The Federal Trade Commission’s forgotten investigation of Nintendo
In 1991, the video game company gave out millions of dollars worth of $5 coupons to settle allegations of price fixing
From the late ’80s to the early ’90s, Nintendo dominated the video game market with its now-iconic console, the Nintendo Entertainment System. According to journalist David Sheff’s 1993 book Game Over:
[T]he Nintendo Entertainment System, in just five short years, was brought into more than a third of the households in the United States and Japan. … The huge Japanese computer company NEC and a video-arcade-game company, Sega, tried to compete with Nintendo, but in spite of investments in the hundreds of millions of dollars, they shared less than 10 to 15 percent of the market through 1991.
Nintendo’s incredible success earned it the ire of competitors, legislators, and regulators who believed the company built its business on unfair — and illegal — practices like price fixing. In 1989, Democratic congressman Dennis Eckart launched an inquiry into Nintendo. Soon, Eckart called on the US Department of Justice to investigate. The DOJ later passed the investigation off to the Federal Trade Commission, which worked with the attorneys general of New York and Maryland.
According to Sheff:
There were no price wars throughout Nintendo’s first years in the marketplace because, it was alleged, Nintendo simply forbade them. Stores tried to discount the NES and the games, but Nintendo pressured them to stop. One chain reportedly lowered the price of the NES by a matter of cents and advertised it in Sunday newspapers, and a competitor called Nintendo, which immediately froze shipments to the company offering the lowered prices. The competitor who turned them in allegedly called [Nintendo] back to ask, “Do I get their allocation now?”
To put a stop to this behavior, the attorneys general of New York and Maryland reached a settlement with Nintendo in 1991. The company did not have to admit to any wrongdoing, but it was required to cease any price fixing and advise retailers that they were free to set their own prices. Nintendo was also required to pay $4.75 million to the 39 states that were party to the price-fixing dispute to cover administrative and enforcement costs. Nintendo was also required to issue up to $25 million in $5 coupons to customers who bought an NES between June 1, 1988, and December 31, 1990. The coupons could only be used on NES games.
After the agreement with the states was announced, Nintendo was still facing action from the FTC. However, the regulatory agency proposed a consent order that would not impose any additional punishment on the company.
Before finalizing the agreement, the FTC accepted comments from the public. Everyone who wrote to the FTC expressed some degree of dissatisfaction with the proposal, according to documents obtained by making a Freedom of Information Act request. However, the FTC ultimately made no changes to the agreement before entering into it with Nintendo.
Many of the letters complained about the plan to provide consumers with coupons.
“Who does it benefit other than Nintendo who was the culprit in the first place?” Julia Hing wrote. “You’re telling [consumers] the only way they can claim their rebates is to spend more money on another game, which adds to the profits of the same people who ripped them off! How ludicrous!”
Unsurprisingly, two Nintendo competitors — Atari and Sega — were among the critics.
Atari president Sam Tramiel complained that the FTC was rewarding Nintendo for its price fixing by not punishing the company enough. Tramiel wanted Nintendo to be required to pay restitution and admit liability for price fixing.
Riley Russell, a lawyer for Sega, likewise argued that the settlement benefited Nintendo at the expense of consumers. He called on the FTC to release financial information about Nintendo.
On the other hand, a man named James McAfee suggested that inflated prices were no big deal because Nintendo’s video games were “turning promising young muscles and brains to porridge.”
And Republican congressman William Dannemeyer argued that Nintendo was being unfairly targeted and that its business practices actually benefited consumers.
Regardless of what the public and Nintendo’s competitors thought about the agreements, the company’s bigwigs weren’t pleased.
“Even without admitting liability, it has hurt to be called price-fixers,” said Nintendo senior vice president Howard Lincoln, according to Game Over.
A version of this story was originally published by MuckRock on February 2, 2017. You can view the FTC documents at the MuckRock request page here.
This month marks 30 years since the publication of Game Over: How Nintendo Zapped an American Industry, Captured Your Dollars, and Enslaved Your Children by David Sheff, which tells the story of Nintendo’s rise to prominence and is one of my favorite books. I still have a vague memory of my parents giving me a Super NES along with Super Mario World and Star Fox for my fifth birthday in 1993, the same year Game Over was published — and I have remained a big Nintendo fan since then. As an adult, it was fascinating to read the story behind the games I grew up playing. If you want to read the book, there’s a free PDF at the Internet Archive.
I don’t intend to publish more writing about video games in this newsletter, but I thought it would be a fun change of pace to share this old story. I at least have the excuse that it was based on documents I obtained from a FOIA request.
If you want to learn about a long-lost Super NES game starring Bill Clinton’s cat, you can read my DigBoston story here. This game, Socks the Cat Rocks the Hill, was actually released in 2018 — I own a copy!
If you’re wondering why I haven’t published anything for a while, it’s because I recently had a nasty flare-up of my chronic hand pain. It’s improved quite a bit, and I should be back to writing now. I have a major announcement that I expect to make in about two weeks, so stay tuned for that.
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