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Tuesday, December 27, 2022

Microsoft is Correct and FTC is Wrong on Activision-Blizzard Takeover

By LUDWIG VON KOOPA - Am I under-estimating the impact? Nah, they're over-estimating it.

One of the hottest events of 2022 in the videogame industry was Microsoft announcing their intent to acquire Activision-Blizzard-King for almost $69 billion. Microsoft has previously said a lot of the reasoning for that comes in strengthening their position in the mobile games market and having more content to offer on their Xbox Cloud Gaming service—not to make Call of Duty, a flagship Activision franchise, an Xbox-exclusive. For at least ten years, they'll even let Call of Duty back on Nintendo platforms again, which the currently independent Activision-Blizzard hasn't been doing! (No word on if the quality of that Nintendo console Call of Duty will be the equivalent of what Electronic Arts does for FIFA.) Microsoft also wishes to make this commitment for Sony, but Sony hasn't accepted it.



The Democrat-run villains at the Federal Trade Commission, as well as their European counterparts, desire to block this deal, citing a likely outcome of severely reduced competition and a tendency towards monopolisation if the acquisition goes through. In other words, if Microsoft buys Activision-Blizzard, they'll win the videogame industry in a landslide. You can read the FTC's full 23-page complaint here. It has some funny redacts.

Brad Smith, Vice Chair and a President at Microsoft (promoted from their legal department) penned a short opinion piece in the Wall Street Journal here denying that the acquisition would harm the industry, instead portraying Microsoft as in the dead last position behind Nintendo and Sony. Microsoft then released a significantly more detailed response (37 pages!) to the FTC's complaint here that goes paragraph-by-paragraph and tries to refute them. So who do I view in the right? Let's go through the documents!


In their response to the FTC, Microsoft repeatedly states how behind they are against the PlayStation and the Nintendo Switch, and they're basically irrelevant in mobile. Microsoft has also explained that the Xbox has significantly less exclusive titles in their ecosystem than Nintendo or PlayStation have. The FTC, meanwhile, has invented an industry called “high-performance video game consoles” specifically to ignore the existence of the Nintendo Switch, and the FTC inaccurately believes that the Switch and the PlayStation and Xbox are not direct competitors due to how differentiated the Switch is. (We've already had a court's opinion that groups Nintendo, PlayStation, and Xbox in the same industry.) They're doing this to misrepresent the dynamics of the industry, in order to make Microsoft becoming more powerful seem more destructive than it actually would be.

Microsoft Xbox response to Federal Trade Commission on consoles sold and exclusive games in 2021 and mobile penetration including Activision
Microsoft added these charts to their rebuttal, but haven't cited the sources for these.


The FTC has a bizarre notion that Call of Duty, as a triple-A (AAA) title, is essential to the success of a game console. Somehow, the Nintendo Switch has been doing just fine without Call of Duty, and the FTC has provided no evidence that Microsoft intends to restrict Call of Duty availability on the PlayStation, with Microsoft stating that it would be foolish for them to cut off that revenue stream—this is similar to what they've done with Minecraft. The FTC also implies that Sony, with all of its resources and industry leadership, would be incapable of procuring a first-person-shooter game that would see mass-market success. This is a stupid implication, and makes it seem like new IP never sees success in this industry. Again, Microsoft has made public commitments to Nintendo and Sony to make Call of Duty available for (at least) ten years, and only Nintendo has responded affirmatively. Sony doesn't seem to see an issue with lacking Call of Duty!

A big part of the FTC's argument is that Microsoft mislead the European Commission when it came to acquiring ZeniMax in their antitrust review—however, both Microsoft and the European Commission deny that alleged misleading actually occurred.

Microsoft's paragraph-by-paragraph counters to the FTC document involves them denying a lot of allegations, even ones that appear to be true. They even denied paragraph 36's claim that Xbox Game Pass Ultimate is priced at $14.99 a month. (Probably because you can get your first month for $1.) Microsoft also refused to comment on the FTC's many “unidentified industry participants”, including these anonymous sources’ contentious definition of AAA games and their place in the industry. The one exception was that Microsoft admitted that sometimes these unidentified industry participants refer to Activision, EA, Ubisoft, and Take-Two as “the ‘Big 4’ or simply the AAA publishers”. Microsoft then admits that sometimes people in the videogame industry refer to AAA publishers as “Big 4 + Epic”, to refer to Epic Games and Fortnite. KoopaTV tried via several Internet searches, but could not find anyone in the gaming industry using this terminology before this FTC statement—with the exception of this June 2019 presentation by hedge-fund firm Third Point Management on slide 55, which portrays Sony's exclusive titles as doing just fine compared to those publishers—and it seems like a conspiracy to downplay the contributions of Japanese videogame companies. That same presentation goes on to discuss cloud streaming, and described Xbox as lacking “must-have” exclusive games. With regards to Epic, my search result got: “Your search - "Big 4 + Epic" Activision Electronic Arts Take-Two Ubisoft - did not match any documents.”


Third Point Sony game studios analysis versus Big 4 publishers Activision Electronic Arts Take Two Ubisoft
I wouldn't consider a hedge fund or other financial entities to be part of the gaming industry, though.
Since this report, Sony has also added the likes of Bungie to their in-house game studios.
(The FTC briefly looked into the competitive impact of Sony getting Bungie, but that seems to have sailed through.)


I also like that Microsoft wholly denied that Xbox and PlayStation appeal to different gaming audiences than the Switch, with the FTC using the disproven canard that Nintendo consoles are for “casual” gamers and Xbox and PlayStation are for “more serious gaming”.

By the end, Microsoft states that consumer welfare won't be negatively impacted, and Microsoft acquiring Activision does not create any undue barriers to entry for other gaming studios to enter the market and produce well-appreciated titles. Microsoft also states that if they weren't acquiring Activision, then none of Activision's games would be available on any subscription service, because it's been an Activision business policy to avoid those. Therefore, when the FTC identified cloud gaming subscription services as a relevant market that would be harmed, that's nonsense.

Really, everything the FTC has alleged is nonsense. Their case is woefully flimsy and they lack evidence on any of their speculations. They're coming from a place of wanting to regulate “big tech” without understanding the videogame industry or what the FTC's mission is supposed to be. The FTC acknowledges that first-party titles are a powerful competitive differentiator. They should acknowledge that Nintendo and Sony have significantly higher market share because they have those first-party titles. Why is Microsoft not allowed to pursue their pro-competitive position of competing on having more first-party titles? Maybe Sony would actually have to work harder and not be complacent if Microsoft was a stronger competitor, which benefits consumers. Some game franchises like Call of Duty would remain multi-platform. I'm sure future Activision-Blizzard-King titles in other franchises would be exclusive to the Xbox ecosystem (which will be greatly expanded to mobile and PC gaming, more than it already is). Microsoft would make those decisions on a case-by-case basis depending on what they see as best for them, just like Sony and Nintendo get to do.



Do you feel like the Federal Trade Commission has a case here? Have you ever seen the phrase, “Big 4 + Epic”? Let KoopaTV know your thoughts on that or any of the many other possible discussion points raised.

2 comments :

  1. Wouldn't it be funny, if after this they just stopped making Call of Duty games for 10 years.

    ReplyDelete

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