generally speaking, Europeans and especially Australians still get the short end of the stick. Naturally, as far as the companies are concerned, importing must be stopped, no matter the cost, as long as it doesn't involve, you know, releasing a wider library on a more timely schedule with better localisations. In other words, actual work.
Fortunately, things are looking much better on the handheld front, as those are generally region-free. However they suffer from similar release date problems. A case in point is that, despite having been released in the US, Phantom Brave: We Meet Again still has no UK release date.
Another reason for importing is to get one's hands on weird stuff that will never see a release outside of Japan. This phenomenon
even especially happens in America. In this case, as well as the technological hurdles, there is the problem of trying to understand the Japanese manual and game text.
Sometimes the popularity of a game on the import market can lead to its localization. The Japanese videogame Osu! Tatakae! Ouendan was not very popular in its home country, but was a popular import title. This led iNiS, the company who made the game, to create a game specifically for the Western market, Elite Beat Agents.
Importing is at a bit of a crossroads, these days — it is becoming both more accessible and less relevant. The Internet makes importing games much easier (in earlier days, importing was pretty much out of the question unless you lived in a major metro area, mostly on the West Coast, or you had access to a mail order club, most of questionable legality), but at the same time, localizations are increasing in both speed and quality, and more and more games are making the jump across the oceans, so it's not as necessary as it used to be. "PS 360" games are also making the jump to the universal 720/1080 line 60hz HD standard, making TV compatibility problems a thing of the past.