Here at Level Up, our inbox is chock full of press releases, PR pitches, notes from my editors, a fan mail or two, and the occasional bit of Viagra spam that slips through our email filters. But every so often, something genuinely compelling comes across the transom--so compelling, in fact, that we have no choice to share it with you. In February, we appeared on the G4TV show X-Play to discuss Electronic Arts' bid to acquire Take-Two. A viewer of the program, Justin Blankenship, is also a regular reader of Level Up, and he wrote us to share his thoughts about the deal. His words were sufficiently compelling that we asked him to shape them into a formal post, which we present to you following our introduction.
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 as part of his division's jurisdiction, Blankenship examined similar mergers while at the FTC, and in his email to us, he expressed his opinion that the FTC would take a hard look at the EA Sports/2K Sports part of this deal for antitrust reasons. " Although you've yet to see antitrust law rear its head in a videogame merger, this is the best case I've seen where it could happen," Blankenship says below. Read on to find out why EA could have more problems on its hands than just Take-Two's wily CEO Strauss Zelnick and the merry band of arbitrageurs holding out for a higher sale price.
There seems to be a lot of chatter in the videogame industry about the inevitability of Electronic Arts' takeover of Take-Two. Although EA's offer may eventually prove too lucrative for Take-Two to pass up, I wouldn't assume that this deal will get a rubber stamp from government antitrust regulators. I'm specifically referring to comments by Wedbush's Michael Pachter, who stated: "Currently [EA and Take-Two] compete in pro basketball, college basketball and hockey. So by taking out all of that, EA has a monopoly in sports. If these guys have a monopoly, they're not going to cut pricing on sports games as quickly. We've been seeing sports games come down [in price] before Christmas the last couple of years. That'll never happen again."
Until 2004, I worked in a division of the FTC that spent a lot of time looking at technology-related mergers, and had at least taken a good look at mergers like this one. I also have every reason to suspect that my former colleagues would give this deal a hard look, especially in light of Mr. Pachter's comments, of which I'm sure they're aware.
Section 7 of the Clayton Act forbids the acquisition of stock or assets when "the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly." (15 U.S.C. § 18) This case, like most merger cases in antitrust, would likely be resolved by the definition of the market (anyone interested in the details of this analysis can refer to the Joint DOJ/FTC 1992 Horizontal Merger Guidelines). If a given market is defined narrowly, it means there are fewer competitors, and concentration levels are consequently likely to be much higher. In a broader market, more competitors are included, concentration levels are lower, and competitive issues are far less likely.
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