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Antitrust Investigation Against Nintendo Gains Momentum

Congressman Dennis Eckart from Ohio has requested that the U.S. Department of Justice look into Nintendo for possible antitrust violations. This stems in part from an Atari Games lawsuit against Nintendo last year claiming unfair competition, but according to Eckart he and his team have come across multiple instances where Nintendo could be in violation of the law. His main competition issues stem from several areas, including:

  • Nintendo’s use of a “lock-out” computer chip in its NES and Game Paks
  • Exclusive licensing agreements with software producers
  • The computer chip shortage that may, in part, have been on purpose
  • The bundling of software and hardware
  • Anti-competitive conduct by Nintendo in the retail market

You can read his full eleven page letter to the DOJ at the bottom of this article, but it appears one of his main sticking points is the use of a lock-out chip in the NES. He contends that it facilitates unfair competition and has little impact on the quality of games released, like Nintendo says. In fact, in Japan where the Famicom is a huge success they don’t have a lock-out chip and the variety of software is way higher and the prices are much lower. He wonders why Americans have to pay more for less choice when it comes to the NES.

He does make some potentially valid points – if true. We don’t have the background evidence that he’s using to prove his points, and of course talking to competitors like Atari Games isn’t always the best way to drill down to the truth as they have skin in the game. It will be interesting to see if this gains ground and if an official investigation is opened by the Justice Department. As of now Nintendo is denying any wrong-doing. Below is an article from the Associated Press and another from The LA Times.

 

Congressman Asks Justice Antitrust Probe of Nintendo

December 7, 1989

 

The chairman of a House antitrust panel charged Thursday there is ″strong evidence″ that unfair marketing practices by Nintendo of America Inc. have monopolized the home video game industry and kept the prices of Super Mario and his buddies artificially high.

Rep. Dennis Eckart, D-Ohio, asked the Justice Department’s antitrust division to investigate Nintendo, the U.S. subsidiary of a Japanese manufacturer that revived the domestic electronic game industry and now controls 80 percent or more of the $3.4 billion market.

Nintendo officials angrily disputed the charges and accused Eckart of denying them an opportunity to defend themselves.

″This guy is just grandstanding,″ said Howard C. Lincoln, senior vice president of Nintendo.

Eckart, chairman of the House Small Business subcommittee on antitrust, accused Nintendo of intimidating retailers to keep competitors’ games off the toy store shelves.

He said Nintendo has used exclusive software arrangements and physical computer-chip barriers to control the market, and he charged Nintendo had created artificial shortages of some games sold by licensed software producers.

He said the result of Nintendo’s marketing practices is that only games licensed or sold by Nintendo can be played on the Nintendo players, blocking independent software publishers and inflating the costs of games to consumers by an estimated 20 percent to 30 percent.

″They have done a brilliant job in marketing their product, but the simple fact remains that our subcommittee investigation has revealed there is no competition among competitors,″ Eckart said.

″Nintendo right now is saying you can buy our machines but you can play only our games,″ Eckart said.

Eckart sent an 11-page letter to James F. Rill, assistant attorney general and head of the antitrust division of the Justice Department. It described the subcommittee staff investigation findings and asked the Justice Department to review or investigate under antitrust laws.

Justice Department spokeswoman Amy Brown said the department received the letter but had no response.

Eckart raised the issue less than three weeks before Christmas, at a time when the parents of children all over the country are buying or looking for popular Nintendo games. The game-playing unit costs $80 or more, and game cartridges range in price from around $35 to $60 each.

By Nintendo’s own estimate it will have its electronic game-playing units in 20 percent of all U.S. households by the end of 1989. The market- penetration figure for households with children aged 7 and up to mid-teens, the prime game-playing market, is far higher.

Eckart released his letter and described the investigation at a news conference.

Lobbyists for Nintendo distributed copies of a letter from Lincoln to Eckart accusing him of unfairly refusing to give Nintendo officials a chance to give their side.

Eckart said his staff had two interviews with Nintendo representatives.

But in a telephone interview, Lincoln heatedly disputed that claim and accused Eckart of ″an outright lie.″ He said Nintendo only learned of the investigation ″on a rumor,″ and that Eckart canceled a hearing where Nintendo was to speak.

In presenting his case against Nintendo, Eckart credited the company with a product that was high-quality and sought-after. But he said evidence suggested Nintendo used its dominance to stifle competition.

Eckart compared Nintendo’s marketing to actions by phonograph producers 50 years ago, which designed equipment so that only their own records could fit on their players.

″Our subcommittee investigation has revealed strong evidence of a pervasive pattern and practice by Nintendo to unreasonably restrain competitors in producing, manufacturing and marketing computer hardware and software in the video games industry,″ Eckart said.

For example, he said, Nintendo installs a ″lock-out chip,″ or patented computer chip, in each cartridge, so that only licensed game cartridges including that chip can be used on Nintendo players.

He said no such chip is used by Nintendo in Japan, and that competing game companies do not use such a chip. Nintendo’s parent company, Nintendo Co. Ltd., is based in Kyoto, Japan.

Lincoln said the chip was a security device aimed at preventing sale and use of pirated, counterfeit and poor-quality games.

Eckart also charged that Nintendo has set artificial and arbitrary limits on the types and numbers of game units that can be sold.

Lincoln, in response, said shortages of games such as the popular ″Simon’s Quest″ and ″Super Mario Brothers″ last Christmas, and similar examples this year, were due to the shortage of computer chips worldwide – now lessening.

 

Nintendo Accused of Unfair Marketing

December 08, 1989|KEVIN DAVIS | TIMES STAFF WRITER

Source: LA Times

 

While visions of Super Mario Brothers dance through the heads of millions of children this holiday season, the maker of the Nintendo home video system is playing unfair games with consumers, the chairman of a congressional antitrust panel charged Thursday.

Rep. Dennis Eckart (D-Ohio) urged the Justice Department’s antitrust division to investigate Nintendo of America, the U.S. subsidiary of the Japanese electronics firm that revived the electronic games industry and now controls 80% of the $3.4-billion market.

Eckart’s complaint, outlined in an 11-page letter, contends that Nintendo has engaged in “unreasonable tactics to restrain competitors” by exercising rigid control over production of the game cartridges played on Nintendo consoles sold in America.

Eckart, whose House small business antitrust subcommittee has investigated the video game industry, would like Nintendo to allow more companies to produce software for its machines with fewer strings attached.

“The key is that software drives sales in this area,” Eckart said in an interview. “Nintendo’s dominance of the home video game market and its tight control of software production has led to an unprecedented level of control over the marketing end of the industry.”

Nintendo officials angrily denied Eckart’s charges that unfair marketing practices have created their near-monopoly and accused the congressman of not giving them an opportunity to defend themselves.

“He is just grandstanding,” said Howard C. Lincoln, senior vice president of Nintendo of America, which is based in Redmond, Wash.

In raising the issue less than three weeks before Christmas, Eckart could strike a chord with millions of parents across the country who are trudging to toy stores to buy Nintendo games and software–and often finding them in short supply.

Nintendo game systems and software have been among the biggest draws for toy retailers for two consecutive years, said Michael Karr, store manager at Toys R Us in Santa Ana. Altogether, video games account for as much as 25% of all toy sales.

“There’s quite a bit of traffic in that area,” Karr said. “The software is doing quite well and is more than living up to sales projections.”

Popular software–such as Super Mario Brothers, Legend of Zelda and Teen-Age Mutant Ninja Turtles–sometimes is hard to find, he said.

Nintendo’s game-playing units retail for $80 or more, and game cartridges range in price from $30 to $60 each. Nintendo officials estimate that the company will have its systems in 20% of all U.S. households by the end of the year.

Only games licensed or sold by Nintendo can be played on Nintendo consoles. That practice ensures that independent software publishers cannot break into the Nintendo market, inflating the cost of games to consumers by 20% to 30%, Eckart said.

The Ohio congressman contended that Nintendo has created artificial shortages of some games sold by licensed software producers and accused Nintendo of intimidating retailers to keep competitors’ games off toy store shelves.

Lincoln said that Nintendo’s business agreements and practices have been reviewed in depth and cleared by the company’s attorneys.

“We are confident that (our business practices) fully comply with U.S. laws,” he said. “They were designed to and have succeeded in restructuring a dead industry in the U.S.–to the benefit of numerous small and large businesses from coast to coast, as well as retailers around the nation.”

Nintendo requires the installation of a patented computer chip, or “lock-out chip,” in each game cartridge sold in the United States to ensure that only licensed cartridges can be used in Nintendo consoles. Lincoln said the chip is a security device aimed at preventing the sale and use of pirated, counterfeit or poor-quality games.

Eckart disputed that claim. “If it were a question of quality control, they would use a lock-out chip in Japan–which they don’t.”

Eckart compared Nintendo’s use of exclusive software arrangements and computer chip barriers to control the market–known as bundling–to a practice halted by International Business Machines in 1968 after a threat of Justice Department intervention.

 

Official 11-page letter sent from Congressman Eckart to DOJ:

 

Nintendo Antitrust Probe | December 7 1989

 

Craig Majaski

Craig has been covering the video game industry since 1995. His work has been published across a wide spectrum of media sites. He's currently the Editor-In-Chief of Nintendo Times and contributes to Gaming Age.

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