Remember the other day when we were talking about how Take-Two flat-out refused EA’s bid but left the door open for mergers? Remember how we said any combination of Take-Two and EA reeked of monopoly? Remember how you were so tired of hearing about it that you just skipped straight to the GTA IV news? You won’t want to skip this one.
A regular at Newsweek’s Level Up games blog named Justin Blankenship has an intriguing perspective on a potential EA/Take-Two merger, and part of the reason it’s so intriguing is that he’s not just any reader:
What made Blankenship’s opinions particularly intriguing is that from Fall 2001 until early 2004 he was employed as a lawyer at the Federal Trade Commission in Washington, D.C. More specifically, he worked in the Mergers 2 division, which reviewed mergers in the chemical, technology, and entertainment fields for potential violations of Section 7 of the Clayton Act, in search of potential anti-competitive concerns that would hurt consumers.
So here’s a gentleman who spent the better part of three years working in the exact section of the FTC that would evaluate the very anti-trust concerns now under consideration — and he says that this bird might not fly.
Mostly, it’s a question of how you define the market in which competition occurs, according to Blankenship:
Market definition is easy in markets where all competing products are interchangeable, such as commodities markets. Videogames, however, are what the guidelines refer to as “differentiated products.” No two titles are identical and each one appeals to different consumers for a variety of reasons, making the economic analysis more complicated. While all videogames compete with one another for gamer dollars in a broad sense, it’s also clear that certain games compete more closely with certain other games.
Under a broad market definition of all videogames, the merger poses no problems, because the loss of one product in a market of thousands of competitors is a ripple in the sea. However, under a narrow market definition, no other third party can make a licensed professional hockey game (with real player names, team names, stats, etc.) other than EA/Take-Two, granting it an effective monopoly.
But the underlying reason of why monopolies are frowned upon is because of the effects they have on price, not just choice — so if economists can prove (like Wedbush Morgan Securities’ Michael Pachter asserts) that the existence of two separate companies has been what drives competition and the lack of those two seperate companies would remove it…
if Mr. Pachter’s comments are accurate, EA and Take-Two’s sports games are price constrained by one another. In other words, vigorous competition between their respective basketball and hockey games is what causes the prices of those games to decrease more rapidly–much more so than competition from other videogames in the market. 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.
While Blankenship doesn’t go so far as to prognosticate a merger being shut down altogether, he believes that the FTC “would give this deal a hard look,” even where past videogame mergers have presented no real legal concerns; and he believes EA might have to divest some of their exclusive sports licenses if such a deal went through.
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