Curbs on Violent Video Games? Makers Brace for Possibility

When the U.S. Supreme Court agreed in April to review a California law prohibiting the sale or rental of violent video games to minors in its next term, it sent shock waves through the gaming industry.

Analysts, insiders and even casual observers had been expecting justices to let stand a lower court ruling, which had declared the law unconstitutional. Once they didn’t, the scramble began to assess the possible implications—and leaders of the industry say they could be dire.

“It’s very, very surprising that the Supreme Court is hearing the case,” says Strauss Zelnick, CEO of Take Two Interactive Software

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[TTWO  Loading...      ()   ]. “I’m worried about it, and I think everybody in our business should be really worried about it.”

At issue in the case isn’t whether publishers can make violent games, but rather whether states can impose sales restrictions on those titles—effectively declaring them to be on the same level as pornography and therefore able to legally limit their sale to adults.

If that happens, the financial impact could be substantial. The video game industry’s ratings system is widely seen as one of the most effective of any entertainment medium. In 2009, the FCC praised it as “one of the most robust voluntary rating systems available”. Still, nothing is flawless—and people under 18 still buy M-rated games.

No CEO was willing to speculate specifically about the effect an unfavorable ruling by the Supreme Court would have on their company’s profits or revenue. They were, however, willing to discuss what they see as nightmare scenarios.

The overriding concern was chiefly the impact a negative ruling could have on retail relationships. If M-rated games are classified as adult only entertainment, certain retailers, such as Wal-Mart (WMT), could elect to stop carrying them—removing one of the industry’s biggest distribution channels.

“It’s not about having a dramatic impact on our bottom line,” says Graham Hopper, executive vice president and general manager of Disney Interactive Studios. “It’s going to make our retailing abilities a nightmare.”

CEOs fear other states will pass laws similar (but not identical) to California’s—meaning the definition of violence is slightly different from state to state. That could force companies to create multiple versions of titles to comply with the law.

“One of America’s great exports is entertainment,” says John Riccitiello, CEO of Electronic Arts. “The implication of Schwarzenegger v. ESA (the case before the Court) is we could end up with state level bureaucracies that define what’s marketable in 50 different jurisdictions across the U.S. I can imagine [the government] trying to tell Steven Spielberg ‘We need 50 different cuts of your movie for each state.’ It will screw us up in a real way.”

M-rated games made up 17.4 percent of all games sold in 2009 by unit. The financial percentage is likely much higher, although the industry does not break out data that way.

Nonetheless, they are often critical to publishers. Take Two has, to date, proven incapable of posting a profit in years when it does not release a “Grand Theft Auto” title—a problem it’s working to correct. And the “Call of Duty” franchise is one of the most important in Activision’s (ATVI) catalog. Even EA, which used to steer away from shooter games, is becoming more invested in the genre, with games like “Dead Space 2” and “Crysis 2” on prominent display at the recently completed E3 trade show.

Game publishers speak with a unified public voice when the issue is addressed: They fully expect the Supreme Court to side with the Appeals courts. To do otherwise, they say, would be a violation of the industry’s First Amendment rights.

Additionally, some believe the Court agreed to hear the case for a single reason—so it can put an end to the stream of similar lawsuits that have come up in previous years.

“We believe as an industry that the primary reason the Supreme Court is hearing it is despite the fact that this law has been struck down, [the issue] has come up 12 times [previously],” says Jack Tretton, President and CEO of Sony Computer Entertainment of America. “I think the Supreme Court is looking at it to potentially see if there’s something to it or to put an end to it once and for all.”