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

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.

Tweet about this on TwitterShare on FacebookShare on Google+Share on RedditEmail this to someone

Comments are closed.