A price war is poised to break out between the two giants of the £550m UK video games market folowing a Monopolies and Mergers Commission report yesterday that the two had operated pricing policies against the public interest.
After a 14-month investigation, the commission found that game manufacturers Nintendo and Sega had operated discriminating pricing policies. It called for these to end and for other changes in the way the games are licensed and the prices at which they are sold.
According to the report, the two manufacturers, in effect, control the supply of video games in Britain through pricing practices and onerous restrictions on the independent software producers granted licences to manufacture their video games. Between them, Sega and Nintendo account for 63 per cent of all video games sold in Britain.
The report looked particularly at relative prices of the Nintendo and Sega games in other countries, adjusted for varying tax rates. The MMC found that for the 16-bit format games, representing about 60 per cent of the total hardware market, the models of Sega and Nintendo cost "substantially" more in the UK than in other countries.
Both companies were alsofound to have set prices to earn higher margins on software than on hardware. This makes it harder for new entrants to the market to compete, since their hardware costs of entry are much harder to recoup.
Nintendo called the report "disappointing", but said it would work with the MMC during a planned review process.
Specifically, the MMC found that the two companies have acted to lower the price of their consoles and raise the prices of their own games, meanwhile applying restrictive conditions to the licences they issue to independent publishers. This enables them to "control the supply of video games", John Evans, corporate affairs minister, said in a statement.
A number of restrictions forming part of licensing agreements also came under fire. Limits on the number of games licensed per year, controls over packaging, and the need to seek prior approval from the companies before developing games were all deemed restrictive. In a particularly strongly-worded recommendation, the MMC said that if the companies found it was not possible to comply in certain of these areas, "some form of price control may have to be considered".
The report also criticised the companies' policies on video game rentals. Nintendo prohibits them, while Sega has established restrictive rules governing the rental market. The MMC ruled that such restrictions and prohibitions are against the "public interest" because they do not allow customers to try out games before making an "informed purchase."
The MMC report sets a consultation period of three months, during which time information regarding the precise terms of the relationship between licencees and the two game companies will be sought.
The two companies had argued that many of the MMC's proposed remedies could not be implemented, because of the UK's obligations under European Union law. The report concluded, however, that EU limitations were not as severe as had been suggested.