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GAME GAMESTATION ENQUIRY

Ben Parfitt
GAME GAMESTATION ENQUIRY
1. On 9 August 2007 the Office of Fair Trading (OFT) referred the completed acquisition of Games Station Limited (Gamestation) by Game Group PLC (GAME) to the Competition Commission (CC) for investigation and report. The reference was made under section 22 of the Enterprise Act 2002 (the Act). We are required to publish our final report by 23 January 2008.

2. GAME is a specialist retailer of new (or ‘mint’) and pre-owned video games (including new PC games), video games consoles and related accessories. GAME operated 817 stores at 31 January 2007: 395 of these are in the UK. GAME also operates a small number of concession stores in larger retail outlets. In addition, GAME has two websites serving the UK market, Game.co.uk and Gameplay.com. In the UK and Ireland it had turnover of £586.4 million in 2006.

3. Gamestation is a specialist retailer of mint and pre-owned PC and video games, video games consoles and related accessories operating stores in Great Britain only. The business was acquired by Blockbuster UK in October 2002. Gamestation, pre-merger, operated 217 stores in Great Britain and 35 franchises within Blockbuster stores. In addition, Gamestation operates a website which offers both new and pre-owned games. Gamestation had turnover of £229.2 million and an operating profit of £2.4 million in the year ended 31 December 2006.

4. In November 2005, Blockbuster Inc made known its intention to divest Gamestation through several public announcements in the USA. On 2 May 2007 GAME acquired Gamestation for a total cash consideration of £74 million. The transaction included the entire share capital of Games Station Limited and its wholly-owned subsidiary Gamestation Limited. GAME acquired 217 operating UK stores and the head office
and warehouse in York. The 34 Gamestation concessions within Blockbuster stores were not included in the transaction.

5. As a result of this transaction, Gamestation has ceased to be distinct from enterprises carried on by GAME. The UK turnover of Gamestation exceeds £70 million, so the turnover test in section 23(1)(b) of the Act is satisfied.

6. On 12 June 2007, GAME gave initial undertakings to the OFT under section 71 of the Act. When the merger was referred in August 2007, the CC adopted those undertakings. We considered whether any further changes were necessary to prevent pre-emptive action by the parties which might prejudice the reference or impede the application of effective remedies at the end of the inquiry. As a result, on 18 October 2007 the CC accepted interim undertakings given by GAME and
Gamestation.

7. The video games software, hardware and accessories market is variously estimated as being worth between £2 billion and over £3 billion in 2006, depending on the exact definition of these products and whether sales of pre-owned products are included. The market has grown significantly in recent years. The pattern of growth is cyclical, the launch of new generations of consoles embodying new technologies (such as higher speeds, clearer graphics, Internet connectivity etc) boost sales of consoles and software, as has happened since 2006 with the launch of latest generation consoles such as the Playstation 3, Xbox 360 and the Wii.

8. Specialist gaming retailers such as the merged parties, in addition to selling mint products, also sell pre-owned software and hardware. Customers can trade-in old or unwanted products in return for credit to be used against future purchases. Cash is also offered but typically less than the value of the credit. Gamestation has a substantially higher proportion of its hardware and software sales made up from pre-owned than does GAME.

9. The parties told us that their pre-owned activity allows them to offer cheaper products to price-sensitive customers in competition with lower-cost retailers such as Internet retailers and supermarkets. They also said that trade-in credits represented in effect a reduction in the net cost of subsequent purchases.

10. Mint products are available from a variety of retailers: the parties, independent gaming specialists, high street stores like Woolworths and Argos, entertainment retailers like HMV and Zavvi, electrical specialists (eg Currys, Comet), supermarkets and Internet retailers. Trade-in and pre-owned tend to be offered mainly by specialists and Blockbuster, although pre-owned products can also be sold and bought through second-hand shops, via Internet trading and auction sites, and through informal trading (such as car boot sales).

11. Over the last few years the market share of specialist retailers, and particularly general high street retailers, has declined. The share of supermarkets and Internet retailers has increased and the parties attributed this to their typically lower selling prices.

12. We found that there were distinct product markets for consoles, software and other peripherals. We did not find distinct markets for different types of games or hardware. We considered whether there were any different markets corresponding to different types of retailer but we found that many customers purchased these products at a variety of retailers, that many appeared to look around for the best deals, and that there were no obvious barriers to customers switching between different types of retailer.

13. We considered carefully whether mint and pre-owned products were in the same market. Much of the evidence put to us demonstrating that they were in the same market was unconvincing. However, there was survey evidence indicating that customers would choose between mint and pre-owned on the basis of relative prices, and we note that all third parties we spoke to believed that there was a competitive interaction between them. We therefore conclude that mint and pre-owned are in the same market.

14. The effect of the merger is to bring the two largest specialist retailers together.

15. In mint products we found that many customers viewed GAME and Gamestation as the next best alternative retailer for each other. Nonetheless, we see that there are many alternative retailers open to customers. Therefore, even though the customers of one of the parties might switch by preference to the other, if the merged entity were to raise prices the customers would also be able to switch to a wide variety of
other retailers, such as the Internet and supermarket retailers who have been increasing their market share.

16. There are fewer alternative retailers for pre-owned, and again GAME and Gamestation were often named as each other’s closest competitor, although alternatives exist in independent specialist and second-hand retailers, Blockbuster, and online retailers and auction sites. We note that sales via online channels have grown rapidly in the last two years. We looked at the extent to which the parties’ ability to raise prices for pre-owned would be prevented by customers switching to mint products at other retailers. We found that while the parties’ pre-owned prices were on average below mint prices charged by the cheapest retailers, there were many exceptions to this for individual products. This might indicate that customers do not necessarily switch to other retailers in response to relative prices. However,retailers are differentiated in the service, environment and range they offer, and evidence from various surveys indicated that consumers would be willing to switch between pre-owned and mint products in response to changes in relative prices. Because supermarkets and Internet retailers are generally cheaper than the parties, we expected that such switching would tend to be away from the parties.

17. We also considered whether the parties could profitably reduce the trade-in values offered as a result of the merger. The same alternative sales channels exist for consumers as for pre-owned. A significant proportion of customers indicated that they would be willing to use online trading or auction sites in response to a price change. In addition, because the parties rely on trade-ins to create pre-owned stock, yet their ability to increase their sale prices for pre-owned is constrained, the parties will be unable to reduce trade-in prices because of switching and lost margins on their pre-owned business.

18. Some of the parties’ pricing policies indicate that the number and proximity of local competitors can affect their pricing. However, we note that the size of any such effect is small and the parties have reduced their use of local pricing. We also consider that Internet retailing is emerging as an effective competitive constraint that applies nationwide. We therefore concluded that there is a national market for gaming products.

19. Lastly, we looked at whether the merger could be expected to harm suppliers or if the merger would increase the parties’ buying power to the detriment of competitors. While the greater size of the merged party is likely to allow it to negotiate improved terms in some cases, the improvement in discount rates that can be achieved is unlikely to be great enough to threaten the ability of others to compete, and in so far as cost reductions are transferred through to customers these are a potential benefit to consumers. As suppliers tend to be large multinational companies, and very little product development is UK-specific, we did not expect the merger to harm investment or innovation by suppliers. We also concluded that suppliers were unlikely to give unfair allocation of scarce stock to the merged parties, and that any allocation of special editions or exclusive products would not be likely to affect competition between retailers.

20. In reaching our decisions, our evaluation of the evidence on constraints and the incentives that will apply to the parties post-merger was finely balanced. Taking account of all the evidence in the round, two of the four members of the Group concluded that the merger was unlikely to allow the parties to increase prices or reduce service for mint or pre-owned products or cut trade-in prices. The other two members of the Group took a different view, concluding that the evidence in this inquiry supported an adverse finding in relation to the sale and trade-in of pre-owned software.

21. As explained above, the Group was evenly divided as to the conclusion to be drawn from the available evidence concerning pre-owned software. In the absence of a decision of at least two-thirds of the members of the Group,1 the Chairman exercised her casting vote2 in favour of the provisional finding that the facts found in this inquiry did not support an anti-competitive outcome.

22. Therefore we provisionally conclude that the merger of GAME and Gamestation has not resulted in and may not be expected to result in a substantial lessening of competition in the markets for the supply of gaming software, consoles or peripherals in the UK.

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