CMA vs Microsoft - Game Changer!
In January 2022 Microsoft announced that it is acquiring Activision Blizzard King (ABK), the video-game developer responsible for successful franchises like Call of Duty, for $68.7 billion. Antitrust regulators around the world are now investigating the proposed merger for competitive concerns. While authorities in Brazil and Chile have concluded that the deal poses no significant issues, regulators in the United States, European Union, and the United Kingdom remain sceptical.
The UK’s Competition and Markets Authority concluded its “phase-1 investigation” in September 2022. The CMA found that there is a realistic prospect that the deal will lead to a substantial lessening of competition — the relevant statutory standard for initiating a “phase-2 investigation”.
Following is a summary of the CMA’s concerns, which are largely echoed by other regulators[1].
The CMA has identified three separate (but interconnected) markets that are relevant to the transaction.
1. Consoles: this is the market for video-game consumer hardware. It is dominated by Sony’s PlayStation, Microsoft’s Xbox, and Nintendo’s Switch.
2. Multi-game subscription services: traditionally, developers have sold their games in digital stores and physical shops on a one-time purchase model Users make a single purchase that gives them permanent access to the title. While this remains the dominant way to purchase games, in recent years a new model has started taking shape where users pay a set monthly fee for access to a catalogue of titles. This is the multi-game subscription service market, and Xbox’s Game Pass subscription is the frontrunner.
3. Cloud gaming services: users have typically accessed their purchased videogame by either downloading it to their local console or by purchasing a physical disk. Cloud gaming is a new method of distribution where the video game is hosted on a central cloud and “streamed” to the user. Thus, no download is necessary, and the game could theoretically be accessed from any device, not just the one it was purchased for. Microsoft’s Xbox Cloud Gaming product is arguably the leader of this market.
It is worth highlighting, as does the CMA, that the markets for multi-game subscription services and cloud gaming services are currently in their infancy, and it remains to be seen if they are secularly viable markets that will truly take hold. Critics of the investigation say this is a reason for regulators to adopt a wait-and-see approach. On the flipside, the CMA argues that action is needed precisely because the markets are nascent. Foreclosing competition at such an early stage could all but guarantee a winner-takes-all monopoly / duopoly.
The CMA has proposed two theories of harm, which trace out how the merger could adversely impact competition in the aforementioned three markets.
1. Input foreclosure: video games are an input in the console and multi-game subscription services markets. Currently, Activision’s games are available on the one-time purchase model across a variety of platforms – PlayStation, Xbox, PC etc. These games are launched simultaneously across all platforms. The CMA is concerned that Microsoft will hinder competition in the console market by making these games exclusive to Xbox, or by degrading competitors’ access; for example, by charging them higher licensing fees or by delaying a release on their platforms. It should be noted that Call of Duty is not available as part of any multi-game subscription service. The CMA argues that after the merger Microsoft could unfairly hinder competition in the market by including the game, which is extremely popular, in the Xbox Game Pass catalogue. This would unfairly make Game Pass a much stronger product than rival subscription offerings, and non-Xbox platforms may be chained to offering the game on a one-time purchase basis. In a counterfactual word where Activision stays independent, the developer would be incentivised to make CoD available across several multi-game subscription services to maximise licensing fees. However, if it is owned by Microsoft, the benefits to Microsoft as a whole will outweigh the cost of losing licensing revenue.
2. Raise barriers to entry and foreclose competition: this concern pertains to the market for cloud gaming services. Streaming games over an internet connection requires powerful cloud infrastructure. Azure, Microsoft’s public cloud product, which is used by companies like Netflix, can deliver the necessary goods. The CMA is worried that Microsoft will leverage its strength in the cloud market (Azure is currently the second largest provider) to unfairly secure its position in the market for cloud gaming services. For example, Microsoft could give Xbox Cloud Gaming preferable access and charge other cloud gaming service providers a higher license fee if they choose to use Azure. Alternatively, competitors could build their own cloud infrastructure, but this is notoriously expensive and is likely to be unfeasible.
The CMA is now conducting an in-depth “phase 2 investigation” to see if the deal will likely result in a substantial lessening of competition – which is the standard that must be met for the regulator to issue an order prohibiting the transaction. This investigation was initially due to be finished in March 2023 but last week the CMA said it needed more time and extended the deadline to April 2023. Meanwhile, the European Commission will release the findings of its in-depth investigation on 23 March 2023, and in the US the Federal Trade Commission has already sued to block the deal in Courts. Microsoft is confident the deal will go through because it is good for competition – an opinion shared by 75% of the public comments solicited by the CMA as part of its information gathering exercise[2]. Only time will tell!
[1] https://assets.publishing.service.gov.uk/media/634536048fa8f5153767e533/MSFT.ABK_phase_1_decision_-_1.09.2022.pdf
[2]https://assets.publishing.service.gov.uk/media/63a303238fa8f53917035814/Summary_of_public_responses_to_Issues_Statement_MS_Activision.pdf