Jenney Games, an upcoming game development company I’m involved with, has had some very interesting discussions over the last several weeks. The company is developing a number of video games and is looking to make one of them family-friendly. Most people familiar with the gaming industry understand that the largest distribution platforms and the gaming industry as a whole is primarily composed of predominantly male gamers. However, Jenney Games believes this market is too large to ignore this portion of gamers and is seeking to enter that space. Therefore, in addition to the traditional marketing channels that concentrate on digital platforms (phones, consoles, and computers) Jenney Games is also marketing through retail channels to reach female gamers. This has led to some very interesting conversations about how to market our game, “Nice Thorns,” to women, particularly from retailers. These conversations have ultimately led into discussions about tied house laws. Tied house laws originally arose out of the post-prohibitionary U.S. in the 1930’s. They were designed to prevent opportunities for businesses to engage in anti-competitive practices with entities in the distribution chain. Certainly these laws have had a dramatic impact in the alcohol industry (and event planning), but their application can be found in all types of business arrangements. For example, their application in the alcohol industry, and their anticipated application in the digital game industry, are two very different things.

Tied house laws, at their core, are designed to favor fair competition. They provide guards against “tied” relationships that might restrict the ability of one entity to do business with another. In addition to guard banding against contracts that might try to tie relationships among manufacturers, suppliers, wholesalers, importers, and retailers, tied house laws also restrict “tied” promotional relationships where some form of incentive is given from one entity to another further down the chain in the distribution channel. Typically tied house laws restrict the arrangement or agreement itself, tax or promotional rebates, inducement of purchases or sales, restricting the use of other products, or other pressures to sell particular products.

To some extent tied house laws prevent “tied” vertical contracts or agreements in which one party with greater leverage uses that leverage to further restrict a second party. Tied house laws are purportedly justified due to the potential for abuse in the beer and related wholesale distribution market. Those industries and markets are traditionally oligopolistic in nature. After a century of events and changes the alcohol industry is still very mature. Compared to it, the digital gaming industry is in its infancy. As a result, many of the things that you see in the alcohol industry today don’t always apply to the digital gaming market or to other content creation or distribution industries. Indeed, many of the issues that I’ve run into as I’ve explored how to market “Nice Thorns” do not appear to arise in other industries.

One particularly interesting discussion was on how Jenney Games should manage its distribution through game platforms and app stores. For example, Xbox Game Pass is a distribution platform that allows game publishers to provide access to a myriad of games for its subscribers (e.g., a Wal-Mart value card). Microsoft charges game publishers to provide their games to the platform. Should Jenney Games pay that fee or drop that platform from its distribution channels? Interestingly, you’d expect that paying that fee would violate tied house laws. However, tied house laws require a mandatory purchase. By allowing game publishers to decide on a case-by-case basis whether or not to pay that fee, Microsoft has avoided violating tied house laws. Tied house laws universally permit optional purchases of products or services (e.g., Sunday Paper subscriptions for newsletters). However, they strictly prohibit mandatory purchases. Microsoft’s use of this platform and the fees it charges doesn’t appear to violate tied house laws. So, moving forward would we owe some sort of distribution fee to the gaming platforms in order to gain access to those platforms? Would this violate tied house laws? These are questions we’re considering.

Analysts cannot help but look at the alcohol industry and predict that only once digitization has reached a comparable level in the digital game industry, will similar tied house laws in digital distribution come into existence. For example, analysts have predicted that Microsoft’s Store is so large that the only way for competing platforms (Apple, Sony, PC, Nintendo, etc.) to significantly build market share against it is to band together to limit the compatibility of other store platforms with digital storefronts. In that scenario the question as to whether or not the digital storefronts and gaming platforms are engaging in tying arrangements will arise. Would the mere fact that you can easily port games from one platform to another result in tied house issues for pre-existing contracts? Would passing along the cost of the games for the migration affect the legality of the new digital storefronts’ terms of service? These questions will require deeper diving as the industry matures.

Like most long-term legal issues there is no clear answer what the effects of tied house laws or the failure to comply with them might be. Perhaps the best understanding of these laws might be found in the penology available on Al Capone. Indeed, tied house laws were a partial response to the abuses of the Prohibition Era and the subsequent attempt to regulate them. It is likely that well-funded publishers would be in a position to push litigation against smaller competitors that violate the regulations on a regular basis, so pushing the limits of these laws would be foolish. However, well-funded companies could also aggressively lobby the legislative and executive branches of government to change these laws. Finally, the industry as a whole might be too immature or fragmented to recognize that tied house laws are even an issue. As such, we may not see the application or expansion of these laws until patronage comes to dominate the industry.

For more information on regulatory frameworks, you can visit this Wikipedia page on tied house laws.