FTC seeks to block Microsoft’s acquisition of Activision

What does the FTC claim Microsoft is illegally doing and why we should care - the deep dive.

The Shallow Dive

The FTC is attempting to block Microsoft’s acquisition of Activision. The FTC claims the merger will make Microsoft a monopoly and allow Microsoft to cause substantial harm to competition by making Activision games exclusive to Xbox consoles. In response, Microsoft claims the acquisition will benefit consumers because Microsoft will be able to offer consumers lower prices for games and subscription gaming by owning the game developer.

The winner here will come down to whether the FTC can show that Microsoft and Sony are the only players in their market for high-performance consoles. The FTC must show other gaming options like Nintendo Switch, PC gaming, and mobile gaming are different markets because they attract different types of gamers. To prevent litigation, Microsoft has offered not to let titles like Call of Duty become an Xbox exclusive for ten years. However, the FTC is still pursuing its cases while simultaneously negotiating with Microsoft.

The Deep Dive

While Microsoft acquiring Activision is not new news, what has become topical is the legality of the acquisition. Specifically, in the last few months, the Federal Trade Commission (“FTC”), the United Kingdom’s Competition and Market Authority, and the European Commission have all launched some form of complaint, objection, or inquiry into the acquisition. So, what is all the fuss about?

The FTC is primarily concerned about the monopolistic and anticompetitive effects on the market that could occur through Microsoft’s purchase. At a very high level, the FTC shares what is probably the concern of a lot of gamers, that Microsoft will make Activision’s content exclusive to Xbox consoles. To really understand this issue, what we need to do is understand how antitrust laws operate in the United States.

What The FTC Claims Microsoft Is Illegally Doing?

First and foremost, monopolies are not illegal just because a monopoly exists. The government even effectively endorses monopolies sometimes. You may see this with your utility company or when the government approves a patent giving a company the exclusive right to the patented items. In fact, natural monopiles are also perfectly legal as long as the monopoly does not engage in anticompetitive conduct.

While monopolies can be legal, 15 USC §18 makes it illegal to become a monopoly or to substantially lessen competition through mergers and acquisitions. This is what the FTC is alleging in their claim against Microsoft. The FTC claims if Microsoft owns one of the premiere game developers, they will restrict where these games are available. While Microsoft had not taken the position that Activision’s games will become exclusive to Microsoft products, the FTC basis its concern on a previous Microsoft acquisition. In 2020, Microsoft bought ZeniMax Media, the parent company of Bethesda. While Microsoft told European regulators it would not make the content exclusive to Microsoft’s consoles, after the transaction was approved, Microsoft announced three of the acquired titles would be available only on Xbox consoles.

How Antitrust Law Works

Almost all antitrust cases come down to one critical battle, the market definition. For a monopoly to even exist and for the monopoly to lessen competition, there has to be a definition for what market that monopoly is in. Monopolists will argue for broader definitions that significantly reduce their market control. In contrast, plaintiffs and government entities will argue for more narrowed definitions.

A straightforward way to think about this fight would be in how you would classify a company like Amazon. Are they narrowed to online retailers, or are they part of the broader market of all retailers? The importance of this definition cannot be understated because, in one situation, the company could have 90% of the market, whereas in the other less than 50%. While there is no exact number for how much of a given market would constitute monopolistic control, the more control a company has, the more likely it can influence competition.

In the Microsoft/Activision acquisition, the FTC alleges three proper Market Definitions: 1. High-performance consoles; 2. Multi-game content library subscriptions; and 3. Cloud gaming subscriptions. The FTC details how each of these markets are defined in their Complaint, but the short of it is high-performance consoles include Xbox and PlayStation only, and the subscription markets are Xbox Live Gold and PlayStation Plus Essential.

You may notice that this excludes Nintendo, PC gaming, and mobile gaming from the relevant market. The FTC argues that these are different markets because of their price difference, style of gaming, and the fact that consumers may have both a Nintendo Switch and a PlayStation or Xbox, but not typically both a Xbox and PlayStation. Microsoft’s response to the FTC does not lay out the market definition to the extent the FTC did, because they are not required to, but they do attempt to group Nintendo as part of these high-performance consoles. They also frame the issue in terms of gaming in general and trying to keep up to compete. Microsoft cites console gaming as the third largest sector of the gaming industry as whole, behind mobile gaming and PC gaming. While this case is still early and the evidentiary hearing is not set until mid to late 2023, the response does provide insight into how Microsoft views the Complaint.

What Happens Now

The next few months are the long waiting period until the evidentiary hearing. In the meantime, the parties will be in what is called discovery, which will make up most of the case. Essentially, parties will request records from all companies that could be in the market to provide to experts who will build models to show the correct market definition. At the same time, Microsoft is actively engaging in negotiations with the FTC to relieve its antitrust concerns. One claim Microsoft made in its answer to the Complaint was that it would keep titles like Call of Duty available to Sony and Nintendo for ten years to alleviate anticompetitive concerns.

Microsoft is not new to antitrust complaints. In the 1990s and early 2000s, Microsoft was repeatedly in the crosshairs of the United States Antitrust Divisions. It is not unreasonable to believe that Microsoft will not try to make titles exclusive to its consoles. It is also likely that companies like Sony or Nintendo would take similar steps to be the dominating force in the gaming market.

Who Will Win?

A winner in this scenario is a bit difficult to define clearly. Most people associate antitrust or monopolies being a bad thing. You may remember briefly studying the Sherman Act in high school US History and the trust-busting of railroads and other industrialized sectors. When people think of monopolies, they think of price fixing or forcing small or local companies out of business. However, antitrust law is an immensely complex body of law that has been in constant flux since its inception in the US legal system.

The focus of antitrust law has shifted with time from railroads and manufacturing industries to modern-day big tech companies. Apple, Meta, Microsoft, and almost every titan of their industry has faced some form of antitrust allegations in the last 20 years. The Biden administration has taken a strong position against “big business” encouraging more antitrust actions. While a lot of attention has been given to more novel antitrust issues with these tech industries, Microsoft buying Activision represents part of the FTC and DOJ’s push to block concerning mergers. The Biden administration has launch 22 actions against mergers, this is more than twice that during the Trump administration. Importantly, the administration has succeeded in blocking 15 out of these 22 mergers. While blocking mergers could be a success for the FTC and DOJ, the success from these occurred largely without going to court. Each company will make its own calculus as to whether fighting these cases all the way is worth the time, money, risk of loss, and attention it will provide, but it is essential to recognize that four recent cases taken all the way to court resulted in a loss for the FTC and DOJ. Microsoft is actively negotiating with US and European regulators for approval, but it is reasonable to see Microsoft pursing this all the way considering the price they are willing to pay for Activision Blizzard. It is impossible to tell who will prevail in court this early on, but the case will come down to whose market definition is used.

Why Should You Care?

It is important to remember that Sony and others will likely be pushing a narrative that this will result in fewer consumers being able to play any game they want and less competition in the console game marketplace. There will be less incentive to create innovations in AAA titles because there will not be competition when it comes to those titles. At the same time, Microsoft will be claiming that this will allow it to charge less to consumers for its gaming subscriptions. Thus, consumers will only be benefited by being able to play more of the games the studios they acquire to make.

I think most people can agree that exclusive games do not make gaming better and close people out from experiences they could have otherwise had. While some people may buy a PlayStation and an Xbox, that is not something everyone can do. The concerns the FTC raises about how this can financially harm consumers do have a lot of merit. That impact may not be immediate but rather something that occurs over a more extended period. Sony and Microsoft will do what they can to be the dominant force in the market. Still, we should demand they keep games available to all consumers. Part of what makes gaming the experience it is, is the shared communal experiences with games. While I believe that video games are an entirely different form of entertainment than film and television, imagine a world where Roku owned Netflix, and you could only watch Netflix on a Roku TV. It is crazy to imagine that world because it simply should not happen. Entertainment is meant to be shared. While I am all for reducing the cost of individual games or gaming subscriptions, that should not come at the price of limiting who can access that content.

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