The Proposed Merger
Microsoft’s nearly $70 billion proposed acquisition of Activision would combine several overlapping and complementary video game assets. Microsoft is a vertically integrated entity that currently offers the Xbox gaming console, produces numerous video games, including AAA titles, provides a video game subscription service, Xbox Game Pass, and owns its own PC gaming store, known as the Microsoft Store. Activision largely creates video games, including several AAA titles, for consoles like Xbox and Sony PS5 as well as for PCs. Notably, Activision produces numerous iconic video game franchises such as Warcraft, Call of Duty, Diablo, and Candy Crush, each of which generates significant revenue. Additionally, Activision also owns a PC gaming store, Battle.net, wherein it offers digital distribution of Blizzard and selected Activision content.
According to the merging parties, the transaction would allow Microsoft to become the “world’s third-largest gaming company by revenue, behind Tencent and Sony.” The combined entity will have over 425 million “active players” across 190 counties and will have a total of “30 internal game development studios, along with additional publishing and esports production capabilities.”
Antitrust Allegations
The antitrust enforcers claim that the combination of these two firms will substantially lessen competition for AAA video games – a key input for gaming consoles and video game subscription services. Focusing on the Federal Trade Commission’s administrative complaint, the FTC seeks to block the merger on the basis that the combined firm could withhold from its rivals or degrade Activision’s AAA content. The FTC’s vertical theory of harm alleges a pattern and practice by Microsoft to acquire third-party gaming studios, like Activision’s gaming studios, and then taking that studio’s video game content and making it “exclusive to its own consoles and/or subscription services.” The FTC argues that this practices strengthens “the position of [Microsoft’s] console and subscription service products relative to its rivals,” such as Sony. Asserting that the past is prolog, the FTC points to Microsoft’s 2021 acquisition of ZeniMax Media Inc., who owns and operates the gaming studio Bethesda Softworks LLC. According to the administrative complaint, at the time of its acquisition, Microsoft informed European regulators that it had no “incentive” to make ZeniMax’s gaming content “exclusive.” The FTC claims that Microsoft went back on its word by making numerous ZeniMax titles only be available on Xbox, PC, or through Xbox Game Pass.
The FTC alleges that the merger will increase prices, diminish consumer choice, and/or lower quality in three distinct product markets: (1) High-Performance Consoles; (2) Multi-Game Content Library Subscriptions; and (3) Cloud Gaming Subscription Services. The alleged High-Performance Console market only includes the Microsoft Xbox and the Sony PS5, and it excludes other gaming devices like PCs and mobile gaming devices. Moreover, the FTC excludes the Nintendo Switch and other handheld consoles, because those consoles lack computational power, do not have the same content portfolios, utilize different technical specifications, cost almost half the price, and have a “different release cadence[].”
Instead of buying individual games, the Multi-Game Content Library Subscription requires consumers to pay a monthly subscription fee to access a range of gaming content. Xbox Game Pass is a leader in this market with over 25 million subscribers. The FTC alleges that this is a unique, relevant market as Multi-Game Content Library Subscriptions are used by consumers who prefer to purchase access to the full suite of video games. Finally, Cloud Gaming Subscription Services allow consumers to play video games via cloud streaming on numerous devices, including PCs, tablets, and smart televisions. Along with Amazon Luna and Nvidia GeForce NOW, Microsoft’s Xbox Cloud Gaming is a competitor in this nascent market.
Potential Remedies
Since announcing its merger with Activision, Microsoft has proactively taken numerous steps to assuage potential antitrust concerns. Specifically, Microsoft pledged to not withhold Activision video games or make such games exclusive to Microsoft’s Xbox or its subscription service. In December 2022, Activision vowed to bring Call of Duty, a leading AAA title, to Nintendo for the next decade and further agreed to allow the game to also be sold through the PC platform Steam. Similarly, Microsoft also announced an agreement with Nvidia to make its video games available to Nvidia’s cloud-gaming service, GeForce NOW.
As part of its findings, CMA issued a “notice of possible remedies,” which included the following structural remedies: (1) divestiture of Call of Duty; (2) divestiture of the “Activision” video game segment; and (3) divestiture of the “Activision” and “Blizzard” video game segments. As part of those findings, the CMA also acknowledges the existence of “potential contractual arrangements with third-party platforms relating to access of Call of Duty” – referred to as an “access remedy.”
Microsoft’s recent efforts to provide access to its rivals mirror another vertical merger case challenged by the FTC. In the Matter of Illumina, Inc. and Grail Inc., the FTC filed an administrative challenge seeking to halt the vertical merger of Illumina, a provider of DNA sequencing tool used in multicancer early detection tests (MCED), with Grail, the likely “first to market” MCED test provider in the United States. In response to the FTC’s challenge, the Respondents noted the existence of a pre-existing behavioral remedy known as the “Open Offer.” The Open Offer is a 12-year supply commitment to Grail’s potential rivals in which Illumina agrees to not raise pricing on its supplied sequencing instruments or consumables and offers universal pricing through a most favored nations clause to ensure competitors receive the same pricing as Grail. In dismissing the complaint, Administrative Law Judge Chappell held that the Open Offer “effectively constrains Illumina from harming Grail’s rival.”
Conclusion
The proposed merger of Microsoft and Activision offers insights into an ever-changing and dynamic industry in which market participants are expanding their reach to players around the world. A vertically integrated entity not only provides consumers with video games, but it also allows for subscription services to a full suite of content and the means by which to play those games – through consoles, PC, or the cloud. Nonetheless, given the concerns raised by various enforcers, this merger faces an uphill battle.
A driving force behind any private litigation will be the concerns of Microsoft’s chief rival, Sony. To date, Sony has provided its “observations” to the CMA, noting its agreement with the enforcer that the proposed transaction will harm competition for gaming console, subscription services, and cloud gaming. In particular, Sony argues that Microsoft has every incentive to cut off access to its acquired AAA games, including Call of Duty. Sony’s contemporaneous documents and testimony could be the lynchpin to any case.
The “proactive” behavioral remedies offered by Microsoft and granting access to its rivals to key AAA games may assuage the concerns of at least some public enforcement agencies. Additionally, the merging parties are likely to challenge the FTC’s proposed relevant markets, including the alleged High-Performance Consoles market which explicitly excludes Nintendo.
We will continue to monitor developments related to the proposed Microsoft and Activision merger and will provide our readers with an update as the array of antitrust litigation unfolds.
