Is Microsoft building a gaming monopoly?


SOURCE: THEVERGE.COM
JAN 19, 2022

Yesterday morning, Microsoft announced plans to acquire Activision Blizzard, publisher of games ranging from the Call of Duty series to Candy Crush Saga, for $68.7 billion. Microsoft says the move would make it the third-largest gaming company by revenue, following Tencent and Sony. The company, already a giant in the market, would gain even more leverage over how games are made and distributed. That’s assuming regulators approve it — something that’s not guaranteed amid a new push for scrutiny of potential tech monopolies.

After a damaging antitrust case in the 1990s, Microsoft has mostly escaped the more recent antitrust criticism directed at tech companies like Apple, Meta, and Amazon. But the company has been steadily building its power in the games world for the past few years. In 2021, it closed an acquisition of ZeniMax Media, giving it ownership of subsidiaries like Fallout maker Bethesda Softworks for a total of 23 first-party game studios. Meanwhile, Microsoft has built its Xbox brand into a gaming service that spans both consoles and PCs. The company recently revealed that its Xbox Game Pass subscription service had grown to 25 million subscribers after launching in 2017. With the Activision Blizzard acquisition, it would integrate a massive game publisher into that system.

MICROSOFT HAS BUDGETED TIME FOR HEAVY SCRUTINY

That new market power could raise eyebrows at the US Justice Department and Federal Trade Commission, which will have to approve the merger. While neither agency has commented on the recent announcement, they’ve committed to more carefully examining tech industry consolidation — launching a joint process yesterday to start overhauling the approval process. Expecting resistance, Microsoft has budgeted an extended timeline for the process, planning for it to close by the fiscal year of 2023.

Microsoft acquiring Activision Blizzard fits the form of a vertical merger: where two companies that offer complementary services combine forces, like a major telecommunications company buying a media production company. In this case, it’s a major game studio joining a major game storefront and console company. (Since Microsoft already owns several first-party game studios, there’s also a level of horizontal merger, where directly competing companies combine.)

The new generation of antitrust activists has recently taken particular aim at vertical mergers. In September of last year, the FTC withdrew Trump administration-era guidelines that agency chair Lina Khan said wrongly attributed helpful effects like increased efficiency to them — calling claims that they provided consumer benefits “misguided.”

A video game industry merger might not seem as immediately dangerous as something like a sprawling Amazon retail monopoly or a locked-up mobile app store. But Microsoft’s growing power in games could reduce its incentive to work fairly with third-party developers who rely on products like the Xbox and Game Pass to reach players. It could also increase the dominance of Game Pass and its leverage to raise prices on subscribers.

“It’s all about the Game Pass subscription model,” explains Matt Stoller of the American Economic Liberties Project. “Everyone who doesn’t own massive distribution is going to have an increasingly difficult time producing games and getting them distributed.”

Stoller believes there’s a precedent for blocking Microsoft’s merger as anti-competitive. He cites United States v. Paramount Pictures, a landmark 1948 Supreme Court decision that took aim at Hollywood studios’ control over the distribution of movies and the theaters where they were shown. The resulting consent decree barred studios from also owning theaters and imposed other restrictions like an end to “block booking,” which forced theaters to book slates of films in advance. (The decree was officially terminated in 2020 after a judge determined it was “unlikely” the studios would wield the same monopoly power today.) The Paramount decision “created an open market for creative content,” says Stoller — it’s credited with helping fuel the rise of television and freeing actors from restrictive contracts by reducing studios’ power.

Stoller sees Paramount-like consolidation today in games. “What you’re finding here is that it was an open market for gaming content, but it’s increasingly being closed off into walled gardens,” he says — although he acknowledges that companies like Nintendo have long maintained closed ecosystems. The recent rise of game streaming, a system where companies can exercise even more control over how content is distributed and played, could further consolidate the industry.

“Game streaming giants will make it much harder for independent game producers to get into the market,” warns Stoller. And Microsoft is one of the biggest players in that space thanks to its cross-platform Xbox Cloud Gaming (formerly xCloud) service.

ONE LAWMAKER HAS CITED “ENCOURAGING” SIGNS FROM MICROSOFT

This doesn’t necessarily mean that regulators — or lawmakers who have expressed a broad interest in tightening the rules for mergers — will be hostile to Microsoft’s merger. The company’s acquisition of ZeniMax didn’t meet substantial resistance in either Europe or the US — although the latter was then still operating under Trump’s administration, which put less weight on antitrust. Rep. Ken Buck (R-CO), a prominent Republican supporter of antitrust reform, tweeted yesterday that he’d received “encouraging” assurances from Microsoft that the deal wouldn’t decrease competition. “They’ve suggested that they’re going to emphasize access to titles and competition in the marketplace as well as the individual gaming experience,” Buck said.

Buck’s comment hits on one of the key splits in recent antitrust debates: whether anti-monopoly efforts should focus narrowly on the direct effects on consumers or the market as a whole. As Khan has noted, combining two complementary services doesn’t necessarily grant benefits to end users. But even if it does, it could have ripple effects that change the way games are made and played, putting more pressure on developers to play by Microsoft’s rules. And in an era of renewed suspicion of monopolies, that might raise more red flags than usual.

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