Poster for the 2001 film "Antitrust," courtesy impawards.com

Oft-quoted Wedbush Morgan analyst Michael Pachter isn't just ubiquitous, he's also multifarious. Did you know that in addition to being a financial wizard (Level 60, no doubt) with 15 years of mergers and acquisitions experience under his belt, he also has a law degree from Pepperdine and a master of laws in taxation? We bring this up because in today's installment of Verbatim, we've got a full-scale legal battle among three parties over the best way to interpret the antirust implications--or lack thereof--in Electronic Arts' proposed acquisition of Take-Two. The combatants are as follows:

• Michael Pachter (see above for his extensive credentials)
• Justin Blankenship, Level Up legal affairs columnist; former Federal Trade Commission lawyer (in the Mergers 2 division, which reviewed mergers in the chemical, technology, and entertainment fields)
• Mark Methenitis, editor-in-chief of the Law of the Game blog; and lawblogger for Joystiq; and a licensed attorney in Texas

We've even got a journalist caught in the crossfire: GamePolitics' Dennis McCauley.

The idea behind Verbatim is that we scour the Internet for what various people have said about a particular topic; isolate the most salient excerpts; and compile them in a single, convenient location for your reading pleasure. To see how these lawyers (and journalist) debated this particular issue, read on:

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The Date: February 25, 2008
The Man: Michael Pachter, Wedbush Morgan analyst
The Source: GamePolitics
The Question: Where's the real value in Electronic Arts' purchase of Take-Two?
The Quote: For EA, sports is enough to pay for the whole [$2 billion] thing. If you get rid of sports competition, you suddenly add Take Two's $200 million per year in sports revenue and EA doesn't compete on price anymore. So, theoretically, they could grow that business by $100 million [per year].

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.

That's worth a lot [to EA]. Everything else is gravy. GTA is just gravy...

The Date: March 31, 2008
The Man: Justin Blankenship, former Federal Trade Commission lawyer and Level Up columnist
The Source: Level Up
The Question: How might the government respond to this merger?
The Quote: Do I think this is a deal that the government would sue to block? Not really. But I wouldn't be at all surprised if they required EA to divest its license agreements with certain sports leagues, and maybe spin off some of the talent behind those games to a competitor. And if that happens, does this deal still have the appeal to EA? Not if what Mr. Pachter said was true and EA's offer is based on the realization of monopoly profits from its sports division. Furthermore, if you see the government give this deal a hard look--beyond the normal 30 days normally allocated--you could possibly see the deal delayed long enough by the review process to adversely affect financing arrangements, potentially derailing the whole affair.

In other words, I wouldn't consider this deal inevitable quite yet. 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. Don't be surprised if this gets more interesting than anyone expects.

The Date: April 17, 2007
The Man: An unnamed publicist in Electronic Arts' corporate communications office
The Source: An EA press release
The Question: What say you, Federal Trade Commission?
The Quote: Electronic Arts Inc. ("EA") (NASDAQ:ERTS) today announced that it received a second request for information from the U.S. Federal Trade Commission ("FTC") regarding its proposed acquisition of Take-Two Interactive Software, Inc. ("Take-Two") (NASDAQ:TTWO).

While EA believes that its proposed transaction with Take-Two would not be anti-competitive, the FTC has not yet reached any conclusions regarding the proposed acquisition and has indicated that it needs further information and additional time to conduct its review.

The Date: April 22, 2008
The Man: Dennis McCauley, GamePolitics editor and Joystiq columnist
The Source: Joystiq
The Question: Remind us, what happened after EA got the exclusive NFL license?
The Quote: Some Joystiq readers will recall the NFL 2K series from Visual Concepts. It was a very good pro football game franchise that originated on the Dreamcast but later migrated over to the PS2 and Xbox. Some reviewers actually came to prefer NFL 2K to EA's Madden series. What's more, Take Two, in a competitive effort to win market share in later years, priced it very aggressively ($19.99). Declining to go that low in price, EA was forced to reduce Madden to $29.99 just to stay competitive (there's that word again).

So what happened next? EA secured an exclusive license with the NFL and NFL Players Association. Quicker than a LaDainian Tomlinson sprint to the end zone, the NFL 2K series ceased to exist. The next edition of Madden, no longer facing competitive pressure from NFL 2K, jumped up in price to $49.99. EA's revenues, of course, shot up. Gamers, however, had to plunk down twenty bucks more than the previous year and lost the opportunity to choose their pro football game based on a competitive comparison of features and price. You either played Madden - at EA's price - or you went home.

Is this legal? Apparently. Is it fair? Only if you are an EA investor.

The Date: April 18, 2008
The Man: Michael Pachter, Wedbush Morgan analyst
The Source: Level Up
The Question: Do you agree with former FTC lawyer Justin Blankenship's analysis?
The Quote: He's right that the FTC is looking at this hard, and right that sports is the likely focus. In the final analysis, sports is a large category (probably $3-4 billion), and EA-TTWO have around $1.5 billion of the market, combined. I think that level of concentration is less problematic to the FTC than is the elimination of competition in NBA, NHL and NCAA basketball. However, those markets total only around $400 million combined (wholesale). Price competition occurs only to the tune of around $40 million or so consumer benefit. I derive that number by assuming 30 percent of all units are discounted by 33 percent because of head-to-head competition.

EA will argue that this is de minimis, or, in the alternative, will show that it discounts 30 percent of other games by 33 percent, demonstrating that head-to-head competition will provide NO consumer benefit. Most importantly, NO retailer will oppose the merger, indicating that EA doesn't gain pricing power from the combination.

The Date: April 23, 2008
The Man: Justin Blankenship, former Federal Trade Commission lawyer and Level Up columnist
The Source: His Level Up column, The Law and the Short of It
The Question: Is Wedbush Morgan analyst Michael Pachter correct that this is de minimis?
The Quote: I wouldn't expect the FTC to ignore the anticompetitive concerns in the sports market just because it represents a small fraction of the overall deal. In his recent comments to Level Up, Wedbush Morgan's Michael Pachter suggested that EA would argue that the consumer benefit from heads-up competition in the sports market is in fact de minimis.

While there's no question that EA would try to make that argument--they certainly wouldn't be the first--they can expect it to get limited traction at best. The FTC devotes plenty of resources to policing mergers of all sizes (hospital mergers in small geographic markets for example), and is unlikely to give the deal a free pass just because the anticompetitive effects are small compared to the overall size of the deal.

Instead, the likely response would be to suggest that EA simply spin off the sports division to another competitor to maintain the head-to-head competition--however small it would be--while preserving the rest of the deal.

The Date: April 24, 2008
The Man: Mark Methenitis, editor in chief of the Law of the Game blog and a licensed attorney in Texas
The Source: Joystiq
The Question: You believe that "the Federal Trade Commission's recent inquiries are likely just routine investigation," and that you "don't think EA absorbing Take-Two will have any actual effect on the sports games market." Why is that?
The Quote: One important aspect of anti-competition law is the FTC's ability to investigate and approve mergers and acquisitions. Under the Sherman Act and its revisions, the FTC is put in the position of 'merger control.' That is, if the FTC believes that, based on the totality of the circumstances, the merger would 'substantially lessen competition,' then it can stop the merger. This happens in the US as well as in many other countries. More importantly, all mergers of companies over a certain size (generally, one party with over $100 million in sales and the other with at least $10 million in sales) are subject to this restriction, so it's not unusual for the FTC to be requesting information from EA. EA and Take-Two are both large enough that the FTC should almost certainly have to give clearance in advance of the merger.

Applying that concept to another real world example, if Microsoft were to be in a position to acquire Apple, that would substantially lessen competition. On the other hand, if id Software were to acquire Gearbox, there wouldn't be a substantial change to competition in the games market. Of course, not everything is nearly so cut and dry. If, say, Ford were to acquire Chrysler, it wouldn't much change the landscape of the global car market, but it would dramatically change the landscape of US car manufacturers. (I really don't want to speculate what the FTC would decide.) Remember, if you will, the EB Games and GameStop merger. While that basically consolidated the retail used games market, it didn't affect overall used game competition, as eBay and other online retailers make up a substantial portion of the market. That merger was, obviously, allowed to go through.

The Date: April 24, 2008
The Man: Justin Blankenship, former Federal Trade Commission lawyer and Level Up columnist
The Source: The comments section on Joystiq
The Question: Justin, we all know that you used to work at the FTC. Is this request really routine?
The Quote: As an ex-FTC guy, there's a few points I'd like to make on this: (1) It's the Clayton Act that regulates anticompetitive mergers, specifically section 7, not the Sherman Act. The distinction is important because the Clayton Act gives the government broader regulatory powers. More importantly, it allows the FTC to block a merger that results in a "substantial lessening of competition." It doesn't have to be a full-fledged monopoly. (2) A "second request" like the one issued to EA is not part of a routine investigation. A second request for more information is rare and only goes out when the staff attorneys/economists have already found significant competitive concerns with a given merger.

The Date: April 24, 2008
The Man: Mark Methenitis, editor in chief of the Law of the Game blog and a licensed attorney in Texas
The Source: The comments section on Joystiq
The Question: Mark, how do you respond?
The Quote: With all due respect to your former employment with the FTC, you've missed the point of the piece entirely.

First, while mergers are controlled under Clayton and HSR, they are also regulated under Section 1 of the Sherman Act. I cite the Sherman act as it is the first in the series, and I was not trying to over-complicate the analysis based on citing every possible regulation. This is arguably a "contract, combination or conspiracy in restraint of trade" and therefore the analysis traces through all the acts.

Second, EA owns a legal right to exclusively produce games based on the NFL. As much as anyone wants to argue this leaves the market open to competition, the fact of the matter is Madden will be the only major football game on the market regardless of whether they acquire Take-Two or not, at least until they opt to let the license expire, which seems relatively improbable. Why? Simply, the NFL is the reason. People want to play games based on the real athletes they watch on TV. There is no "next best alternative" to NFL fans. Unless there is a move to invalidate basic intellectual property law on the basis that it is "anticompetitive" (which is unprecedented and would negate the concept of intellectual property to a large extent), then no amount of competition in the marketplace will make a dent in the EA NFL monolith.

The Date: April 24, 2008
The Man: Justin Blankenship, former Federal Trade Commission lawyer and Level Up columnist
The Source: The comments section on Joystiq
The Question: Any final thoughts, Justin?
The Quote: While you're technically right that Sherman Section 1 may govern as well, it's only going to arise if there's a private cause of action. Section 7 of the Clayton Act gives the government broader enforcement powers, so it's simply the only statute that comes into play in FTC merger review. More importantly, Section 7 analysis relies on the Joint DOJ/FTC Merger Guidelines, which is what guides the actual analysis.

There's clearly no competition now in professionally licensed football games due to EA's exclusive. And although Madden is the sexiest product in the sports lineup and it's what everyone wants to talk about, the FTC isn't looking at this deal because of Madden. Nothing about the combination of EA and Take Two affects the NFL exclusive with EA, so it's off the table. You're absolutely right that there's nothing illegal or anticompetitive about the NFL leveraging its intellectual property through an exclusive license--whether or not it's good for consumers.

The FTC's second request is likely about two things (1) the EA/Take Two overlaps in NBA basketball, NCAA basketball, and NHL hockey (as discussed by Mr. McCauley in his column http://www.joystiq.com/2008/04/22/the-political-game-one-vote-against-an-ea-take-two-takeover/); and (2) whether the overall size of EA's sports portfolio after acquiring Take Two would allow it to unfairly exercise market power to the detriment of consumers. The areas of direct overlap are the biggest key here however.

With regards to your general opinions on antitrust, I didn't miss the point of the piece. My main reason for popping in was to point out that a second request isn't routine, which is an admittedly esoteric point of administrative procedure at the FTC that only those who worked in government merger review are likely to know. It just seemed tacky to take issue with the opinion portions in this forum when my piece is out there. But maybe a little back and forth will be beneficial for your readers?

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