The story so far: The United States’ Federal Trade Commission (FTC) has sought to block Microsoft’s $69 billion deal to acquire Call of Duty-developer Activision Blizzard, alleging anti-competitive practices that “would enable Microsoft to suppress competitors to its Xbox gaming consoles and its rapidly growing subscription content and cloud-gaming business.”
The FTC is planning to file a lawsuit to block the merger, and the arguments will be heard in a courtroom. In its complaint, the commission made a note of Microsoft’s past actions— it has withheld gaming content from its rivals by making it exclusive to its platforms. “Today we seek to stop Microsoft from gaining control over a leading independent game studio and using it to harm competition in multiple dynamic and fast-growing gaming markets,” said Holly Vedova, Director of the FTC’s Bureau of Competition.
What is the significance of the acquisition?
The deal is the largest ever purchase by Microsoft; also, it is the largest ever in the video gaming industry. The acquisition, should it go through, would strengthen Microsoft’s Gaming segment with the inclusion of Activision Blizzard titles such as Call of Duty, Warcraft, Diablo, Overwatch and Candy Crush, among others.
Moreover, the deal endeavours to strengthen Microsoft’s gaming portfolio, converting Activision Blizzard’s 400 million active monthly users based in 190 countries to bolster its video gaming subscription service ‘Xbox Game Pass’ — which attained a milestone of over 25 million subscribers earlier this year. The Xbox Game Pass entails customers paying a monthly fee to access a library of first and third-party video games for a console or personal computer.
Microsoft also seeks to more strongly approach the consumer metaverse by “intersecting global communities rooted in strong franchises”.
In a separate context, S&P Global quoted CFRA Research’s John Freeman as saying that Microsoft is interested in the value of Call of Duty users who are playing against each other in real time. “Hundreds of millions of active players; that’s a nice asset that Microsoft could most definitely monetise,” he stated, adding, “Call of Duty is a very narrowly defined metaverse that Microsoft could expand out.”
What are the market’s dynamics?
FTC recognises that Microsoft and PlayStation-creator Sony control the market for high-performance video game consoles. “The number of independent companies capable of developing standout video games for those consoles has contracted, with only a small group of firms commanding that space today,” it notes.
Consumers purchase consoles based on the technological capability of the console, the price, and the games available for that specific console, among other factors. Gamers for long had opted to purchase physical copies of individual games or download digital copies onto their console, PC, or any other device. However, of late there has been a transition to cloud gaming subscriptions, which allow players to stream games, in other words, playthe game on their consoles without downloading them. They can start playing a game in seconds— also omitting the requirement for download or update, which further eliminates the need for higher storage limits on a gaming device.
Both Xbox and PlayStation have their own multi-game content library.
Why are popular titles important?
There are two important factors which make Activision’s gaming titles important. Firstly, to differentiate their products from rivals, console manufacturers make certain titles exclusive to their platforms, rendering them unavailable on rival products. Secondly, AAA games are of particular importance to manufacturers. AAA games are highly anticipated games that entail high development costs, superior graphic quality and, as the FTC notes, “represent an outsized portion of revenue on these products (consoles) and drive greater engagement and adoption”.
A diverse array of AAA games also strengthens their position when negotiating with publishers for additional content — they can now tout the number of active users on their platform and thus, their potential to endow the game developer’s title with discoverability and engagement.
What are the alleged anti-competitive effects?
FTC argues that given the competition between Sony and Microsoft, the post-merger entity would have lesser incentive to collaborate with Sony. Microsoft would be able to make exclusive Activision-created titles for their own platforms and deny access to rivals, or raise rivals’ costs, change the terms of access to Activision content, or degrade the quality of content available to rivals. This is particularly noteworthy given that cloud gaming uses the developer’s off-site datacentres (or servers) to stream a live feed of the game to the player’s device.
Thus, it is “reasonably likely’‘ that the transaction would create a monopoly in the cloud gaming and console markets, FTC argues. This would reduce consumers’ choices, reduce product quality, potentially increase prices and result in lesser innovation. Further, it would increase entry barriers for both new console manufacturers (reduced or no access to AAA titles) and game developers to diversify their content on multiple platforms.
Concerns are heightened due to Microsoft’s past actions, post its acquisition of video game developer ZeniMax. The FTC notes that, despite disavowing the intention to make ZeniMax’s titles exclusive, post-acquisition, Microsoft plans to make three of them exclusive to its Xbox consoles and Game Pass subscription service. Although Microsoft released previous titles of the ZeniMax franchise on PlayStation, the upcoming titles would only be made available only on their own platforms and consoles.
What are the companies saying?
Microsoft Vice-Chair and President Brad Smith dismissed claims that the company would make Call of Duty unavailable on PlayStation – calling it “economically irrational”. He said that a vital part of Activision Blizzard’s Call of Duty revenues comes from PlayStation game sales. “Given the opportunity of cross-play, it would also be disastrous to the Call of Duty franchise and Xbox itself, alienating millions of gamers,” he wrote in the Wall Street Journal.
He shared that Microsoft offered Sony a 10-year contract to make each new Call of Duty release available on PlayStation the same day it releases on Xbox, adding that they were open to providing the same to other platforms as well.
Activision Blizzard’s CEO Bobby Kotick, in a letter to his employees, wrote that the FTC challenge “sounds alarming, so I want to reinforce my confidence that this deal will close.” He also mentioned potential “player backlash” from the alleged move.
Adding that the game faced massive and growing competition, Mr Kotick said that if Microsoft cuts it from PlayStation, gamers would simply move to other games instead. “There is no good reason for Microsoft to drive customers to competitors in that way,” he said.
Mr. Smith alleged that Sony has emerged as the “loudest objector” to the acquisition. “It is as excited about this deal as Blockbuster was about the rise of Netflix,” he wrote.
Blocking the acquisition would make the gaming industry “less competitive and gamers worse-off,” he argues.
“Think about how much better it is to stream a movie from your couch than drive to Blockbuster. We want to bring the same sort of innovation to the videogame industry,” he writes.