Price of video games puts Nintendo in EC firing line

THE EUROPEAN COMMISSION is investigating the pricing policies of Sega and Nintendo, the giant Japanese corporations behind this Christmas's best- selling Sonic II and Streetfighter II video games.

Video games are expected to make up half of this year's pounds 1.2bn toy market, with Nintendo and Sega being responsible for their phenomenal success.

Nintendo's worldwide profits are expected to be more than dollars 1.4bn, making it Japan's third most profitable company. The European Leisure Software Publishers Association estimates UK sales of Nintendo and Sega products (roughly equally split between games and hardware) will be more than dollars 1bn. Germany is likely to generate about dollars 1.1bn, France dollars 764m and Italy dollars 388m.

The two groups have 97 per cent of the UK video game market. 'Consoles' - dedicated game-playing computers - with their software make up over 80 per cent of the market. The consoles are sold relatively cheaply - profits lie in games.

Companies have to apply for licences from Sega and Nintendo to produce games for their computers.

Licensed publishers must get approval for each game released and pay a hefty fee for each game sold. Often, though, the Japanese companies insist they manufacture and market the games.

Sega and Nintendo say they need to use copyright law to control the software market to prevent it being 'flooded' by poor quality games. Critics say that cuts competition and raise prices. They also say it is similar to video manufacturers deciding what films can be played on their machines.

The European Commission has ventured where Britain's Office of Fair Trading has been reluctant to tread following complaints by UK firms that Japanese business practices keep out independent software publishers - leading to higher prices.

Under EC law, the Commission has wide powers to investigate and prosecute companies it believes are unfairly restricting competition.

The OFT, which could recommend a Monopolies and Mergers Commission investigation, said yesterday video games were one of the many issues under review, but it had looked at them before and found no grounds to recommend a full MMC inquiry.

David Darling, a director of Codemasters, a UK computer game publishing house, said companies were reluctant to complain in case Sega and Nintendo cut them out of the lucrative software market.

Codemasters is being sued by Sega in an attempt to prevent it publishing games for Sega's Mega Drive without the Japanese company's permission.

Nick Garnell, who is responsible for Virgin Group's video games sales, said prices, which start at about pounds 35, were unreasonably high because of controls exercised by the Japanese.

'Game publishers have been required to sign very onerous deals. As a result Sega and Nintendo decide what games are released, when, how they are marketed and what price they sell at.'

But Nick Alexander, managing director of Sega Europe, defended its pricing policy. A pounds 35 game was sold to the retailer at about pounds 18.75, he said. Sega's production costs are about pounds 10.50, including manufacturing costs of pounds 5-pounds 6 and a licence fee of up to pounds 2, both of which will probably benefit Sega's Japanese parent.

By the time retailers' margins are included, the price is pounds 29.78 with VAT adding another 17.5 per cent. However, most games sell for at least pounds 40.

Nintendo's Streetfighter II, which costs up to pounds 65 in the UK, sells for about pounds 44 in the United States.