N'Gai Croal: EA-T2 Merger Could Face Anti-trust Problems

March 31, 2008 -

Should Electronic Arts be successful in its bid to acquire a controlling interest in Grand Theft Auto publisher Take Two Interactive, the merging of the companies could face harsh government scrutiny, reports Newsweek's N'Gai Croal.

Croal serves up a guest post from one of his readers, Justin Blankenship, who formerly worked for the Federal Trade Commission. While with the FTC, Blankenship's assignment was to review potential technology and entertainment mergers for anti-trust violations. Of the EA-T2 situation, Blankenship writes:
 

Although EA's offer may eventually prove too lucrative for Take-Two to pass up, I wouldn't assume that this deal will get a rubber stamp from government antitrust regulators. I'm specifically referring to comments by Wedbush's Michael Pachter, who stated:
"Currently [EA and Take-Two] compete in pro basketball, college basketball and hockey. So by taking out all of that, EA has a monopoly in sports. If these guys have a monopoly, they're not going to cut pricing on sports games as quickly. We've been seeing sports games come down [in price] before Christmas the last couple of years. That'll never happen again."


GP: Blankenship is referring to comments Pachter made to GamePolitics in a report from February 25th. See: Pachter: Sports Drives T2 Deal for EA; GTA is "Gravy". Blankenship explains:


 

Until 2004, I worked in a division of the FTC that spent a lot of time looking at technology-related mergers... I also have every reason to suspect that my former colleagues would give this deal a hard look, especially in light of Mr. Pachter's comments, of which I'm sure they're aware.


 

...If a government agency has problems with a merger, it's likely because it believes the economic data supports a narrowly defined market (e.g., licensed professional hockey videogames or hockey videogames). The parties to the merger will argue to define the market more broadly (e.g., videogames as a whole, or sports videogames as a whole)...

The concept of market definition turns on economic evidence, which I'm not privy to, but if Mr. Pachter's comments are accurate, EA and Take-Two's sports games are price constrained by one another... In that case, it's entirely probable that government regulators could define a narrow submarket of "NHL-licensed hockey games," "NCAA-licensed basketball games," and "NBA-licensed basketball games." If so, what you're effectively seeing here is almost a complete elimination of competition in those narrow submarkets...


GP: Blankenship also touches on one of GamePolitics's favorite hot button consumer issues: The Madden Monopoly. Blankenship continues:
 

Although I don't believe we've ever seen the government step in to take any sort of action in a videogame merger in the past... This case is also unique because the sports game industry provides a unique piece of economic evidence: the Madden model. An economist could easily plot the rate of price reductions in professionally licensed football games before EA had an exclusive agreement with the NFL (when we had Madden NFL vs. NFL 2K sports), and after the exclusive agreement (Madden only). If EA has been able to slow the price decline in Madden after its exclusive agreement with the NFL, one presumes they could do the same in basketball/hockey games as well. I don't have that data in front of me, but it strikes me as a relatively straightforward analysis and an apples to apples comparison...


GP: Beyond what Blankenship writes about the rate of Madden price reductions is the inarguable fact that the initial pricing of the game skyrocketed once competition from the NFL2K series was eliminated by the EA-NFL licensing deal. As GP has reported several times in the past, Madden jumped from $29.99 in NFL2K's final year of existence to $49.99 in the year immediately following, when there was no competition. More from Blankenship:
 

Do I think this is a deal that the government would sue to block? Not really. But I wouldn't be at all surprised if they required EA to divest its license agreements with certain sports leagues, and maybe spin off some of the talent behind those games to a competitor. And if that happens, does this deal still have the appeal to EA? Not if what Mr. Pachter said was true and EA's offer is based on the realization of monopoly profits from its sports division. Furthermore, if you see the government give this deal a hard look--beyond the normal 30 days normally allocated--you could possibly see the deal delayed long enough by the review process to adversely affect financing arrangements, potentially derailing the whole affair.


 

In other words, I wouldn't consider this deal inevitable quite yet...


GP: Great insights from Justin Blankenship,and we've only excerpted a small portion here. Check out N'Gai's Level Up blog for the whole story.

Comments

It's the USA. If the merger means the rich getting richer, it will get approved. What massive merger hasn't been approved by the FTC in recent years? It's just a technicality at this point.

If it does happen wit won't take even this to give EA a big head and go after Activision too.

@ Bard

The difference between EA having a monopoly on sports games and Nintendo having a monopoly on Mario games is that Nintendo created and owns the likeness of Mario. That's why Sonic only appeared in games on the Sega consoles until Sega got out of the console business.

EA buying Take-Two would mean that only EA's sports franchises, more specifically NBA Live, MVP Baseball(Take-Two has an exclusive deal with Major League Baseball), and their NHL series(as EA already has exclusives with the NFL, NASCAR, and the Arena Footbal League, and I think FIFA as well?) would be on the shelves(does anyone really think that the Take-Two 2K games would continue after EA completes the buyout?)

I agree, with no competition the game ends up costing more for the customer.

I actually hadn't thought about the merger making a monopoly for some of the sports games. It's a good thing that it didn't go through then.

Has anti trust ever been applied to an entertainment industry, or any industry that makes products designed for leisure activities?

I gotta echo Brokenscope on his point. Furthermore, EA may be large, but they are by no means the only major player in the field here in the USA and around the world. Non-issue.

Agreed.

And as anyone who knows a bit of EA history has witnessed, EA is not a friendly player when it comes to monopolies and pricing.

They will press as much juice out of the fruit as they possibly can, while charging full price for every drop.

@ Brokenscope

In Europe the authorities looked at the AOL/Time Warner and Sony/Bertelsmann mergers. The UK Authorities looked at the Game/Gamestation merger in retail.

Any EA/T2 merger would no doubt have to go through EC merger control as well as the US system.

AHAHAHAHAHAHAHA!!!! Yes! I damn well hope so. EA would own every majoe sports franchise and that is a monopoly. (That and I DO NOT want them to get GTA)

Cannot see so long as Activison exists EA can do what they want. And vice-versa.

Not an entire monopoly. It wouldn't take much for any other developer to pick it up. Lets not forget all the sports games Nintendo's been releasing lately.
Personally, I couldn't give a care about sports. It's the black sheep of the gaming genres. It's a stain on the gamers' pants. However, the idea of EA having a monopoly (as well as control of all other T2 franchises) is quite unsettling. EA's the last one we want in charge.

I still think it's only a matter of time and enough money before the merge goes through; However, I've never known a corporation that wouldn't sell its own grandmother to the ravenous bugblatter beast of Trall for a nickel.

I can't help but wonder about the assumption that the EA merge represents a monopoly. For one, it's arguable how much marketshare T2 really has in the first place, I don't doubt that they have their supporters both among people who think the product is good, and people who just hate EA. However, 2 companies, one of which has 90% the other has 10%, is an effective monopoly if not a total one. For another, I don't know that the federal regulators on our side of the pond have allot of teeth. I've heard it said that Apple represents 6%? It doesn't necessarily follow that windows is the other 94. Linux probably has some share of that, but my point is microsoft has staved off anti-trust controls for years, I don't know why EA couldn't do the same.

Plus, how, really, does the NFL fit into this? Don't they get some credit for helping to create market conditions in which EA could take over? If the NFL took back EA's exclusive license, how many devs do you suppose would emerge from the crowd and offer to make a football game? It doesn't make much sense to me to hold EA to task for being a monopoly and not hold the NFL to task for helping create the same.

@ jadedcritic:

Windows is a monopoly. That's been recognized for a long time. However, merely having a monopoly in a market is not in itself illegal. The operating systems market will naturally push one competitor or the other to have a near total monopoly because that's when operating systems work best.

What is illegal is using that monopoly as leverage to destroy competition in other markets. And Microsoft has in fact been convicted of doing this in the US (it's just that the eventual penalties were pretty weak).

However, like many here I'm not convinced that EA getting a monopoly on sports games is going to concern the FTC too much. It just doesn't have that much impact on the public. It's not as if sports games are a necessity of life like computer operating systems, oil or telephone service.

EA already has an NFL monopoly. The Madden games are the only NFL games out there. They don't even have to change the game much. Just slap a new year on it and people will buy. Even the deal affected Tecmo Super Bowl on the Virtual Console.

With no competition and the same $5836 being produced by EA, I think sales will just go down honestly. I never was a sports person, but I've seen the differences between Madden 06, 07, 0-whatever, or lack of differences rather. Eventually people are gonna stop buying the same crap every year...

@ Chada

I doubt that. There are some hardcore fans of the NFL and if their game does not have the updated roster, they will flip out. They will continue to buy the full game every year until such a time that EA feels that it is feasible to just release an updatable version of the game and release yearly expansion packs.

EA is not likely to ever do that though. They make more money by updating the game themselves and releasing it at full price.

EA needs to get their money grubbing hands off of the good developer's

first they take bioware/pandemic and now this T2 business

they ruin everything

it's not like they need this deal to stay in business or anything

EA is like a giant monster making it's way across the gaming landscape, devouring everything shiny that it sees, then spitting out the refuse.

And someone needs to stop the foul thing...

Don't like 'em? Don't buy 'em.

@BreadCultist: AARRRRRRRRRRRRRRRR!!!! SHIVER ME TIMBERS!
At LEAST they aren't as douchey as they once were when throwing out nothing but licensed games.

FTC comes up with some weird reasons to block mergers at times. They can also put stipulations in even if they don't block.

It's an interesting point made, but I don't see the FTC blocking the merger. Assuming the merger even happens in the future...

Saying that EA would have a monopoly over sports games is like saying Nintendo has a monopoly over Mario games. Hell, with Mario, you actually have to have the current Nintendo console to get your triple jump on. And considering that sports games (especially fffffuhffootball) are crap... well, I don't have a point, really.

GOOD! MAYBE THEN PEOPLE WILL STOP BUYING THE DAMNED SPORTS GAMES IF THEYRE TOO EXPENSIVE! TALENT UNDERMINING WANKERS! >=(

Ha ha! It won't be approved then!

I think the most reasonable hope here is that this makes it too expensive for EA to takeover T2. This will likely hurt the price of their stock, and cost EA plenty of money to defend, not to mention the PR headaches they will suffer.

On a more personal note, It's about damn time the FTC got on EA's case!

Monopolys are bad for the consumer,thats a fact.
And since T2 is really the only other serious competition on the sports area to EA super franchise monster,wich is already mediocre,i cant imagine how it would end.

good for Take-Two! dont give into the monster that is EA. I shudder at the thought of an EA-only sports market
 
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