Dan Blog

By Dan Mackrides[1]

Dan Blog

1. Tutorial Island: A Broad Overview of the          Gaming Industry.

            Gaming is the largest entertainment sector in the world.[2]  Analysts project revenues of $196.9 billion for 2022 and $221.4 billion for 2023.[3]  Estimates for total users hover around 2.5 billion for 2023.[4]  Gaming is generally split into three distinct categories: mobile, PC, and console.[5]  The focus of this piece lies in the console market, specifically dealing with the latest chapter in the decades long battle between Microsoft and Sony.[6]  While dominating one’s opponent is usually one’s main objective, Microsoft’s quest for video game domination over Sony probably just backfired. This post details the Microsoft-Activision merger and the looming FTC action threatening to derail the deal.

2. The Console Wars: Meet the Cast of                 Characters.

            While thousands of different corporations make contributions to the gaming sector, three corporations dominate the gaming console market.  Microsoft, Nintendo, and Sony cleared the field of all other competitors decades ago; no other company fielded a commercially viable console since Sega Dreamcast bowed out in 2001.[7]  Since that time, Nintendo charted a different course, focusing less on technical prowess and more on mass appeal and family friendly properties.[8]  Microsoft and Sony continue to battle over the same subset of users.[9]  Dubbed, the “console war”, this digital skirmish enjoys ample coverage in gaming news circles.[10]  The two gaming titans continuously push out generations of consoles with similar technical specifications and trying to match each other with exclusive titles that cater to similar audiences.[11]  To feed their need for exclusive titles, Sony and Microsoft rely on acquisitions to wholly acquire smaller companies and all of their gaming intellectual property.[12]  While most of these acquisitions draw only the ire of angry twitter trolls, Microsoft’s recent proposed acquisition of Activision Blizzard, Inc. (“Activision Blizzard”) drew the “aggro”[13] of a most dangerous “boss;” the Federal Trade Commission (“FTC”).[14]

  • Level-Up or Cheating?: The FTC Reports For Duty.

            The FTC recently signaled that Microsoft may be legally “rekt”[15] with regards to its attempted acquisition of Activision Blizzard.[16]  Now Microsoft faces the potential complete unwinding of the Activision deal as it continues to battle Sony in the decades long “console war” in which the two find themselves locked.

            Activision Blizzard incorporated in Delaware in 2000.[17]  The corporation controls numerous development teams responsible for developing a number of popular franchises;[18] none more popular than the first-person shooter Call of Duty.[19]  Seeking to leverage the strength of these franchises—especially Call of Duty—Microsoft announced its intentions to acquire Activision Blizzard on January 18, 2022.[20]  The all-cash transaction of $68.7 billion instantly became the largest acquisition in video game history by more than five times the second largest deal.[21]  Mixed reactions followed.[22] Gamers spanned the spectrum from angry to enthused; media, on the other hand, seemed shocked.[23]  Those reactions carried no legal significance; but the growing discord of the FTC imperiled the deal.

             Microsoft framed the deal as a chance to increase the accessibility of its games across multiple platforms, including PC and mobile.[24]  This sunny outlook failed to sway the FTC.  Perhaps in this deal, like Ikaros, Microsoft flew too close to the sun.  Nearly eleven months after Microsoft announced the proposed merger with Activision Blizzard, the FTC filed a complaint under The Clayton[25] and FTC Acts[26] to enjoin the proposed deal; Game Over Microsoft?[27]

3. No Lives Left: Microsoft Faces                           Administrative Action.

           To understand the trouble Microsoft faces, a brief overview of federal law regarding monopolies follows.[28]  The FTC is empowered under federal law to prevent unfair methods of competition.[29]  Indeed, federal law prohibits the acquisition of stock in a company for the purpose of lessening competition or creating a monopoly.[30]  Ergo, the FTC can block mergers when they result in anti-competitive behavior or monopolies.

           In the present situation, the FTC alleges that the Microsoft-Activision merger could “lessen competition substantially or tend to create a monopoly,” in the video game industry, “as a result of the combined firm’s ability and incentive to withhold or degrade content,” from its rivals, specifically Sony.[31]  The complaint explains that big budget games (“AAA”) count as crucially important to the success of a video game console.[32]  It further acknowledges that Activision Blizzard is one of only four independent publishers capable of reliably delivering AAA gaming content to gaming consoles.[33] The complaint goes on to single out Call of Duty among all other AAA game franchises for its ability to generate massive profits.[34]  The numbers bely belief.  The latest Call of Duty game made $1 billion globally in ten days, Top Gun: Maverick took a month to reach the same threshold.[35]

           With the value of Activision Blizzard teed up, the FTC lays out the risks to the market of allowing the deal to consummate.  The FTC alleges that Microsoft would have incentive to harm its rivals by withholding or degrading content.[36]  It points out that while an independent Activision Blizzard stands to gain from selling more games, Microsoft stands to gain more if it forces gamers to buy Xboxes to access Activision content.[37]  There would no longer be incentive to optimize Activision content for other consoles, and infact, there might be motivation to do just the opposite.[38]

           The complaint then delves into Microsoft’s actions following a previous acquisition of publisher ZeniMax.[39]  It alleges that Microsoft made representations to European regulators indicating that it would not keep ZeniMax’s content exclusive only to go back on those representations post-merger.[40]  The FTC concludes that this same behavior is likely to repeat itself should the Microsoft-Activision merger go through.[41]

           Microsoft mounts its defense by largely denying all allegations leveled by the FTC.[42]  Microsoft argues that it started in third place when it entered the console market and it still remains there today.[43]  It couches its purchase of Activision as an attempt to enter the mobile gaming sector, where 94% of gamers spend their time.[44]  Microsoft attempts to rebut the allegation of anti-competitive behavior by championing its agreement to provide Call of Duty to Nintendo, and states that it has offered the same to Sony.[45]  Microsoft further argues that it has no incentive to throw away a revenue stream that Activision currently enjoys from providing its games to Sony and other platforms.[46]

           On the ZeniMax deal, Microsoft refutes that it mislead the European Commission.[47]  Instead, Microsoft points out that the first two ZeniMax games to release after the merger went to Sony’s Playstation as exclusives.[48]  Microsoft also argues that the only ZeniMax games it keeps exclusive are single-player and small group games, it keeps the large, online games multi-platform.[49]  Here it compares these online ZeniMax games to Call of Duty, suggesting that there is no need to fear it pulling Call of Duty into exclusivity.[50]  Microsoft seems to lean on the argument that it only is bringing niche games exclusive, while promoting the larger multiplayer ones cross-platform.

4. No Shot?: Can Microsoft’s deal Survive the     Complaint?

           It seems likely that the FTC will block the Microsoft-Activision merger.  Call of Duty is a massive game that generates the kind of buzz and profits that could help a console maker form a monopoly. While Microsoft tries to characterize its behavior following the ZeniMax deal as simply following the way different types of games are played, its argument seems unavailing.  Microsoft did make ZeniMax games exclusive, it seems incredibly likely that it would do so again, or at least exclude them from Sony consoles.  While this may not be monopolistic behavior due to the inclusion of Nintendo in the Call of Duty chain, it is surely anti-competitive.  Multiple regulatory agencies aside from the FTC seem to signal that they will block the deal.[51]  Perhaps more importantly, with financial uncertainty in the U.S. seemingly impending, Microsoft presents an easy target for government regulators to slap down to prove that they are keeping “the bad guys in check.”  Microsoft currently does not hold a monopoly in the video game industry.  To argue otherwise is folly.  But the FTC is not trying to break a monopoly in this case but prevent one from forming.  The hope seems to be that keeping Activision Blizzard independent will keep its games multi-platform and prevent one of Microsoft or Sony from taking the other out.

          Regardless, Microsoft is a massive company with a market cap over $1 trillion.[52]  While the possible cessation of its merger with Activision Blizzard would sting, it is no death knell.  Microsoft will survive regardless.  In the end, if the deal falls through, it will be less “Game Over”, and more “start over from previous save.”

[1] Credit for the title image goes to dgim-studio. dgim-studio, Game over with glitch effect (photograph), in Freepik, https://www.freepik.com/free-vector/game-with-glitch-effect_7997336.htm#query=game‌%20over&position‌=0&‌from_view=keyword (last visited Jan. 31, 2023).

[2] See Drew Townley, Gaming’s singularity: how games media is taking over the world, The Drum (May 16, 2022), https://www.thedrum.com/opinion/2022/05/16/gaming-s-singularity-how-games-media-taking-over-the-world (“Gaming is now the largest sector in the entertainment business. . . .”).

[3] Video Games – Worldwide, Statista: Digital Market Insights, https://www.statista.com/outlook/dmo/digital-media/video-games/worldwide#revenue (last visited Jan. 29, 2023).

[4] Id.

[5] See generally Mobile Games Vs. PC Vs. Console Games: What Market is the Best Bet?, Starloop https://starloopstudios.com/mobile-games-vs-pc-vs-console-games-what-market-is-the-best-bet/ (last visited Jan. 29, 2023) (providing a broad overview of the respective markets and their pros and cons).

[6] While the currently contested Microsoft-Activision merger indeed touches all three of these categories, the concise nature of the blog format demands a tighter focus.  In-depth analysis of the PC and mobile markets lies outside the scope of this individual article.

[7] See Emre Basaran, Strategy showdown in gaming: Nintendo vs. Sony vs. Microsoft, Daily Sabah (Mar. 29, 2021), https://www.dailysabah.com/life/strategy-showdown-in-gaming-nintendo-vs-sony-vs-microsoft/news (summarizing the history of console gaming with focus on Microsoft, Nintendo, and Sony); see also 23 Years Ago, Sega’s Biggest Flop Changed Video Games Forever, Inverse (Sept. 23, 2022), https://www.inverse.com/gaming/sega-dreamcast-23rd-anniversary (examining the brief history of Sega’s ill-fated Dreamcast console).

[8] Nick Statt & Janko Roettgers, Nintendo escaped the console war. Now Microsoft and Sony want out, too., protocol (Sept. 13, 2022), https://www.protocol.com/newsletters/entertainment/nintendo-splatoon-3-sales (explaining Nintendo’s differing strategy in the console market).

[9] Id. (stating that “the two companies ultimately borrow each other’s strategies.”).

[10] See generally Statt & Roettgers, supra note 8 (discussing the console war between Sony and Microsoft); Giovanni Colantonio, The console wars are back and worse than ever, digitaltrends (Jan. 19, 2022), https://www.digitaltrends‌.com‌/gaming/console-wars-2022/ (discussing the console war between Sony and Microsoft in context of various previous console wars).

[11] See generally PS5 vs Xbox Series X: which is better?, What Hi-Fi? (last updated Dec. 23, 2022), https://www.whathifi.com/advice/ps5-vs-xbox-series-x-power-features-pricing-and-controllers-compared (discussing hardware comparisons of Microsoft’s and Sony’s latest consoles); Statt & Roettgers, supra note 8 (discussing the battle between Microsoft and Sony for exclusive games).

[12] Peter Johnson, Microsoft and Sony Acquisitions – a Strategy Game, Tech Insights, https://www.techinsights.com‌/‌‌blog/microsoft-and-sony-acquisitions-strategy-game (last visited Jan. 31, 2023).

[13] Short hand for aggression, a commonly used gaming term referring to the a player character drawing the attention and aggression of an enemy character; many times a powerful one. LaPetiteJort, Aggro, GiantBomb (last edited Mar. 4, 2020, 8:07a.m.), https://www.giantbomb.com/aggro/3015-105/.

[14] FTC Seeks to Block Microsoft Corp.’s Acquisition of Activision Blizzard, Inc., FTC (Dec. 8, 2022), https://www.ftc.gov/news-events/news/press-releases/2022/12/ftc-seeks-block-microsoft-corps-acquisition-activision-blizzard-inc.

[15] A term and the requisite spelling generally used in gaming circles to indicate a loss.  rekt, Dictionary, https://www.dictionary.com/browse/rekt (last visited Jan. 31, 2023).

[16] FTC, supra note 14.

[17] Third Amended and Restated Certificate of Incorporation of Activision Blizzard, Inc., SEC: Edgar, https://www.sec.gov/Archives/edgar/data/718877/000110465914044513/a14-14950_1ex3d1.htm (last visited Jan. 29, 2023).  Originally incorporated as “Activision Holdings, Inc.,” the company amended its certificate twice since the original incorporation.  Id.  The current certificate last saw amendment on July 9, 2008, when Activision became Activision Blizzard, Inc. Id.

[18] Activision Blizzard: About Us, https://www.activisionblizzard.com/about-us (last visited Jan. 29, 2023) (listing many of the popular franchises owned by Activision Blizzard).

[19] Tobi Oguntola, A History of Call of Duty – release dates, sales and more, X Fire, https://www.xfire.com/a-history-of-call-of-duty-release-dates-sales-and-more/ (last updated Oct. 3, 2022) (stating that the Call of Duty has sold 425 million copies).

[20] Microsoft to acquire Activision Blizzard to bring joy and community of gaming to everyone, across every device, Microsoft News Center (Jan. 18, 2022), https://news.microsoft.com/2022/01/18/microsoft-to-acquire-activision-blizzard-to-bring-the-joy-and-community-of-gaming-to-everyone-across-every-device/.

[21] See, e.g., Microsoft is acquiring Activision Blizzard in shocking deal, digitaltrends (Jan. 18, 2022), https://www.digitaltrends.com/gaming/microsoft-acquires-activision-blizzard/ (stating that the second largest deal totaled $12.7 billion); Microsoft News Center, supra note 20 (confirming the $68.7 billion figure).

[22] Matthew Byrd, Gamers React to Microsoft Buying Activision Blizzard, Den of Geek (Jan. 18, 2022), https://www.denofgeek.com/games/activision-blizzard-microsoft-xbox-internet-reactions-memes/ (describing reactions from gaming reporters and gamers in the immediate aftermath of the acquisition announcement).

[23] Id.

[24] Microsoft News Center, supra note 20.

[25] The “Clayton Act” 15 U.S.C. §§ 12–27.

[26] The “FTC Act” 15 U.S.C. §§ 41–58.

[27] Complaint at 1, 26, In re Microsoft Corp., No. 9412, F.T.C. (Dec. 8, 2022) [hereinafter “Cmpl.”].  Specifically, the FTC stated that the Microsoft-Activision merger violated 15 U.S.C. § 45, and if consummated would violate 15 U.S.C. § 18.  Cmpl. at 1.

[28] A very brief and very rough approximation of the FTC’s authority and procedures follows.  It is beyond the scope of this blog post to provide much more.

[29] 15 U.S.C. § 45.

[30] 15 U.S.C. § 18.

[31] Cmpl. at 21.

[32] Cmpl. at ¶ 43.

[33] Cmpl. at ¶ 46.

[34] Cmpl. at ¶ 59.

[35] Cmpl. at ¶ 59.

[36] Cmpl. at ¶ 108.

[37] Cmpl. at ¶ 109.

[38] Cmpl. at ¶¶ 108–12.

[39] A discussion of this particular merger and acquisition is outside the scope of this blog post, for more information, see Phil Spencer, Officially Welcoming Bethesda to Team Xbox, Xbox Wire (Mar. 9, 2021), https://news.xbox.com/‌en-us/2021/03/09/officially-welcoming-bethesda-to-the-xbox-family/.

[40] Cmpl. at ¶¶ 114–15.

[41] Cmpl. at ¶ 117.

[42] See generally Amended Answer and Defenses of Respondent Microsoft Corp., In re Microsoft Corp., No. 9412, F.T.C. (Dec. 8, 2022) [hereinafter “Ans.”].

[43] Ans. at 1.

[44] Ans. at 1.

[45] Ans. at 2.

[46] Ans. at 5.

[47] Ans. at 6.

[48] Ans. at 6.

[49] Ans. at 6.

[50] Ans. at 6.

[51] Foo Yun Chee, Exclusive: EU antitrust regulators ramp up Microsoft scrutiny, probe likely – sources, Reuters (Nov. 24, 2022), https://www.reuters.com/technology/eu-antitrust-regulators-ramp-up-microsoft-scrutiny-probe-likely-sources-2022-11-24/.

[52] Market capitalization of Microsoft (MSFT), Companies Market Cap, https://companiesmarketcap.com/‌microsoft/marketcap/ (last visited Jan. 31, 2023).