The only game in town: Nintendo and Sega are masters of the video games universe - including the price. Now the little guys are fighting back, Gail Counsell reports

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The Independent Online
BENJAMIN and Jonathan Abbott may be crazy about video games but the twin 10-year-old Nintendo addicts draw the line at paying dollars 45 a time for the latest titles. Or at least their mother does.

Toshiro Abbott, a California paediatrician, and Barbara Morse, an accountant with two similarly fanatical sons, are suing the mighty Nintendo corporation because they think Nintendo games cost too much.

Up to dollars 30 a game too much, according to Francis Scarpulla, the lawyer handling the case - a 'class action', where the result holds good for all an American state's consumers. He would have it that the reason Nintendo games are so expensive is because the Japanese company is not playing fair.

Nintendo toys incorporate a security chip, which means anyone wanting to produce a video game which can be played on them must first ask the corporation's permission, and that comes expensive.

Scarpulla draws an analogy with films. 'It's as if Sony had the power to decide anything you could watch on video, just because they invented the machine in the first place.'

As a result: 'Games selling for dollars 40-dollars 45 would have been dollars 15 without Nintendo's lock-out chip and licensing agreements.'

To the ears of British Nintendo fans, that sounds mild. In the UK Nintendo games typically cost around pounds 40, or dollars 75, almost twice as much as in the US. But UK buyers will probably have to leave it to their American counterparts to challenge Nintendo's way of doing business. The British legal system, which has traditionally barred class actions and contingency fees, means that individual lawsuits by consumers are rare.

The Office of Fair Trading has spent the past year or so looking into complaints about the video games market, but says it has so far not identified anything in the activities of Nintendo or any other manufacturers that amounts to a breach of UK competition laws. As with its more extensive investigation of CD prices, just because a manufacturer is making a hefty profit does not necessarily mean it is doing anything illegal.

Big money is at stake. At an estimated pounds 400m last year and an expected pounds 565m this, UK software games sales are bigger than the pounds 345m music CD market. The European Leisure Software Publishers Association says sales will top pounds 650m by 1993, rivalling the value of the music market in its entirety.

Of that, by far the fastest-growing and most profitable segment is the one dominated by Nintendo and its smaller Japanese Doppelganger and rival, Sega.

Wander down to a specialist retailer such as the Virgin Games Centre and you will find the shelves lined with the likes of WWF Wrestle Mania, Populus and Mega Man 2.

To the uninitiated they all look the same. But aficionados explain that they come in two distinct varieties: video games on special cartridges for dedicated machines such as Nintendo's Game Boy, on one hand, and computer games published on floppy disks and played on home computers, on the other.

The distinction is vital. Manufacturers of dedicated machines, or consoles, are the masters of their own particular universe, able to dictate who can produce games for their machines; home computer manufacturers have no such luck.

Nintendo and Sega, which between them account for more than 95 per cent of the UK consoles market, use slightly differing techniques to control what is published for their machines, but achieve the same effect.

While Nintendo's special security chip and copyright cartridge make it almost impossible for other companies to produce cartridges which will work on Nintendo machines except under licence, Sega machines automatically display a copyright notice on any game which is played on them. That creates a sea of legal difficulties for anyone who wants to produce games without Sega's involvement.

The issue is at the heart of the argument about how much the games should cost. The games machines are sold as cheaply as possible. The profit lies in selling the software.

'It's like razors,' observes David Darling of Codemasters, a software publisher. 'They virtually give away the handle but make their money on the blades.'

By deciding who can produce games for their machines, Nintendo and Sega - which are also software publishers and distributors - ensure they share in the profit from the games. Analysts estimate up to 80 per cent of Nintendo's profits come from software.

Darrel Whitten, an analyst with Prudential Bache in Tokyo, says Nintendo makes a profit of about 10 per cent on its machines. But on software produced for its consoles, it charges a royalty amounting to around 37 per cent of the publisher's price.

Anyone who wants to publish a game for a Nintendo console must become a 'licensed' publisher. Almost without exception, licensed publishers have to allow Nintendo or Sega, as the case may be, to manufacture and package their games. The companies then decide what games may appear and when, a strategy they say is designed to avoid too many poor-quality games flooding the market and disillusioning their customers.

The price the companies charge games publishers for making and packaging the cartridges reflects this interest. By the time a hefty royalty for Nintendo is added in, it may be more than double the cost of cartridges sourced elsewhere in the Far East.

'A game with a retail price of 7,900 yen ( pounds 33) will have been sold to the retailer for about 5,900 yen ( pounds 20), who will have bought it from a software publisher for around 4,000 yen ( pounds 14),' says Darrel Whitten. 'Of that 4,000 yen the publisher will have paid a 1,500- yen ( pounds 6.50) royalty to Nintendo, plus whatever it was charged by Nintendo for manufacturing and packaging cartridges.'

It is a very profitable business. Nintendo's worldwide sales were dollars 3.9bn last year, while its profits were dollars 1.1bn. Its only significant rival in the consoles market, Sega, is about a quarter of its size; though a strong force in Europe, it is much less powerful in Japan and America. Worldwide, Nintendo claims more than 80 per cent of the video games market, though its edge is being eroded by Sega.

Both companies have shown phenomenal growth, reflecting the fact that consoles have proved the hottest, fastest-growing end of the market. In the UK, cartridge games now account for around 48 per cent of the market by value (though only 31 per cent by the number of units sold) according to Elspa, a figure it says will rise to 85 per cent by the end of 1993.

With Nintendo and Sega representing 95 per cent of this market, video games publishers have little choice but to produce software for their consoles on their terms. To some, this is bad news.

'The Japanese way is to control all aspects of the market,' says one industry insider. 'For the software publishing industry this is very bad; it means that the publisher progressively becomes just a developer of games on behalf of Sega or Nintendo. But the up-front costs and the lack of control mean they have no choice.'

Nintendo sees things differently. 'The licensing system meets our No 1 goal, which is to provide the consumer with the best quality of product,' says Ron Judy of the Paris-based NES International, Nintendo's main European distributor.

It was failure to exercise similar control in the early Eighties, when consoles by Atari were briefly popular, which ruined the market for a long time, he argues. A deluge of cheap but poor games left buyers disenchanted.

Publishers may moan about costs, but they appreciate the effort Nintendo puts into ensuring game quality, he says. 'Obviously Nintendo's licensees will say Nintendo charges such and such more. But the licensees also know how much time and effort Nintendo puts into checking the product and going back and forth with it.'

Few companies wanting to become licensees are turned down, he argues, and if they can satisfy Nintendo on their manufacturing and packaging standards, they will be allowed to produce their own cartridges.

Darrel Whitten agrees that in some cases Nintendo has allowed publishers to produce their own cartridges under licence. But he says the royalty fee is still payable, and without Nintendo's economies of scale in manufacturing, some have found it unviable and returned to the fold.

Another argument made out in favour of Nintendo and Sega is that they do not unfairly dominate an existing market, but each represent an individual market that they have created through a huge investment in development and promotion.

'Of course Nintendo control the market,' says Mike Hayes of Bandai, Nintendo's authorised UK dealer. 'Nintendo created the marketplace. They created the video games movement in America and then offered licensees the opportunity to become involved.'

This argument goes near to the heart of the competition issue. Are the games merely an extension of Nintendo's product which it has the right to control absolutely? Or are they a separate market in themselves which should be open to all?

The Abbotts and Morses, not to mention a battery of lawyers, would argue the latter. Moreover, this being America, where no court case is complete without an appeal to the Constitution, they claim the former approach is not only a breach of competition laws but touches on freedom of speech.

Mere breaches of the Constitution are not, in such circumstances, actionable by consumers. But Francis Scarpulla hopes the claim may still come in handy. 'It's a very sexy argument to put before the jury, anyway.' Should the jury be swayed by it, things could turn expensive for Nintendo, since the Abbotts and the Morses are suing on behalf of every other Californian buyer of Nintendo games.

At the last count around one in three US homes had a Nintendo console - either the basic 8-bit 'NES', the hand-held Game Boy or the latest 16-bit 'Super NES', and had bought on average 10 games for it.

But the mills of American justice grind slowly, and although the opening rounds were fired in 1990, it may well be another year before everyone files into the San Francisco courtroom to hear the verdict.

In the meantime, Nintendo and Sega have been under fire from other quarters. Nintendo recently had to settle an action brought against it in the US by the Federal Trade Commission, over alleged resale price maintenance in relation to its hardware. That meant Nintendo had to distribute up to dollars 25m in 'coupons' offering buyers dollars 5 off their next purchase of a Nintendo product.

Then there are a number of US cases outstanding which involve disputes between publishers and Nintendo. So far only one significant case has been heard by the courts, between the software company Atari and Nintendo, and the rather muddled resulting decision has been seized on by both sides as evidence in their favour. The jury found that Nintendo had monopoly power in the market, but had done nothing which had damaged Atari. As a result, Atari lost.

But Atari is claiming a partial practical victory. The thrust of its objections had been to a condition in the licensing agreement that said games produced for Nintendo machines by Atari could not be published for other manufacturers' machines, a restriction dropped during the course of the trial, says Atari's legal counsel, Adron Beene.

Atari is appealing, but the case most anxiously awaited in the industry - involving another publisher, Atari Games (confusingly, it has nothing to do with Atari) - has yet to come to trial. It should establish a broad principle as to whether Nintendo's lock-out chips are a breach of US anti-trust law. But it is unlikely to be heard until next year.

In the UK the main potential challengers to the status quo are the publishers of video games, but they have so far been reluctant to act. After their chaotic and traumatic experiences with Atari in the Eighties, when many publishers and retailers were left with huge stocks of unsaleable games, Nintendo's orderly market has proved a haven. This has been a gravy train in which all aboard have been able to share.

Many agree that for the consumer, prices are too high. 'I think the price is inordinately expensive,' says Dominic Wheatley of Domark, a UK software publisher. 'Admittedly cartridges do cost more than disk software to manufacture. But the price for the consumer is still very high.'

But with the Eighties collapse fresh in mind, few are keen to take on Nintendo and Sega. 'As a publisher of software I've enjoyed free markets in the past,' Wheatley says. 'But I've also seen those markets crumble with a lack of co-ordination. The structure Nintendo and Sega offer is a benefit.'

'No one wants to challenge the system,' says Stuart Dinsey, editor of CTW, the computer games trade magazine. 'They have their licences and they are making a lot of money out of it. Smaller companies who can't afford to be licensees and retailers don't like it so much, but the ones who are the hardest done by are the consumers, who end up paying high prices for software.'

Despite this reluctance, a few publishers have recently grasped their slingshots and taken sighting shots at the Goliaths.

In particular, two complaints have been lodged with the European Commission, one against Sega by a company called Accolade, another by a company called Active Enterprises, against Nintendo. Both relate to the alleged roles of the Japanese companies in distribution. The EC has yet to decide whether to open an investigation, however.

Among the complainants are retailers. Nick Garnell of Virgin Retail, which owns the Virgin Games Centres chain, says prices are 'off-puttingly high', especially in relation to the cost of the consoles. 'We certainly feel cheaper price points would be a lot healthier for the industry.' He would 'rather deal with a larger number of suppliers,' he says.

CTW's editor, Stuart Dinsey, says the prices are often a big surprise for parents: 'I don't think that most parents realise when they buy the hardware for pounds 70 that the software will cost pounds 35- pounds 40 a game.'

Mike Hayes of Bandai disputes this, however. 'We've carried out research which shows that the parents don't look at the price of the hardware. They look at the price of the software.' They may initially exclaim 'How much?' he says, but they soon grasp that given the length of time it will take a child to play the game, it is good value.

One of the most delicate subjects for the industry is the differential between the prices of video games in the US and the UK. The recommended retail price of Nintendo's popular Dr Mario is dollars 37.99 ( pounds 20) in the US and pounds 34.99 in Britain, for example. Even allowing for VAT at 17.5 per cent in the UK, the American price is significantly lower.

Nintendo justifies the difference on the grounds of 'economies of scale' in the US. 'Americans are wealthier,' says Mike Hayes. 'In the UK we sell four games for every piece of hardware, while in the US we sell 10.'

But industry sources argue that as nearly all of the games are manufactured and packaged in Japan for Nintendo, economies of scale are relatively unimportant. 'There is no reason why games shouldn't retail at the same price as they do in the States,' says David Darling. 'They come on one ship from Japan.'

The obvious answer might be for buyers to purchase direct from the US. But Nintendo machines and cartridges produced for the US market have a different security chip from those produced for sale in Europe, which makes such 'grey' imports difficult.

That may change, however. Already one company, Horelec SA of Belgium, has started marketing - without Nintendo's permission - a device allowing players to use US cartridges on British Nintendo machines.

Nintendo is highly litigious when it comes to protecting its marketplace, and it remains to be seen whether it will leave the product unchallenged. But the war of the games does seem to have been joined in earnest.

(Photographs omitted)