Commission decision

of 30 October 2002

relating to a proceeding pursuant to Article 81 of the EC Treaty and Article 53 of the EEA Agreement

(COMP/35.587 PO Video Games, COMP/35.706 PO Nintendo Distribution and COMP/36.321 Omega - Nintendo)

(notified under document number C(2002) 4072)

(Only the English, Portuguese, Greek, German, Italian, and Swedish texts are authentic)

(Text with EEA relevance)

(2003/675/EC)

THE COMMISSION OF THE EUROPEAN COMMUNITIES,

Having regard to the Treaty establishing the European Community,

Having regard to the Agreement on the European Economic Area,

Having regard to Council Regulation No 17 of 6 February 1962, First Regulation implementing Articles 85 and 86 of the Treaty(1), as last amended by Regulation (EC) No 1/2003(2) and in particular Articles 3 and 15(2) thereof,

Having regard to the complaint lodged by Omega Electro BV on 28 November 1996, alleging infringement of Articles 81 and 82 of the Treaty by Nintendo Netherlands BV and Nintendo UK Ltd and requesting the Commission to put an end to that infringement and to impose a fine,

Having regard to the Commission Decision of 25 April 2000 to initiate proceedings in this case,

Having given the undertakings concerned the opportunity to make known their views on the objections raised by the Commission in accordance with Article 19(1) of Regulation No 17 and with Commission Regulation (EC) No 2842/98 of 22 December 1998 on the hearing of parties in certain proceedings under Articles 85 and 86 of the EC Treaty(3),

Having regard to the final report of the Hearing Officer in this case(4),

After consulting the Advisory Committee on Restrictive Practices and Dominant Positions,

WHEREAS:

1. THE FACTS

1.1. The parties to the proceeding

(1) The parties will be referred to as follows in the present decision: in the factual part the authors of the infringement will be mentioned. In the legal assessment, reference will be made to the actual addressees of this Decision.

1.1.1. The Nintendo group of companies

(2) The ultimate parent company of the Nintendo group of companies is Nintendo Corporation Ltd (NCL), a listed company established in Kyoto, Japan. Nintendo's business in the EEA is conducted by the following wholly-owned(5) subsidiaries:

- Nintendo of Europe GmbH (NOE). NOE is Nintendo's main EEA-based subsidiary. It coordinated certain business practices of Nintendo in Europe and was the exclusive distributor for Germany, at least from January 1991(6) until 31 December 1997,

- Nintendo of America Inc (NOA), although not itself distributing Nintendo's products in the EEA, was also responsible for the coordination of certain of Nintendo's business practices in Europe during the period relevant for this Decision,

- Nintendo Netherlands BV (NN). NN was the exclusive distributor for the Netherlands, at least from 1 January 1993(7) until 31 December 1997. This company is currently called Nintendo Benelux BV,

- Nintendo France SARL (NF). NF was the exclusive distributor for France, at least from 31 December 1992(8) until 31 December 1997,

- Nintendo España SA (NE). NE was the exclusive distributor for Spain, at least from 1 January 1994(9) until 31 December 1997,

- Nintendo Belgium SPRL (NB) was the exclusive distributor for Belgium and Luxembourg, from at least 1 January 1994 until April 1997(10),

- Nintendo UK Ltd (NUK) was the exclusive distributor for the United Kingdom and Ireland from at least March 1993 until 4 August 1995(11).

(3) The term "Nintendo" may refer to any or all of those companies in the Nintendo group.

1.1.2. The independent Nintendo distributors

(4) In other territories, Nintendo had appointed independent exclusive distributors.

(5) THE Games Ltd, a trading division of John Menzies Distribution Limited, which is a wholly-owned subsidiary of John Menzies plc, was appointed in August 1995 as independent exclusive distributor for the United Kingdom and Ireland, after NUK ceased performing this function (together referred to hereafter as THE). THE remained Nintendo's exclusive distributor for this territory until at least 31 December 1997.

(6) Chaves Feist & Cia LDA, later called Soc. Rep. Concentra LDA and, since September 2001, Concentra - Produtos para crianças SA (hereafter referred to as Concentra) was Nintendo's exclusive distributor for Portugal, at least from 14 May 1991 until 31 December 1997(12);

(7) Linea GIG SpA (hereafter referred to as Linea) was Nintendo's exclusive distributor for Italy, at least from 1 October 1992(13) until 31 December 1997.

(8) Bergsala AB (hereafter referred to as Bergsala) has been Nintendo's exclusive distributor for Sweden since 1981 and, since 1986, also for Denmark, Norway, Finland and Iceland(14).

(9) Itochu Hellas EPE (in correspondence often referred to as Itochu Hellas Ltd) was Nintendo's exclusive distributor for Greece at least from 14 May 1991 until February 1997. All shares in Itochu Hellas EPE were always held by Itochu Corporation or wholly-owned subsidiaries of Itochu Corporation(15). Thus, Itochu Hellas EPE is, ultimately, a wholly-owned subsidiary of Itochu Corporation (hereafter referred to Itochu). Itochu Corporation is headquartered in Tokyo, Japan.

(10) Nortec AE (hereafter referred as to Nortec) was Nintendo's exclusive distributor for Greece subsequent to Itochu from at least 4 April 1997 until 31 December 1997(16);

(11) CD-Contact Data GmbH was Nintendo's exclusive distributor for Belgium and Luxembourg from at least April 1997 until 31 December 1997. For this purpose, it founded a wholly-owned subsidiary, Contact Data Belgium NV, for distributing the products in this territory(17) (referred to hereafter as Contact).

(12) On 29 September 1998, Activision Inc, a company established under the laws of the Stare of Delaware (USA), gained control over CD-Contact Data GmbH by purchasing all its shares.

(13) Subsequently, on 9 June 1999, CD-Contact Data GmbH founded a wholly-owned subsidiary, CD Contact data BV established in the Netherlands. All shares in Contact Data Belgium NV, previously held by CD-Contact Data GmbH, were then transferred to this newly founded company. CD-Contact Data GmbH continues to exist as a holding company(18).

1.1.3. Omega

(14) Omega Electro BV (hereafter referred to as "Omega") is a company established in the Netherlands that is active in the import and sale of electronic games. On 26 November 1996, it lodged a complaint under Article 3(2)(b) of Regulation No 17 that primarily concerned the distribution of Nintendo game cartridges and consoles and contained a variety of allegations, inter alia, the hindrance by Nintendo of parallel trade and its operation of a resale price maintenance policy in the Netherlands.

1.2. Relevant product markets

(15) This case relates to game consoles and video games or game cartridges, which allow users to play games displayed on a screen.

(16) In the correspondence of the parties the term "hardware" is often used as a synonym for "game console". In this Decision, the term "game console" is used systematically, except for direct quotations. Similarly, in the correspondence of the parties the term "software" is often used as a synonym for "game cartridge". In this Decision, the term "game cartridge" is used systematically, except for direct quotations.

(17) During the period of the infringement, Nintendo produced various types of game consoles (see table 1 below) and game cartridges for use with these game consoles. Collectively, they are referred to hereinafter as "the products"(19).

1.2.1. The game consoles

(18) Game consoles are electronic devices dedicated to and specifically designed for playing video games. The user interface is a simple pad or a control, such as a "joy stick", which allows the user to control the movements of the characters on the screen. Game consoles can be divided into static and hand-held game consoles. The generations of static consoles during the period of the infringement were called 8-bit, 16-bit, 32-bit and 64-bit consoles, in ascending order of performance. The various consoles on the market during the period relevant for this Decision and their manufacturers are indicated in Table 1.

TABLE 1

Consoles produced by the major game console producers during the period relevant for this Decision

>TABLE>

1.2.1.1. Personal computers and game consoles are not substitutable products

Demand side

(19) Like game consoles, personal computers (PCs) allow games to be played. However, a PC cannot be regarded as a substitute for either a static or a hand-held game console for the following reasons.

(20) PCs and game consoles are intended to fulfil different consumer needs:

- whereas PCs are, by definition, multitask devices, intended to satisfy a wide range of needs, including, but not necessarily, game-playing(20); game consoles are designed solely, or at least optimised, to satisfy only the gaming needs, in particular of the younger generations,

- in addition, it is uncontested that the technical performance and characteristics of static game consoles for game-playing are substantially better than those of PCs. This can be illustrated by statements to this effect by THE and Nintendo's presidents(21),

- furthermore, in contrast with static game consoles, PCs have only a short life span as a game-playing platform capable of playing the latest released games unless expensive upgrades are made(22),

- the need to upgrade a PC makes it, in addition, a more complex game-playing device than a game console and reduces its attractiveness for consumers seeking only a gaming platform.

(21) In addition, the average PC is five times more expensive than a game console(23).

(22) In view of the above elements, it is unlikely that users looking for a gaming device will switch to buying a PC as a result of a small but permanent increase in the price of game consoles. The reverse is also true: users looking for more than just a gaming device are unlikely to switch to buying a game console as a result of a small but permanent increase in the price of PCs.

(23) This conclusion is supported by the results of consumer research: of the consumers who already owned a static game console and were planning to buy another, fewer than 15 % had considered purchasing a PC for this purpose(24).

Supply side

(24) The relevant criteria to assess supply side substitutability is whether alternative suppliers are able to switch production to the relevant products and market them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices. In the present case, evidence shows that no PC manufacturer has ever tried to enter the market for game consoles. In-roads in the market have been made by a consumer electronics manufacturer (Sony) and by a software producer (Microsoft). It has to be added that this entry affected only the static game consoles market and that the entry by Microsoft occurred after the period of the infringement. Hence, supply side substitutability is not relevant for market definition(25).

(25) As regards hand-held consoles, the same arguments developed above in recital 20 are relevant to show that they are neither substitutable to PCs, nor to laptops. In terms of needs served, on top of playing games, hand-held consoles (contrary to PCs) are portable devices. They are not at all designed to perform any other task than playing games. In addition, PCs are between 10 and 15 times more expensive than hand-held consoles. The comparison with laptops will not change the conclusion that hand-held consoles are no substitute for PCs. Laptops are portable PCs and, hence, multitask devices intended to satisfy a wide range of needs. Furthermore, laptop computers are, for a given performance level, significantly more expensive than PCs. This is mainly due to the cost of certain components, notably the LCD screen and the energy-saving processor. In addition, laptops require the use of miniaturised components which also tend to be more expensive. In conclusion, PCs and laptops are not a substitute for static or hand-held game consoles and, hence, both PCs and laptops belong to different markets(26). The fact that PCs and laptops belong to a different product market from static and hand-held game consoles has not been contested by any party.

1.2.1.2. Static game consoles and hand-held game consoles belong to different product markets

(26) A distinction can be made between static game consoles and portable, hand-held game consoles. The following arguments support the conclusion that relevant distinct markets for hand-held and for static consoles have to be defined.

Demand side

(27) Both types of consoles are intended to fulfil different user needs, in particular as regards the requirement for portability. Static consoles are designed to be used in a fixed location with a normal TV set. Hand-held consoles are designed to be used anywhere. Hand-held consoles only need a game cartridge for use, while static consoles must be connected to a TV set.

(28) Both types of consoles have substantially different technical capabilities. Static consoles offer greater picture resolution, more colours, more computing power (allowing users to play more sophisticated games) and, often, multi-player capabilities. The games that can be played on hand-held consoles are very unsophisticated in comparison with those that can be played on static consoles.

(29) In addition, there are substantial price differentials between hand-held and static game consoles. The price of a portable console is much lower than a static console. For instance, for 1997/1998 THE planned a recommended retail price for N64, SNES (with one game) and Game Boy Classic of GBP 249,99, GBP 79,99 and GBP 39,99 respectively. Another Game Boy product line (Game Boy Pocket) had a recommended retail price of GBP 49,99(27). Nintendo's most popular static game console at the time, the N64, was therefore at least five times more expensive than Nintendo's hand-held console.

(30) As a result, it is unlikely that a significant number of existing or new users of one or the other type of game console will switch to the other type as a result of a small, permanent increase in the price of any of them.

Supply side

(31) Competition among suppliers of static consoles is characterised by the fact that every three to four years, a new generation of static consoles with more advanced technology is introduced onto the market. With the introduction of a new generation of static consoles, sales of less advanced static consoles decline(28). This phenomenon has not been visible in respect of hand-held game consoles(29). During the period of the infringement and after it, only Nintendo introduced a new product, but it was just a new version of its existing hand-held console. Product innovation was primarily limited to reducing the size of the device and increasing the colours in which it was available.

(32) Contrary to what occurred in respect of static consoles, entry by new producers did not take place in the hand-held game consoles market either during the period of the infringement or from that moment to date.

(33) It is even more significant that the only competitor to Nintendo, Sega, had already ceased to be a viable competitor by 1995 (see Table 4 and recital 75). Since then no new product has been introduced in the market by a company other than Nintendo itself.

(34) Consequently, as static consoles and hand held consoles are not substitute products, they are concluded to belong to different product markets. The fact that static and hand-held game consoles belong to different markets has not been contested by the parties.

1.2.2. The games

(35) The purchase of a game console does not in itself allow a user to start playing games. The software which provides the gaming functionality is contained on game cartridges, which make the games directly usable on the game consoles. These game cartridges are distributed and sold to the end-users.

(36) The technical specifications for the media and the software itself differ from brand to brand, and also between the various consoles produced by the same manufacturer. As a result, a cartridge with a game designed for a specific console cannot be used with any other console(30) and, once a particular game console is chosen, only game cartridges compatible with the chosen console can be used.

(37) As a result, in the event of a small, permanent increase in the price of a particular game cartridge, a user of a given game console is unlikely to switch to a game cartridge compatible with a different console. This is due to the fact that the user has to bear the cost not only of the new cartridge, but also that of buying a new console able to interoperate with that cartridge. It is uncontested that the number of game cartridges that need to be purchased to make switching worthwhile is far in excess of the average number of game cartridges owned by the average game console owner. Switching cost may be less important if interoperability between game consoles had existed but no interoperability existed between consoles of different brands or between different generations of Nintendo manufactured game consoles(31).

(38) In conclusion, available facts point to the existence of separate markets of game cartridges per game console and manufacturer. However, it is not necessary to precisely delineate markets any further as Nintendo has accepted: (a) the Commission's factual and legal findings as set out in the Statement of Objections; and (b) that the restrictions of competition identified by the Commission in the Statement of Objections had an appreciable effect on competition in the sense of Article 81(1) of the Treaty(32).

1.2.3. Nintendo's arguments concerning product market definition

(39) Although it did not contest the facts outlined in the Statement of Objections, Nintendo has argued for a broader definition of the relevant product markets. It maintains that competition takes place between "systems" (i.e. the console and cartridges as a whole). As a result, the relevant product market should be defined as one comprising all game consoles and compatible game cartridges. Nintendo's argument is twofold.

(40) First, it maintains that a manufacturer is discouraged from raising its prices for consoles, not only by the predictable loss in console sales, but also, since consoles and games are complementary products, by the related loss of sales in compatible game cartridges(33). Since it follows from the definition of the relevant product market for consoles that the price elasticity between consoles of different manufacturers must be considerable, it also follows that the related loss in sales of game cartridges as a result of increasing console prices would be high. The loss of profits would be higher still because of the high margins on game cartridges.

(41) Nintendo's second argument is that, since an increase in the price of the game console stimulates demand for competing consoles, hence for game cartridges compatible with those competing consoles, game consoles and compatible game cartridges share the same market. Nintendo furthermore argues that the Commission has recognised that changes in the price of game cartridges influence the demand for game consoles(34).

(42) The Commission notes first, that market definition in the present case is not decisive for the establishment of the infringement. Second, Nintendo has used the substitutability test in an incorrect manner. The relevant test for determining whether a product constitutes a separate market is whether users will switch to readily available substitutes in response to a small but permanent increase in prices of that product. However, in order to determine whether game cartridges compatible with a particular game console belong to the same market as game cartridges for different consoles, Nintendo uses a test based on a hypothetical increase in the price of game consoles, not of game cartridges.

(43) Furthermore, as regards Nintendo's first argument, the Commission takes note that Nintendo accepts that game consoles and cartridges are complementary products. The Commission considers that the first argument by Nintendo just implies that static game consoles belong to a single product market, a view that also the Commission takes. If Nintendo's argument is true, then the conclusion may just be that market power by console manufacturers may not be very substantial.

(44) As regards the second argument, the Commission considers that Nintendo is confusing the notions of substitutability between products, that is relevant for product market definition, and that of complementarity. The notion of complementarity between two products is not relevant for product market definition because it means by definition that demand for the two products is positively correlated, so that a price increase in one of them will result in a decrease of demand for both of them. Although this effect may well be taken into account by firms when designing their pricing policies for their products, it is not relevant for the purposes of product market definition.

(45) The Commission considers that for a correct analysis of the demand for game cartridges and its interaction with the demand for game consoles, a distinction must be made between current game console owners at the one hand and new buyers of game consoles and consumers who are looking to replace an obsolete one at the other.

(46) As indicated above in recital 37, current owners of a game console would face substantial switching costs if they switched to different game cartridges, and are generally "locked in" for a period of at least three to four years, usually until their current game console becomes obsolete. For them, competition took place at the time of deciding what console to buy. Their reaction to a small, permanent price increase in game cartridges compatible with their console would be limited because buying an incompatible game only makes sense if the console associated with that new game is bought at the same time.

(47) What happens in practice is that, according to NOE, "When a customer has bought the hardware, for whatever reason, he will buy (...) the software anyhow"(35). Thus, Nintendo recognises that current console owners are not expected to switch.

(48) For consumers who do not yet own a console, or who own one that has become obsolete and are considering buying a new one, prices for game cartridges may be one of the competitive variables used by console manufacturers to compete in that market. However, there are no indications in the file to support that prices of games are more or less important than other elements such as the price of the console itself, its technical capabilities, the time between generations, the interoperability between successive generations of consoles by the same manufacturer, the availability and types of games(36)(37) and the timing of new game releases.

(49) No precise calculation of price elasticities have been made by Nintendo. However, available evidence appears to show that demand for both game consoles and game cartridges is relatively inelastic(38). Low price elasticities for game cartridges and game consoles indicate that consumers do not consider price the most important factor in their purchasing decisions.

(50) Indeed, although N64 compatible game cartridges were sold at slightly higher prices than, for instance, games compatible with Sony's Playstation, this did not prevent the N64 from achieving the fastest sales rate in game history after its launch(39), indicating that the relative higher price level for N64 game cartridges had little, if any, influence on consumers' willingness to purchase the N64 console.

(51) If current owners of a game console will not switch to substitutes in response to a small, permanent price increase of game cartridges, and if such a price increase in game cartridges will not or will insufficiently induce consumers that do not yet own a game console or seek to replace an obsolete one to buy a different one, it has to be concluded that, contrary to Nintendo's argument about system's competition, game cartridges compatible with a particular game console belong to a different market than those compatible with another.

(52) In any event, the issue whether competition takes place between systems or whether the price of games has a significant influence in the decision of buying a new game console can be left open because Nintendo has accepted, firstly, the Commission's factual and legal findings as set out in the Statement of Objections and, secondly, that the restrictions of competition identified by the Commission in the Statement of Objections had an appreciable effect on competition for the purposes of Article 81(1) of the Treaty(40).

1.3. Geographical scope of the markets

1.3.1. Technical compatibility

(53) The fact that static consoles must be used in conjunction with a TV set means that they may require adjustments to different standards of TV sets. The PAL standard is used in all EEA countries except France, where the SECAM standard is in use. According to Nintendo(41), static consoles made to operate with the SECAM standard will not operate correctly in a PAL country (and vice versa). Different television systems therefore represent something of a technical barrier to trade in consoles. Consequently, as regards the geographic market for static consoles, a distinction must be made between France and the rest of the EEA.

(54) Within the PAL area, it appears that N64 consoles can operate anywhere within the EEA with few technical modifications(42). As to other static consoles produced by Nintendo, it appears that they, too, can function anywhere within the PAL area with only minor, if any, modifications(43). Consequently, it is not necessary, at least for compatibility reasons, to make a further subdivision of the geographic scope of the market within the PAL area in the EEA.

(55) Since there is no direct interaction between game cartridges and the TV screen (both connect via the game console), there are no similar technical compatibility problems with respect to game cartridges. Indeed, games for SNES consoles operate properly, whatever TV standard the consoles have been designed to meet(44). Game cartridges for N64 consoles were parallel-traded from Belgium to France(45) and those for the NES console from Spain to France(46). In Spain and Belgium, the PAL standard is used and in France SECAM. Since game-cartridges for static consoles functioned regardless whether the consoles on which they were used were created for use with the SECAM or PAL standard, technical barriers to trade for these products did not exist.

(56) Finally, hand-held consoles are technically identical worldwide. The game cartridges marketed to operate with these consoles are also technically identical worldwide.

1.3.2. Other considerations relevant for the geographic market definition

(57) As part of an overall remedy to avoid parallel trade, NOE deemed it necessary to "shoot for prices within 10 % difference to trade within Europe after max. terms"(47), implying that, in order to prevent retailers established in one territory to switch to suppliers established in another territory, price differentials of not more than 10 % were needed. This means that suppliers in different areas do constitute an actual alternative source of supply for the products. Already on this ground alone, it can be concluded that an EEA wide market exists for technically identical products. The above statement is consistent with the finding that demand conditions within the EEA were very homogeneous.

(58) To substantiate this further, it could be noted that the composition of the supply of products on each relevant product market is very similar throughout the EEA because game consoles manufactured by Nintendo, Sega and Sony are sold in every EEA country and the vast majority of available game cartridges for such consoles are offered for sale everywhere in the EEA(48). New products are often launched throughout the EEA on the same day(49). Nintendo, Sony and Sega's market shares were broadly similar in different areas of the EEA and Sony's entry in the market for static consoles had a very similar impact on the Parties' market shares throughout the EEA(50). Consequently, as far as the supply side is concerned, no substantial differences in competitive conditions existed either within the EEA.

(59) Moreover, transportation costs or other barriers to trade are not a significant impediment to trade in the products either, as game cartridges and consoles were parallel-traded on many occasions between different Member States. Any barriers to trade as regards the products would be even lower for game cartridges and hand-held consoles than for static consoles, in view of the very small volume and weight of game cartridges and hand-held consoles as well as the lack of any apparent need to adapt these products to local conditions.

(60) It can be noted further that the existence in certain countries of companies that actively offered parallel-traded products for sale to retailers confirms the fact that parallel trade and the reselling of parallel-traded products to final consumers was an activity with business potential, not requiring significant modifications to the product's technical characteristics or their packaging(51). Also, the existence of parallel traders rendered the dealing in parallel-traded goods more transparent and more cost-effective for potential purchasers(52), further lowering any impediments that may prevent dealers from switching to suppliers located in different areas.

(61) Nonetheless, substantial price differences existed between various EEA countries. Eventually, Nintendo did not align its prices to within limits that would prevent parallel trade but, instead, restricted parallel trade. In view of the above considerations, those price differentials do not suggest separate geographic markets, but simply emphasise the fact that the infringements had the actual effect of partitioning the single market.

1.3.3. Intellectual property rights

(62) The Commission has considered the possibility of geographic markets wider then the EEA. However, this is not the case because Nintendo has a policy of actively prosecuting traders who parallel import Nintendo game consoles or game cartridges from outside the EEA, on the ground that this infringes intellectual property rights owned by Nintendo in the EEA(53).

1.3.4. The geographical scope of the markets according to Concentra

(63) Concentra argues that the Portuguese market should be considered as a separate market(54). Concentra has not contested the Commission's analysis above of the geographical scope of the relevant product markets or the facts underlying this analysis. It argues that its situation stands out only because of the existence of Portuguese laws under which consumers have a right to information in the Portuguese language and companies operating in Portugal are required to provide information in Portuguese(55).

(64) However, the absence of parallel trade does not necessarily mean that distinct national markets exist. It can very well be consistent with an area where conditions of competition are sufficiently homogeneous to constitute a single geographic market.

(65) Trading consoles within the EEA may require various operations but these are limited to any or all of the following: switching the power plug of the static console, adding a so-called Scart cable to connect the game console to a TV set as used in the country of destination and providing a simple booklet with instructions in the local language. The Commission's file contains several documents emanating from the Parties(56) that estimate the costs of these operations. These facts were not contested by Concentra, nor did it submit any additional facts. From these documents it is clear that these costs are insignificant by comparison with the value of the console and, clearly, did not prevent parallel trade.

(66) Thus, whilst trading in the EEA may involve certain costs, these costs are not such as to justify the existence of separate geographical markets in the present case.

(67) The existence of a separate geographical market for Portugal is also contradicted by the fact that, contrary to Concentra's assertion, at least at certain times, parallel trade of game consoles and game cartridges into Portugal was substantial and no less in comparison with other territories(57).

(68) In conclusion, for static consoles, two geographical markets would have to be distinguished: France, on the one hand, and the rest of the EEA on the other. The geographical market for hand-held consoles is as wide as the EEA. The geographic scope of all the markets for the game cartridges compatible with the different Nintendo consoles is also EEA-wide.

1.4. The state of competition on the relevant markets

1.4.1. The markets for game consoles

(69) There were only a limited number of significant suppliers of game consoles during the period of the infringement, namely, Nintendo, Sony and Sega. They are all Japanese-based companies. Other game platforms, such as 3DO, Commodore CD32, Philips CD-i and the Atari Jaguar, were not significant forces in the market(58).

(70) In the year ending 31 March 1997, Nintendo had a worldwide turnover of JPY 417,6 billion(59), Sony's games business segment had a turnover of JPY 419 billion(60) and Sega's consumer equipment division JPY 114,5 billion(61). Those turnover figures are equivalent, respectively, to EUR 2990 million, EUR 3001 million and EUR 820 million.

(71) In 1994, Nintendo held substantial market shares in all types of consoles then on the market, in France as well as in other EEA countries (see Tables 2 and 4 below). In fact, before September 1995, Sega and Nintendo sold virtually 100 % of all game consoles in the EEA(62). At the end of September 1995, Sony entered the EEA market(s) for game consoles with its 32-bit Sony Playstation and obtained a significant market share. Sega in turn launched a 32-bit console (Saturn), which was less successful. Nintendo's response to this challenge, the N64 console, was not introduced in the EEA until March 1997. However, according to Nintendo's annual reports for 1995 and 1996, Nintendo remained the single largest producer of home video products in the world(63). In 1997, Nintendo's overall worldwide turnover fell only just short of that of Sony's games business segment.

(72) According to Datamonitor(64), Sony's 1997 European sales of static consoles were worth USD 673 million or EUR 530 million at retail prices. Nintendo's EEA turnover in consoles was about Eur [...]* at wholesale prices in the year ending March 1998(65). Sega's European-wide turnover for consoles only is not known. However, sales of Sega's consoles are widely believed to be significantly lower than those of Sony and Nintendo. In fact, Sega's European turnover for consoles and games, for the financial year 1996/1997, was GBP 173 million or EUR 250 million(66), that is, Sega's overall EEA turnover was less than Nintendo's EEA sales for consoles alone. Therefore, Nintendo's share of the EEA market(s) for game consoles was still at least [...]* % in 1997(67).

1.4.1.1. The market for static game consoles

(73) The figures in Table 2 demonstrate that Nintendo held substantial market shares for all types of static game consoles on the market in 1994, both in the French market and in the market comprising other EEA countries (except the United Kingdom).

TABLE 2

Market shares in volume terms of Nintendo and Sega by type of static console and country in 1994

>TABLE>

Source:

GFK, Nielsen.

(74) According to figures obtained from Screen Digest, Nintendo's market share in 1997, if measured in volume terms and over advanced static consoles alone, excluding Nintendo's sales of the 16-bit SNES console, was 31 % in the French market for static game consoles and 37 % in the market for static game consoles comprising all other EEA countries (see Table 3). Itochu has confirmed that the competitive situation of Nintendo as regards static consoles in Greece was similar to that in other EEA countries(68). Consequently, although Nintendo's importance as a supplier of static game consoles may have decreased since Sony's entry into the market, it can still be concluded that Nintendo has remained a significant supplier of static game consoles in France as well as elsewhere in the EEA.

TABLE 3

Market share in volume terms for sales of advanced (32 and 64-bit) static consoles in 1997((See pages 2575 and 2576. By 1997, sales of less advanced 16-bit static consoles did not represent a significant share of the sale of static consoles any more. From the table contained in CTW "UK market soars to £890m" (page 2293) it is possible to deduce a Nintendo UK market share for advanced consoles only of 31,7 %. This figure is very close to the figure mentioned for the United Kingdom in Table 2, but derived from a different source, which strengthens the credibility of the figures presented in Table 2. From the same table it appears that 16-bit console sales constituted about 6 % of the UK sales of dedicated game consoles.))

>TABLE>

Source:

Derived from figures provided by Screen Digest. Due to rounding-up, not all columns add up to 100 %.

1.4.1.2. The market for hand-held game consoles

(75) In 1994 Nintendo held (see Table 4) an important share of the EEA market for hand-held consoles. Since then, its market share has increased considerably. By 1995, Nintendo Game Boy held [...]* % of the hand-held market in Germany, [...]* % in Spain and [...]* % in France(69). In the United Kingdom, according to THE's 1997/1998 business plan, "the demise of the Game Gear leaves Game Boy dominating the portable market with a share of [...]* %"(70). Therefore, it can also be concluded that Nintendo is by far the most important supplier in the EEA market for hand-held game consoles. Again, Itochu has confirmed that the competitive situation of Nintendo as regards handheld consoles in Greece was similar to that in other EEA countries(71).

TABLE 4

Market shares in volume terms of Nintendo and Sega for hand-held consoles by country in 1994

>TABLE>

Source:

GFK, Nielsen.

1.4.2. The markets for game cartridges

(76) For each console, a wide range of game cartridges is available. In fact, the availability of a significant number of games is one of the main factors contributing to the success of any game console. The game cartridges are developed/marketed either by the console producer itself or by third parties, normally under licence from the console manufacturers. Third party game publishers may use distribution channels for their game cartridges independent of the Nintendo channels(72).

(77) Game cartridges are sold for use on the installed base of game consoles. According to Nintendo's 1997 annual report, the worldwide installed base at the end of April 1997 of Game Boy consoles was 55 million units whereas 235 million units of compatible game cartridges had been sold. The equivalent figures for SNES consoles and compatible game cartridges were 46 million and 359 million units respectively(73).

(78) Competition in the different separate markets for game cartridges is primarily driven by quality in terms of the use of popular characters (such as Nintendo's "Mario" character), the quality of graphics, the uniqueness of each game in its genre(74) and its price by comparison with other games available for the console in question. The demand for a particular game is usually relatively short-lived and limited to three to 12 months only. Whereas a large number of games compatible with a certain console may exist at any particular point in time, sales of game cartridges are often concentrated on a very few recently released games. According to THE(75), [...]* % of game sales concern the 10 most popular games at the time. Only the most successful games may be in demand for several years. Once the demand for a particular game has subsided, remaining stocks are cleared out at lower prices, creating a premium and budget structure for game cartridges. Recommended retail prices for budget games are approximately half of those of premium items(76).

(79) It is not possible to provide exact market share figures for Nintendo products in each of the markets for cartridges compatible with its consoles for each and every year(77). However, Nintendo's importance as a publisher of games is reflected by the fact that it is listed as second in the United Kingdom Top 20 publishers for 1997 by Charttrack(78). If measured over the combined sales of game cartridges for all types of games consoles, that is, over a turnover significantly larger than that of the combined turnover of the relevant markets for games compatible with Nintendo-produced consoles(79), Nintendo's market share amounts to 18,5 %. Its market shares in the relevant markets for games compatible with Nintendo consoles must therefore be significantly larger, because Nintendo manufactures only cartridges compatible with its own consoles. In Germany, Nintendo's market share, if measured over all games media for game consoles, is 54 %(80).

(80) Nintendo's importance as a game-publisher can also be illustrated by the facts outlined in sections 1.4.2.1 to 1.4.2.3. These facts demonstrate that Nintendo was the largest supplier in each market for game cartridges compatible with the Nintendo-produced SNES, N64 and Game Boy consoles.

1.4.2.1. The market for SNES compatible game cartridges

(81) If measured against the total European sales of game cartridges for 16-bit consoles, Nintendo's sales in 1995 and 1996 would appear at first sight to indicate market shares of [...]* and [...]* % respectively(81). These figures, however, still underestimate the market share of Nintendo on the relevant market for game cartridges compatible with the SNES consoles within the EEA. First, Nintendo produces only game cartridges compatible with its own consoles, whereas these percentages relate to the aggregate of the market for SNES compatible game cartridges and the one for game cartridges compatible with Sega's 16-bit console. Therefore, Nintendo's share of the market that is relevant here, the market for SNES compatible game cartridges, must necessarily be higher than its share of a more widely defined market. Second, the figures for the market as a whole are in retail prices whereas the "share of Nintendo" is calculated in terms of Nintendo's turnover at prices to trade; no account is taken of margins of retailers and independent distributors.

(82) According to Gallup, in the United Kingdom, Nintendo had a market share in volume terms in the market for games cartridges compatible with the SNES console of 43,0 % in the quarter ending 31 December 1994. During the same period, Nintendo's most important competitors in this market were Virgin, Acclaim, Ocean and Sony with market shares of, respectively, 9,5, 9,1, 7,9 and 4,2 %. Nintendo's market share in volume terms during the quarter ending 31 March 1995 was 29,4 %. During that same period, the market shares of Virgin, Acclaim, Ocean and Sony were 11,4, 9,5, 8,5 and 8,9 % respectively(82). Nintendo's market share in the United Kingdom stayed fairly stable during the period of the infringement(83).

1.4.2.2. The market for N64 compatible game cartridges

(83) In the United Kingdom, sales of cartridges compatible with Nintendo's N64 console were GBP 63 million or EUR 91 million at retail prices in 1997(84). Nintendo's United Kingdom 1997 turnover at wholesale prices was EUR [...]* in the financial year ending March 1998(85). That means that Nintendo's 1997 market share in the market of cartridges compatible with the N64 console was at least [...]* %(86). For the second half of 1998, 17 third party game publishers were expected to have published a total of 33 games for the N64 platform other than those marketed by Nintendo. The most important of these were Acclaim and Infogames with five and six games respectively(87). These figures relate to the United Kingdom only. However, it is uncontested that that the market share in the EEA market for N64 cartridges cannot be lower.

1.4.2.3. The market for Game Boy compatible game cartridges

(84) According to Gallup, in the United Kingdom, Nintendo had a market share in volume terms in the market for games compatible with the Game Boy console of 57,0 % in the quarter ending 31 December 1994 and 53,6 % in the quarter ending 31 March 1995. Its most important competitors in this market were Ocean and Acclaim. The average market shares of these two companies during those two quarters were 8 % and 6,3 % respectively(88).

1.5. The procedure

(85) In March 1995, the Commission opened an investigation into the video games industry (Case IV/35.587 PO Video Games). In September 1995, as a result of its preliminary findings, the Commission opened an additional investigation into the distribution system of Nintendo specifically (Case No IV/35.706 PO Nintendo Distribution). Case No IV/36.321 Omega - Nintendo arose from a formal complaint under Article 3(2)(b) of Regulation No 17 lodged in November 1996 by Omega.

1.5.1. Contacts between Nintendo and the Commission during the investigation

(86) In June 1995(89), the Commission sent Nintendo a request for information pursuant to Article 11 of Regulation No 17 asking, inter alia, for information regarding Nintendo's distributors and subsidiaries within the EEA as well as for copies of its formal distribution agreements with those undertakings active in France, Germany, Italy and the United Kingdom. In its reply of 31 July 1995(90), NOE provided the names of Nintendo's main distributors and subsidiaries within the EEA and a copy of the formal distribution agreement with the Italian distributor, Linea. NOE stated that no agreements existed in relation to the other territories specified as the undertakings active on those markets were wholly-owned subsidiaries of Nintendo.

(87) On 19 September 1995, the Commission also requested a copy of NOE's general terms and conditions of sale(91). It was stated that these terms were in the process of being reviewed and that copies of the new terms would be forwarded to the Commission as soon as they became available. In a supplementary response to the Article 11 request of 26 June 1995, copies of the formal distribution agreements with the Greek and Portuguese distributors were sent to the Commission on 26 September 1995(92). On 9 October 1995(93), the Commission sent a request for information regarding certain terms in those agreements. On 20 November 1995(94), Nintendo informed the Commission that it was currently reviewing its distribution agreements and would forward specific proposals on any modifications to the Commission.

(88) Subsequently, on 19 January 1996(95), a meeting was held between the Commission and Nintendo representatives. The Commission requested a description of Nintendo's distribution policy. Nintendo stated that the agreements were under review and that a final draft of the agreements would be forwarded to the Commission when completed. Nintendo indicated that this version would become the standard agreement and would be used by all distributors. It assured the Commission that all concerns relating to distributors' obligations would be addressed in the new draft of the distribution agreement.

(89) On 19 April 1996(96), Nintendo submitted its new draft agreement for independent distributors, as discussed in the meeting of 19 January 1996. A meeting between the Commission and Nintendo representatives was held on 24 April 1996(97). At that meeting, the Commission requested clarification of a number of points, such as the terms relating to "authorised dealers" and the status of the old agreements. Nintendo informed the Commission that the agreement with the Italian distributor had expired and that the others were still in force. Nintendo also explained on this occasion that an "authorised dealer" was free to sell to anyone. Nintendo confirmed that the new agreement was applicable to the EEA as a whole.

(90) The revised draft agreement for all EEA distributors was sent to the Commission on 27 November 1996(98). This agreement incorporated those elements that had been dealt with at the meeting of 24 April 1996. Agreements modelled on that version of the standard agreement were eventually implemented at the beginning of 1997.

(91) Subsequent to Omega's complaint in late 1996(99), the Commission extended its investigation. On 7 March 1997(100) Nintendo was requested, pursuant to Article 11 of Regulation No 17, to submit its distribution agreements with independent exclusive distributors, as well as its general terms and conditions of sale and its distribution agreements with customers for those countries where Nintendo subsidiaries acted as exclusive distributors for the period 1994 to 1996.

(92) In its reply of 16 May 1997(101) Nintendo admitted that some of its distribution agreements and general terms and conditions had contained certain restrictions on parallel trade within the EEA. In so far as the agreements had not at that time expired, they were altered so as to put an end to this. In particular, on 15 May 1997(102), NOA instructed NE to delete from its general terms and conditions of sale any terms that prohibited sales outside NE's territory. In addition, on 15 May 1997, NOA wrote to its EEA-based subsidiaries reminding them of the requirements of Community law regarding intra-EEA parallel trade(103).

(93) As indicated above(104), Omega's complaint contained the allegation that Nintendo operated a policy of resale price maintenance in the Netherlands(105). In Nintendo's reply to Omega's complaint dated 11 April 1997, Nintendo stated that "Nintendo does not enforce its recommended retail price"(106). In a letter dated 22 October 1997 from the Commission to NOE, the Commission suggested sending a circular letter to Nintendo's Dutch dealers to clarify that they were able to set their resale prices freely(107). On 30 October 1997, Nintendo agreed to send this circular letter(108).

(94) On 23 December 1997, Nintendo wrote to the Commission stating that it had become aware of "a serious issue in relation to parallel trade within the Community"(109). It expressed the wish to cooperate voluntarily with the Commission, to inform it about the way it had operated certain aspects of its distribution policy in Europe and to provide a written account of relevant matters. Nintendo submitted hundreds of documents to the Commission in submissions received on 21 January, 1 April and 15 May 1998(110).

(95) Subsequent to its admission, Nintendo also took what seem to have been credible steps to ensure compliance with Community law in the future. Those steps included presentations on 25 February 1998 to its senior management, three seminars, in two of which not only Nintendo's EEA subsidiaries participated, but also its independent distributors, and instructions to its EEA subsidiaries. Nintendo continues to organise such representations(111).

1.5.2. Correspondence between THE and the Commission during the investigation and THE's admission

(96) The Commission sent THE a formal request for information dated 7 March 1997, prompted by information received indicating that dealers might have been prevented from purchasing in other Member States(112). THE replied on 25 April 1997 that it did not restrict parallel trade by its dealers and that it had never refused a dealer supplies of Nintendo products on the ground that the Products would be exported(113).

(97) Subsequently, the Commission received new information that parallel trade was nonetheless being hampered, in particular from the United Kingdom. As a result, the Commission sent THE a new request for information, which it received on 10 October 1997(114). On 1 December 1997, THE's reply(115) to that request showed that THE, Nintendo and some other parties were involved in hindering parallel trade illegally. On 13 January 1998 THE spontaneously provided further evidence(116).

(98) Subsequently, THE took various steps to prevent any more breaches of competition law. Those steps included a formalised competition law compliance programme, entailing compliance reports, presentations to the managing directors and financial directors of all John Menzies subsidiaries, site visits and the introduction of standing instructions for the review of any arrangements or practices that might give cause for concern in relation to competition law.

1.5.3. Contacts between the Commission and other distributors during the procedure

(99) Prior to the notification of the statement of objections, the Commission had no contact with distributors other than Nintendo and THE, except for correspondence concerning the confidentiality of certain documents in the Commission's files. In that correspondence, exchanged with Soc. Rep. Concentra Lda (now called Concentra - Produtos para crianças SA), Linea Gig SpA, Nortec AE, Bergsala AB, Itochu Hellas EPE and CD-Contact Data GmbH and dated 9 June 1999, the Commission also stated that it was considering opening formal proceedings against those companies (as well as against Nintendo and THE)(117).

1.5.4. The administrative procedure

(100) On 25 April 2000 the Commission addressed a statement of objections to Nintendo Corporation Ltd (copied to Nintendo of Europe GmbH), John Menzies plc (copied to THE Games Ltd), Soc. Rep. Concentra Lda (now called Concentra - Produtos para crianças SA), Linea GIG Spa, Nortec AE, Bergsala AB, Itochu Corporation (copied to Itochu Hellas EPE) and CD-Contact Data GmbH (copied to Contact-Data Belgium NV).

(101) None of the parties requested a formal hearing pursuant to Regulation (EC) No 2842/98 and, consequently, no formal hearing was organised.

1.6. Events in the United Kingdom and Ireland

(102) Starting with the United Kingdom and Ireland below, the behaviour of Nintendo and its independent distributors will be described in detail. The facts are given for each territory separately and, if relevant, for the different parties that have been active in such a territory at various times.

1.6.1. The events concerning Nintendo UK Ltd

(103) From at least March 1993(118) until 4 August 1995(119) Nintendo's exclusive distributor for the United Kingdom and Ireland was NUK.

(104) Prices to trade in the United Kingdom were low in comparison with Germany and parallel-exportedproducts were offered to German retailers at prices lower than those offered by NOE(120). The existence of substantial parallel trade into Germany and other EEA countries during 1994 and 1995 is also an indicator of price differentials(121).

(105) In several letters sent during April and May 1995, NOE demanded [...]*(122) [...]* to give instructions to all Nintendo subsidiaries because: "Grey imports are becoming a real major problem (...) The following decisions are needed from your side: (...) B. There should be a strict instruction to all subsidiaries (...) - to clearly eliminate customers who are known or are likely to export products to other countries. (...) The UK (...) is not giving that subject the necessary attention (...) we have to stop these grey export activities with all measurements possible immediately".

"Dear [...]*, I would appreciate if you could give instructions (...) to all subsidiaries (...) with the target to stop any further grey exports and control bigger numbers immediately with all customers"(123).

(106) The instructions that NOE sought were further clarified in a letter form NOE to NOA dated 19 April 1995(124). Of the measures proposed in this letter, which included not supplying exporting clients, buying parallel-imported stock from retailers, and the coordination of prices to trade, the most successful were the measures to stamp out parallel trade at its source; these were standard business practice throughout the EEA. More specifically, the requested instructions were:

"I. Strict order to all subsidiaries to take all measurements to stop grey exports.

This means:

1. Do not supply customers and especially distributors who are not 100 % safe and clean.

2. Check out regular customer orders before shipment to make sure quantities are in line with customers potential.

II. Right to subsidiaries to buy out grey imports and send back to supplying countries in Europe at purchasing price to be paid to importer/customer provided minimum quantity exceeds 500 respectively 1000 pieces.

III. Advance info between subsidiaries on:

- product lowest price and quantities available at reduced prices,

- new items planned for sale at reduced prices to regular customers. (...)

D. Price and availability coordination on Europe

As per your (i.e. NOA's) suggestion/plan we should target (...)

II. Pricing

1. Shoot for prices within 10 % difference to trade within Europe after maximum terms (...)

2. Product in actual line we should try to narrow differences beyond 10 % at least to maximum 15 % where unavoidable due to current commitments.

3. Price comparison to the made for all key products (...).

All this however will only work, if one company/person carries the ball and coordinates"(sic).

(107) On 22 May 1995, soon after the conception of the plan, NOA stated in a letter to NUK that, "During our meetings with other European distributors, we learned that the grey market problem has increased significantly over this past year and made it almost impossible for our distributors and subsidiaries to sell their inventories in their respective markets"(125). From this quote, it is clear that the "problem" of parallel trade was discussed not only within the Nintendo group, but also with Nintendo's independent distributors at the time. In particular, during a meeting between Bergsala and NOA that took place during the E3 exhibition approximately a week before 22 May 1995, Bergsala discussed with NOA the problems that Bergsala had as a result of the large amounts of grey imports being supplied by a UK-based parallel exporter, [...]*, into Sweden. As a result, NOA instructed NUK by the same letter dated 20 May 1995 already quoted above to "determine whether Nintendo sells its products to [...]* or to a customer who does business with them"(sic)(126).

1.6.2. The events concerning THE

(108) On 4 August 1995 THE(127) acquired from Nintendo the exclusive distributorship for Ireland and the United Kingdom. THE remained Nintendo's exclusive distributor for this territory at least until 31 December 1997. Nintendo remained present in the United Kingdom via its wholly-owned subsidiary Nintendo Services Ltd. This subsidiary had, however, no direct responsibility for the distribution of the products in the United Kingdom.

1.6.2.1. The formal distribution agreements between Nintendo and THE

(109) Up to 1 January 1998, THE had three successive agreements with Nintendo(128). Under each of these agreements, THE undertook to buy the products exclusively from Nintendo, and Nintendo in turn was to sell the products only to THE within the United Kingdom and Ireland. The products covered were Nintendo-manufactured game consoles and the game cartridges that Nintendo manufactured for these consoles.

(110) Until 1 January 1997, the agreements contained provisions to the effect that THE could sell only to certain categories of customers, in particular retailers which specialise in retail to consumers(129). Parallel trade was severely restricted as a result of these provisions because resale of the products by THE's customers to other traders, including those established outside the United Kingdom, was prohibited. As will be shown below, this provision was applied in practice to prevent parallel exports by THE's customers.

(111) The various successive formal distribution agreements between THE and Nintendo ostensibly gave THE the right to export the Products to any country outside its territory, although THE was prohibited from actively seeking export sales. The facts show that de facto this right had no meaning, as Nintendo forced THE to take measures to prevent any exports from its territory. (See in more detail in recitals 162 to 169).

1.6.2.2. "THE games commercial policy regarding authorised customer"

(112) With its letter of 1 December 1997, THE submitted to the Commission a copy of "THE games commercial policy regarding authorised customer", that contains various policy statements(130). In particular:

(1) "THE Games are only prepared to sell products to companies who will directly market the product to the end-consumer (i.e. retailers, mail order companies and catalogue stores)" (...);

(2) "THE Games will refer any approach from a retailer outside of the United Kingdom and Ireland initially to the local distributor, but will not refuse to supply if the retailer makes further requests". The stated commercial rationale for this policy is that "The practice of a UK product being sold to a retailer in a territory outside the United Kingdom and Ireland is not a desirable practice (...)";

(3) "THE Games will not sell products to other wholesalers or subdistributors". The stated commercial rationale for this policy is that "If we (THE) were to supply Nintendo products to wholesalers they would by definition, either sell these to UK retailers or to retailers from outside our territory (...)". THE recognises in its rationale to the third policy statement that sales to wholesalers and subdistributors would also mean a violation of its first and also second policy statements.

(113) THE admits that its policy restricted parallel trade(131). According to THE, the rationale for these policies is apparent from the exchanges with [...]* and [...]*, referred to in recitals 114, 135 and 158. As THE's correspondence with [...]* is dated 14 August 1995, THE's policy must have been established before that date(132).

1.6.2.3. THE's actions against [...]*

(114) One of the first actions THE took after acquiring the distributorship of the products concerned a company called [...]*. [...]* was a UK-based wholesaler of the products and part of the [...]* Group, a retail chain. Apart from supplying [...]* shops, it also acted as an independent wholesaler. In a letter dated 14 August 1995, THE wrote to [...]*, "THE Games has been appointed the exclusive distributor of Nintendo first party product in the UK to 'authorised dealers' (i.e. qualifying Retailers). The terms of this appointment preclude us from supplying other intermediate distributors. Therefore, although we are more than happy to supply [...]* with Nintendo products on behalf of [...]* retail outlets, we are unable to supply [...]* with Nintendo products on any other basis"(133). From a letter from [...]* to THE dated 25 August 1995, it appears that [...]* had been made to understand that THE "was no longer happy for [...]* to act as distributor of this product to any of our customers except [...]*"(134).

1.6.2.4. The deteriorating business relations between THE and Nintendo

(115) In February 1996, THE launched a promotional campaign in which THE offered its products at substantially lower prices than other Nintendo distributors. Consequently, parallel exports from the United Kingdom became an even more attractive option for suppliers. THE's promotional prices were also advertised in a trade journal called CTW on 19 February 1996, and were referred to as "The Big Deal". THE justified its price reductions by reference to the competitiveness of the United Kingdom retail market, the unsatisfactory shelf position it occupied and the intention to extend the life cycle of SNES and Game Boy products(135).

(116) The prices THE offered were significantly lower than those offered in other EEA countries such as Germany(136), Italy(137) the Netherlands(138), Greece(139) France(140) and Spain(141). The price difference in relation to game consoles in Germany ranged from 20 to 31 % and for game cartridges from 4 to 65 %(142). In comparison with the wholesale prices charged by Linea, prices to trade for SNES consoles offered by parallel importers were 18 % lower. The differences in wholesale prices for SNES compatible games ranged from 3 to 30 % and for Game Boy compatible game cartridges from 13 to 39 %(143). Consumer prices for SNES games in the United Kingdom were 7 to 66 % lower than in the Netherlands, 26 % lower for a Game Boy console bundled with one game cartridge and about 35 % for one bundled with two Game Boy compatible games(144). United Kingdom parallel traders offered Game Boy consoles to Spanish retailers 18 % below the wholesale price charged by NE(145). A Game Boy console bundled with a compatible game was offered to trade at a price that was even 35 % lower than the lowest price that NE would charge its customers for the same bundle(146). Differences in retail prices for Game Boy game cartridges were 46 % and for SNES game cartridges differences in retail prices ranged from 10 to 39 %(147). Bergsala estimated that, overall, parallel imported products sold at retail prices 10 to 30 % lower than the products supplied to retailers by Bergsala itself(148). According to NOE(149), substantial grey imports from the United Kingdom had also taken place in Denmark, Norway and Finland. It may be concluded that prices in these countries where parallel imports took place were also higher than in the United Kingdom(150). These price differences had apparently existed for a considerable length of time(151). As a result of the lower price levels in the United Kingdom, incentives for parallel trade in the products from the United Kingdom to other EEA territories existed.

(117) In a letter from Nintendo's Greek distributor, Itochu, to NOE dated 22 February 1996, Itochu estimated that the prices THE was charging to United Kingdom retailers were actually lower than the price Itochu itself paid for supplies from Nintendo and that, as a result, "any Greek retailer can purchase from the United Kingdom and 'compete' with Nintendo local distributor; all these with the blessings of Nintendo"(152).

(118) Two days after the launch of the "Big Deal" campaign, on 21 February 1996, [...]* of NOA became directly involved in the matter. THE reassured NOA that: "it is not our intention to supply Europe"(153). Similarly, THE reassured its colleagues in other EEA countries. THE stated: "I can give you the following information about prices that we are offering to retailers in the United Kingdom, and for UK sale only" (emphasis added) and "we will try at all costs, to prevent product arriving in Europe"(154).

1.6.2.5. Nintendo's boycott of THE

(119) THE could not convince Nintendo, because on 27 February 1996, [...]* NOA and [...]* NCL, gave the following instructions to [...]* of Nintendo Services Ltd: "NCL is very concerned that THE Games Limited is currently aggressively marketing Super NES and Game Boy hardware and software contrary to various terms of its Distributorship Agreement. (...) Please do not accept any orders for product from THE until the results of THE's current marketing efforts are evaluated and the issue is resolved to NCL's satisfaction"(155). [...]* subsequently informed THE of these instructions and explained to THE: "that these orders would be put on hold until such times as he [...]* fully understood whether any stock from the United Kingdom had found its way into any other European country"(156). At least at that time, NOA apparently thought that its written agreement with THE implied that THE was to prevent exports from its territory. NOA has also admitted this to the Commission(157).

(120) This action on the part of Nintendo had a considerable impact on THE's business. The five orders put on hold involved [...]* units of game consoles and [...]* game cartridges with a total purchase value of about GBP [...]*(158). These volumes represented about [...]* % respectively of the expected sales volumes of THE in the year 1996/1997(159). A further purchase THE was about to make, of approximately GBP [...]*, was also affected. According to THE, these orders were essential to meet customer demand, which was exceeding its available stock. A stock shortage risked jeopardising THE's relations with important and influential customers. In fact, at the time THE considered that it was in danger of losing its distribution agreement(160).

(121) Unsurprisingly, THE wrote on 5 March 1996 to [...]* of NOA that "it will not happen again, (...) because we have taken every possible precaution to ensure that no product whatsoever reaches any country outwith our authorised territory"(161).

(122) In order to verify whether THE was really taking action, NOA made a survey of its European distributors. When the results of this survey were known, on 20 March 1996, a meeting was held between [...]* of NOA, in particular [...]*; representatives of NOE, in particular [...]*; and THE. The measures which THE took were apparently to the (initial) satisfaction of Nintendo. As a result, Nintendo's suspension of THE's purchase orders was lifted. Nintendo's boycott lasted from 26 February 1996 until 21 March 1996(162).

1.6.2.6. Further pressure on THE

(123) With the acquisition of the distributorship for the United Kingdom and Ireland, THE also acquired the right to "supply to [...]* for the purposes of distribution in South Africa only until such time as an NCL distributor has been appointed in such country"(163). No NCL distributor was appointed for South Africa until April 1996. THE intended to acquire these rights on a permanent basis and to extend them to other African countries.

(124) Soon after 21 March 1996, when Nintendo's supply boycott of THE ended, NOE checked whether the level of parallel exports from the United Kingdom had been reduced. On 1 April 1996, NOE sent an identical questionnaire to "Nintendo distributors and subsidiaries" [concerning] "actual grey market offers, especially from the United Kingdom and the United States of America", [intended] "to improve coordination of Nintendo's business"(164). The questionnaire requested information on "offers which are in your markets which are very different from your own offers with respect to: A. Product [with] (...) special attention to products as per CTW report enclosed. B. Prices - price comparison: 1. With your own price to trade 2. Retail prices in comparison"(165). The CTW report mentioned as well as THE's advertisements that were also attached to this questionnaire describe in detail the price reductions that were offered to United Kingdom retailers on certain Nintendo products and clearly identify THE as the distributor directly responsible for this price policy. Thus, the questionnaire clearly linked the existence of lower prices in the United Kingdom with parallel exports from the United Kingdom to other EEA territories and identified THE as the distributor responsible for this. The reply was required on the same day. Apart from Nintendo's own subsidiaries, Nintendo's independent distributors Linea, Concentra, and Itochu also replied(166). Linea also added to its reply a copy of an offer that [...]* had made to one of its customers.

(125) This survey had direct consequences. In a letter dated 1 April 1996, NOE wrote to [...]* of NOA on the subject, "Grey Exports from the United Kingdom - non-effective Control by THE - requested rights by THE to export to South Africa (and maybe other countries).[...] I have checked out the situation in the meantime with almost every European country and came to the following results: A. Grey exports are happening in general and especially based on the special new offers from THE as per enclosed CTW report of issue No 3 from February 19, 1996. (...) D. Strong recommendation: (...) 6. They definitely should not get clearance to export to any country [...]"(167). NOE believed that THE's behaviour should lead to short-term consequences and asked NOA for immediate action.

(126) Apparently, THE perceived that the acquisition of the distribution rights for (South) Africa was dependent on satisfying the concerns of NOE. THE wrote to NOE on 11 April 1996 saying: "we are keen to acquire the Nintendo distribution rights in Africa (...). I was planning to put a formal request and application for the distributorship licence through to [...]*. However, I have decided to leave this submission until after you and I have met (...)"(168).

1.6.2.7. Nintendo's concerns and THE's reactions

(127) Nintendo's concerns covered various aspects of THE's business behaviour, inter alia, THE's pricing policy and THE's lack of control over exporting customers. Complaints about this were set out in letters from NOE to THE of 4 April 1996(169) and from NOE to NOA dated 1 April 1996(170). The letter from NOE to THE dated 4 April 1996 starts off by stating "As we agreed we both want to cooperate to maximise out mutual benefit and in the interest of the total European market place for Nintendo"(171), indicating that THE and NOE had agreed to resolve their conflict and that NOE was representing the interests of all the other European distributors. That NOE was representing other parties' interests can also be deduced from the fact that this letter to THE contained a flowchart(172) depicting flows of parallel trade that NOE considered to exist and the names and place of establishment of numerous parallel traders. The parallel traders were established in Belgium, the Netherlands, the United Kingdom, Germany, Sweden, Italy, France, Austria and Switzerland. This means that THE must have known that NOE was not only seeking a solution to stop parallel imports into its own territory (Germany) but also for the rest of the EEA, including territories of other independent exclusive distributors.

(128) In the same letter, NOE used information that it had collected by means of the questionnaire it had sent out on 1 April 1996 to EEA subsidiaries and independent distributors to underpin its criticisms of THE. This included the information provided by Linea in its reply to NOE dated 1 April 1996(173).

1.6.2.8. THE's pricing behaviour

(129) With regard to THE's pricing policy, NOE complained to [...]* of NOA in a letter dated 1 April 1996(174) that THE had "lower prices released than everybody else"(175) as "Low prices in the United Kingdom and for grey exports force reduction of margins (...) in other countries"(176). In addition, THE's low prices would result in "undermining European coordination: - product, - price"(177). According to NOE "It cannot be allowed (...) that they (...) put the whole European market in jeopardy due to products floating out to other European countries at prices nobody else can understand or afford"(178). NOE also insisted that: "THE must control their market and their customers, what they obviously do not at the time being."(179). However, THE did not raise its prices(180).

1.6.2.9. THE's control of exports by its customers

(130) Regarding NOE's criticism of THE's pricing policy, THE explained on 11 April 1996 to NOE: "I fully understand the difficulty that this differential pricing creates for other mainland European countries where the market can clearly stand a much higher price than that which the market can stand here in the United Kingdom. (...) I am sure that we can, by working closely together, better control the situation on grey imports and find a much better way of isolating our products and our prices to within the shores of the United Kingdom, thus reducing the impact that this differential pricing has upon mainland Europe"(181). Clearly, THE undertook to collaborate closely with NOE to control exports from its territory. "I (THE) am determined that we will do everything we can to stamp out/limit grey imports into mainland Europe from the UK (...)"(182).

(131) NOE listed in its letter of 1 April 1996 to THE(183) a number of specific inquiries about supplies to certain known parallel traders. In its reply to NOE dated 11 April 1996, THE reported on the measures it had already taken to control the situation, in particular the actions it had taken against four of its customers ([...]*, [...]*, [...]* and [...]*) and promised a progress report during a meeting between NOE and THE in the near future(184). At NOE's request, THE had also investigated whether it or its customers could have supplied [...]*, [...]* and [...]*, three known parallel traders. THE reassured NOE(185) that it had never supplied these traders. THE presumed that these companies had been supplied by [...]*, [...]*, [...]* and [...]* and that, therefore, as it had taken action against these companies, the problem had already been addressed. Therefore, on 11 April 1996, THE had started an extensive collaboration with NOE to tighten the control of parallel exports from THE's territory.

1.6.2.10. The actions THE took against exporting customers

(132) The actions which THE undertook against exporting customers were well summarised by THE itself in a letter to [...]* of NOA dated 24 May 1996: "I can tell you that a significant amount of activity has been undertaken by THE since January/February this year with a view to stopping the grey exporting of products from the United Kingdom into the continental European market. Our major activities in this regard have been to either shut off supplies completely or to really control/restrict the supply of product into the UK market place, to certain questionable retailers. We are no longer selling to anyone who cannot prove that they operate a bona fide UK retail/mail order business. (...) The companies involved and in which we have curtailed our business are: [...]*, [...]*(186), [...]* and [...]* along with a handful of others. I have proved that these companies have been supplying products into continental Europe via such companies as [...]* and [...]*, and as result of this we have closed their accounts"(187). During this period THE also ceased trading with a company called [...]*"whom we suspected of shipping outside the United Kingdom"(188).

(133) These actions amounted to a systematic business policy. As can be seen from later correspondence, THE actively pursued this business policy throughout the whole of 1996. In a fax dated 20 January 1997 THE wrote to NN: "We have over the last 12 months actively sought to ensure that we only supply bona fide UK retailers(189). We also review all orders from our retailers to check that the quantities are appropriate in regard to the number of retail outlets that they operate"(190).

(134) The Commission possesses correspondence between THE and [...]*, [...]* and [...]*, three of the companies to which THE referred in recital 132(191). This correspondence confirms that THE did indeed take measures against those companies, either during, or immediately after, the boycott of THE by Nintendo. In particular, it is clear from the two examples below, regarding [...]* and [...]*, that (i) THE actively tried to trace parallel exporters, (ii) it did so by comparing the orders placed by particular customers with their potential for retail sales in the United Kingdom, (iii) THE invoked its agreement with Nintendo to justify the steps it took against exporting customers, (iv) the obligation on its customers to sell only at retail level within the United Kingdom was effectively an export ban; and (v) the ban was enforced by a supply boycott.

(135) The correspondence between THE and [...]*(192), a parallel trader, also shows that THE maintained effective control over parallel traders during 1996 and in 1997(193). For instance, on 30 April 1996 [...]* wrote to THE saying: "you mentioned that your concern was that stock was being sold and that SEGA of America [meaning NOA, in view of the context of letter] had come down on you quite hard. For your information any stock purchased from you will be sold by us in the United Kingdom" (sic)(194). Similar incidents took place during 1997 (see recital 158).

[...]*

(136) The events concerning [...]* are summarised by THE in a letter to [...]* of NOA dated 4 April 1996(195).

"1. [...]* placed large orders for certain products, quantities of which seemed excessive for his three retail outlets.

2. These orders were reduced to appropriate levels for his three retail outlets

3. [...]* spoke to [...]* (of THE) regarding our reduction in his order, and [...]* intimated that this was due to his export activities. (...)

4. [...]* (of THE) (...) finally gained evidence that [...]* was linked to [...]* who were exporting product(196).

5. [...]* was told that he could only place orders to levels appropriate for his retail activities since we are only able to supply to bona fide retailers.

6. [...]* placed daily orders up to his maximum order level and upon identification of this we ceased trading with him. (...)"(197).

(137) In order to justify its supply boycott, THE invoked its formal distribution agreement with Nintendo. In a letter dated 28 March 1996 from THE to the lawyers of [...]*, THE explained that: "THE Games have a distributorship agreement with Nintendo. However, we are only allowed to supply bonafide retailers in the UK. (...) Whilst [...]* has three retail outlets the level of orders that we have received suggests that all products are not going through these outlets. (...) THE Games would be delighted to supply [...]* if we can be satisfied that all product is for retail purposes. I am sure that you appreciate that we must comply with out distributor agreement. I hope that your client can satisfy us of this fact and that we can re-establish our trading relationship"(198) (emphasis added). From the reply of [...]*'s lawyers, dated 19 April 1996(199) it appears that [...]* was prepared to enter into an undertaking to that effect. Eventually, THE asked [...]* on 23 April 1996 to give a written undertaking(200) that the Products would only be offered for sale to consumers from outlets to be agreed with THE and not be offered for sale to [...]* or to any other person whom [...]* knew or suspected might be buying the products for resale purposes. [...]* had to undertake not to buy the products from [...]* in the future. These undertakings were given and THE re-established supplies at the latest by 28 June 1996(201).

[...]*

(138) On 26 March 1996, [...]* wrote to THE that, because of: "The recent troubles that you (THE) have experienced with certain accounts, i.e. those companies who you know export into Europe (...)[...]* will guarantee THE Games that no stock shall be wholesaled across Europe (...) I trust we can once again start to trade with immediate effect (...)"(202) (emphasis added).

(139) Yet again THE invoked its formal distribution agreement in order to justify the measures it took. THE explained to [...]* on 1 April 1996 that: "Our Nintendo distributorship agreement is extremely clear and very precise in that we are only allowed to sell our products to multiple retailers and bona fide independent computer games shops within the UK market. In addition, we are able to supply products to known mail order companies, and catalogue retailers (...). We do not have the right to sell our products to either wholesalers or distributors within the UK market place (...). I read the contents of your letter to me with interest and perhaps you would let me have full details of your multiple retail stores group and mail order companies that you would like to supply with our product"(203).

1.6.2.11. The effects of THE's measures on the market

(140) On 29 May 1996, NOE wrote again to "All EEA-based Nintendo distributors and subsidiaries" [on the] "Subject: Volumes of 'grey' imports into your country (...) We urgently need, for top management review, info on intercountry trans-shipments (grey) outside Nintendo's control and influence"(204). In this letter, all subsidiaries and independent distributors were asked to provide detailed figures on the volume of parallel traded Products for the years 1994, 1995 and 1996, the precise product items involved while specifying the volume and countries of origin separately for each parallel traded product item as well as the price differences at retail level between those parallel traded product items and the same product item when sold by the distributor itself. Attached to the same letter of 29 May 1996 from NOE was a detailed standardised questionnaire also requesting information about the volume of grey imports, the product items involved and the country of origin, the retail prices of grey imported products, and price differences between grey imports and products supplied by the subsidiary or distributor in the territory of the addressees over the period 1994 to 1996. All Nintendo subsidiaries as well as Nintendo's independent distributors Linea, Bergsala, Concentra and Itochu replied to this standardised questionnaire(205).

(141) Nintendo has provided the Commission with a synoptic table entitled: "Volume of grey imports"(206), apparently drawn up on the basis of the replies to NOE's questionnaire. From this table and the replies to the questionnaires, it appears that in nearly all countries and for every Nintendo product line at the time, SNES consoles and SNES compatible game cartridges and Game Boy consoles and compatible game cartridges(207), parallel imports were significantly reduced during 1996(208). THE, in its reply to the Statement of Objections, provided statistics showing that indeed, sales by THE to parallel traders as identified by the Commission tailed off markedly from March 1996 onwards(209).

(142) This fact was also recognised by NOE, as on 20 June 1996 it wrote to THE stating "I would like to compliment you for dramatically reducing parallel exports which everybody around Europe has realised and compliments"(210). Later, on 26 June 1996 NOE wrote to THE: "Thanks for your fine cooperation and keeping your promise on the grey market exports control, which like everybody feels around Europe, makes you finally a member of the family"(211).

1.6.2.12. THE's collaboration

(143) It was now clear to THE that "What we must all do now is to continue to monitor the situation and (...) communicate to our other European partners, both subsidiaries and distributors, of the action we have taken, and to ask them to communicate with me directly if they find any grey imports believed to have come from the United Kingdom in the future"(212).

The boycott of [...]*

(144) As already explained in recitals 136 and 137 above, [...]* Director of both [...]* and [...]*, had given written undertakings to the effect that all Product supplied by THE would be resold in the United Kingdom. However, on 27 June 1996, THE received information that [...]* had advertised products outside the United Kingdom(213). The next day, THE took decisive action. It wrote to [...]* stating that, as it had breached the undertaking [...]* had given, its account with THE would be closed with immediate effect. THE explained that "any stock supplied to [...]* was only for retail stores in the United Kingdom. This latest advertisement (...) in Continental Europe is a breach of that agreement"(214). THE investigated this matter thoroughly as, in its reply to a fax from [...]* dated 27 June 1996, it stated "we suspect they [...]* may have received some stock from a company called [...]*. (...) We are currently looking to undertake further investigations into [...]* but if our suspicions are confirmed, we will stop supplying them with product also [...]"(215). In the same letter it wrote "if you come across any grey import product which you suspect has come from the United Kingdom, then I would ask you to purchase samples, together with any details you can gather so that we can trace the ultimate source of supply to [...]*"(216).

THE's collaboration with Linea

(145) On 10 July 1996, after an inquiry by Linea concerning parallel imports into Italy that requested "prompt actions to stop this phenomenon"(217), THE stated that: "We have no record of ever having dealt with [...]*, but if you can give me further details we may be able to trace it back to see whether we supplied any dubious dealers who may have done a deal with [...]*. (...) in order that we can continue in our diligent efforts to overcome this problem"(218).

(146) A further letter dated 3 December 1996, from THE to Linea stated: "We are certainly not supplying any of the three people mentioned in your letter, so it must be coming from some alternative route. If you can do anything at your end to place this source then that would be most useful, in the meantime we will continue with our investigations at this end. (...) I am sorry that you are having trouble with grey imports, particularly as we are working very hard over here to stop this from happening, so anything more you can do to help us in our endeavours would be appreciated"(219). This collaboration continued into 1997(220).

NN and [...]*

(147) Apparently, offers of parallel traded products from the United Kingdom continued. NOE suspected a United Kingdom-based company called [...]* of exporting the products. THE reassured [...]* of NOE on 20 November 1996 that: "we are not dealing with [...]*" [but] "having done so much work in trying to eliminate grey imports from the United Kingdom I very much want now to try to find out where he is getting this stock. Can we try and arrange for someone to purchase some stock and see if we can trace it back (...)?"(221).

(148) NOE followed this suggestion and instructed NN to buy some parallel traded product. In a letter from NN to THE dated 6 December 1996, NN wrote: "Regarding the discussion with [...]* (from NOE) concerning parallel trade you requested some examples. Therefore we have checked some game shops and found Super Metroid including Giant Players guide. (...) we also found Winter Gold (...), [I] will keep you informed of further finding"(222). In a letter dated 10 December 1996, NN supplied further details to THE concerning offers of parallel traded products of United Kingdom origin, made to two of its most important customers, [...]* and [...]*(223).

(149) Apparently, these measures were deemed insufficient and more sophisticated measures were required. On 10 December 1996, NN wrote to THE to let them know that "Your input will be appreciated as working 'in concierto' on these matters may avoid problems"(224). Shortly thereafter, in a fax dated 20 January 1997, THE wrote to NN that: "we are now individually marking the security film that covers the boxes for a number of customers in order to try and identify if any of these are the source of your problem. (...) please send any new offending packages to me. Once we know the source of the problem, we can take any necessary action. (...) Please be assured that we are doing all that we can to assist you in this matter and let me reiterate we only wish to supply customers for UK retailing activities"(225).

(150) In February of 1997, THE again worked closely with NN to ensure that [...]* would not be supplied with Nintendo products(226). In March of 1997, NN requested THE to investigate matters and provided information based on the above tagging system in order to assist THE in this regard. On 26 March 1997 it wrote to THE stating "A quick tour through some major cities to appreciate N64 presentation lead to finding substantial quantities of THE material (...). At one address, the products were still in the original packaging and we found reference number 02 06 01 97. Hopefully this reference gives you a clue who is the customer concerned"(227).

(151) According to THE's reply to a Commission request for information, no action was taken against any customer as a result of the tagging system it had introduced. The tagging system was introduced on 2 January 1997(228) and discontinued in April 1997(229).

(152) The continuing efforts of THE were recognised by NOE, as the latter wrote to Linea on 6 November 1997 that: "since January of this year, hardly any offers of merchandise were coming out of the United Kingdom which I do hope will also finally be the case with N64 hardware"(230). NOE expected this collaboration to continue and expected THE to address any remaining parallel trade problems.

Renewed parallel trade in N64 Products

(153) The possibility of parallel trade from the United Kingdom again became an issue on 22 October 1997 as a result of THE's latest pricing policy regarding N64 products, both N64 consoles and compatible games(231). On that date NOE informed all European Distributors and sister companies that: "THE, our UK distributor, will reduce recommended retail prices" [and] "the United Kingdom is an isolated situation, definitely no price changes planned or even considered for continental Europe."(232). NOE justified this step by referring to the fact that N64s were "overpriced" in comparison with the price of Sony's Play Station and other recently improved Sony product offerings in the United Kingdom(233). The recommended retail price for the N64 console decreased from GBP [...]* (approximately EUR [...]* at that time) to GBP [...]* (approximately EUR [...]*), about 33 %.

(154) As a result, parallel importers in Greece, Italy, Denmark, Norway and Portugal(234) offered local retailers prices that were lower than those the local exclusive distributors obtained from Nintendo. The only reasonable explanation for such differences is that Nintendo charged substantially lower prices to THE than to its other independent distributors(235). Evidently, important price differentials between the United Kingdom and other EEA countries would create incentives for parallel trade and/or make it more difficult to sustain an efficient control of parallel exporters.

(155) The exclusive distributors for Greece(236), Italy(237), Norway(238), Sweden(239) and Denmark(240) all reported, within two weeks, to NOE about the problems which the United Kingdom price reductions had caused on their markets due to the consequent surge in parallel imports from the United Kingdom in the expectation that Nintendo would address these problems. Apparently NOE was of the opinion that it could rely on the continuing collaboration of THE. In this respect, it wrote(241), in response to the complaint from Linea(242) that no parallel trade had come from the United Kingdom that year and that it expected this to continue.

(156) NOE requested Linea to provide detailed proof of parallel traded products into Italy from the United Kingdom, including indications as to the source of the parallel trade(243). It received such proof as, in a fax dated 7 November 1997 from NOE to THE it is stated: "please find enclosed fax dated November 7, 1997 from our Italian distributor, Linea GIG, with copy of advertisement for your information and 'action'"(244). Annexed was an offer of Nintendo products which [...]* made to clients of Linea that had been sent to NOE by Linea that same day.

(157) Nortec also provided NOE with detailed information about parallel imported Products in Greece, did a test purchase to establish the origin of the parallel trade(245) and requested NOE's assistance(246). Subsequently, NOE apparently transmitted this information to THE with the instruction to deal with these instances of parallel exports from its territory. A fax dated 3 November 1997 from the Greek distributor to NOE stated: "1. I must admit that your instructions to 'THE' not to supply any customer who would export to '[...]*, the Greek Parallel importer' has worked and has delayed things for a while. (...) They were told to wait for a while until things will settle down"(247). The letter also names four United Kingdom-based companies that were about to supply [...]*. "The situation is crucial, so kindly keep a close eye on it and advise us how to cope with it"(248). NOE also requested and obtained proof from Bergsala's Norwegian subdistributor which also undertook to make a test purchase(249).

(158) On 24 June 1997 THE wrote to [...]* regarding "Nintendo 64 Discount structure"(250) saying that it would only be prepared to supply [...]*'s mail order operations in accordance with its policy to supply bona fide retailers and direct to consumer mail order operators only and not to secondary distributors (see also recitals 112 and 113). THE requested information on the likely turnover of [...]*'s mail-order operation. Not long before 8 July 1997, THE apparently reduced substantially its supplies to [...]*(251). In a letter to [...]* dated 7 November 1997(252), THE reiterated its position that it would not supply distributors and required from [...]* a written undertaking that any stock it would be supplied would be for its Console Plus mail order operation. THE reserved the right to cease supplies should [...]* not be able provide this reassurance.

(159) Despite Nortec's assertion to the contrary (recital 157) and the incidents regarding [...]*, THE has denied taking any action against parallel exports when parallel exports in N64 consoles surged in October 1997(253).

1.6.2.13. Parallel Imports into the United Kingdom

(160) After Nintendo's boycott, THE started to collaborate and control exports from its territory (recital 130). THE also saw advantages for itself in doing so. In a letter dated 11 April 1996 to NOE, it wrote, while providing information to NOE about parallel imported products in the United Kingdom, that "by working close together in the future, (with NOE) we can limit both our market places being damaged by grey imports"(254) (emphasis added). In a letter to [...]*, dated 5 June 1996, THE stated "(...) we have learnt over the past few days that one of our key retailers has been illicitely offered supply of Killer Instinct on SNES at a price of £[...]* [...] we are assured that the stock available is the correct UK version. This was offered by [...]* who in addition offered a variety of French and Portuguese SNES and Game Boy products. (...) I hope these points provide some assistance with your investigations"(255). Apparently, THE felt that NOE would be able to give assistance in the matter and put an end to these imports, just as it had done for the distributors in other territories when the product originated in the United Kingdom.

(161) According to THE, these letters were written to divert some of the criticism of THE, and it did not expect any action to be taken(256).

1.6.2.14. Passive export sales by THE

(162) The various successive formal distribution agreements between THE and Nintendo ostensibly gave THE the right to export the Products to any country outside its territory, although THE was not allowed to actively seek export sales.

(163) However, de facto, the underlying premise of THE's business relation with Nintendo was that THE would not exercise its supposed right to supply companies outside its territory in response to unsolicited requests for exports. Nintendo has expressly admitted this. According to Nintendo, during the conflict early in 1996 with THE, it had focused on the distinction between active and passive selling, but it admitted that these considerations "were not accorded the follow-up that, in hind sight, [were] necessary to ensure compatibility between our written agreements and practices in the market"(257).

(164) Indeed, it would not have made sense for Nintendo to force THE to exercise a strict control over its customers to prevent them from exporting if THE itself was still permitted to export, albeit passively. Ninte