The Consolidation of the Video Game Industry: The Microsoft-Activision Deal and Antitrust Concerns
Since the inception of the video game industry, console manufacturers have been searching for ways to set their products apart from the competition. Over the years, some companies have tried using “gimmicks,” like the Nintendo Wii’s motion controls.[1] Others have tried to garner attention by having the most powerful hardware, like the Xbox One X.[2] However, many argue the most important way a console can separate itself from the competition is through its software library.
In the video game industry, “exclusives” are games that are only available on certain platforms.[3] Having a hit game that cannot be played anywhere but your platform can often lead to increased sales.[4] Therefore, a video game company’s IP is very important to them.
Exclusives can be made in-house, or their rights can be purchased from third-party developers.[5] Sometimes, however, a console manufacturer may pull out their wallet and purchase entire third-party studios (along with their IP).[6] An acquisition usually results in studios that formerly made games that would release across multiple platforms now making software solely for their new owner.[7]
This practice of buying up studios seems to be on the rise.[8] A 2022 Bloomberg report shows that acquisitions in the industry are now at an “all-time high.”[9] In 2018, Microsoft announced they would be acquiring four new studios, and in 2019 Sony sealed the deal with their longtime partner, Insomniac Games.[10] Then, in 2020, Microsoft made a huge splash with the completion of their deal to acquire ZeniMax Media, the parent company of game publisher Bethesda Softworks.[11] This $7.5 billion purchase, which included the rights to beloved series like Fallout and Doom, was finalized in 2021.[12] This deal was major news in the industry at the time, but it apparently was just the beginning.
Earlier this year, Microsoft announced plans to acquire Activision-Blizzard, creators of popular games like Overwatch, Call of Duty, and World of Warcraft.[13] The $7.5 billion purchase of ZeniMax pales in comparison to this nearly $69 billion deal.[14] If the deal is successful, it will make Microsoft the third-largest video game company in the world.[15] The announcement sent shockwaves throughout the industry, but video game makers and consumers weren’t the only ones that took note.[16]
An acquisition of this scale naturally raises antitrust concerns. Antitrust laws are designed to protect consumers and promote healthy competition.[17] So, when evaluating this deal, regulators will try to determine how it could harm competition and therefore harm the consumer.[18] In this case, they will likely examine how limiting access to Activision’s games could harm rivals like Sony.[19]
With these antitrust concerns also came the attention of regulatory bodies around the world. Regulators in Brazil and Saudi Arabia have already given the deal their approval.[20] However, Microsoft is not having as easy of a time in Europe and the United States.[21]
Earlier this year, regulators in the EU launched a preliminary probe into the deal.[22] They have claimed the probe showed the deal could “significantly reduce competition on the markets for the distribution of console and PC video games.”[23] They also reached out to Microsoft’s competitors for their input.[24] Sony has expressed concerns about the deal, which Microsoft has tried to assuage.[25] The European Commission is now in the second phase of their review.[26]
The deal also faces a probe by the Competition and Markets Authority (“CMA”) in the UK.[27] The CMA’s Senior Director of Mergers, Sorcha O’Carroll, has stated: “We are concerned that Microsoft could use its control over popular games like Call of Duty and World of Warcraft post-merger to harm rivals, including recent and future rivals in multi-game subscription services and cloud gaming.”[28] After refusing to offer remedies, the CMA is now beginning a more in-depth review.[29]
Microsoft and Activision have both made statements in response to the probes in Europe. Microsoft’s president, Brad Smith, has said they are “ready to work” with UK regulators and has maintained that the deal will not harm the industry.[30] Activision’s CEO, Bobby Kotick, also addressed the probes. He believes the industry is “fragmented” and thinks the merger makes sense.[31] The CMA and the European Commission both have until March to issue a final decision.[32]
Across the Pacific Ocean, the Federal Trade Commission (“FTC”) has been less transparent about their process.[33] However, it is safe to say they are at least reviewing the deal and may challenge it if they find it unfairly anti-competitive.[34] If the deal happens, it will likely be considered a “vertical merger,” in which one company acquires another company that is from a different part of the supply chain.[35] Some commenters believe this could make things more difficult for regulators.[36]
The outlook on the merger’s success is mixed. Antitrust expert Daniel Crane thinks that litigation is a possibility but also feels good about Microsoft’s chances.[37] On the other hand, FTC Chair Lina Khan expressed her desire to crack down on the consolidation of power in the tech industry.[38] This has caused more concern regarding the likelihood of success for the deal.[39] Additionally, in April, the deal spread indicated that investors were still uncertain about the success of the merger.[40]
This merger could likely end with a consent decree, in which Microsoft would make some concessions to seal the deal.[41] Microsoft has clearly expressed at least some openness to this idea, and it may be the only way that it gets through.[42] In this case, Microsoft may be required to keep certain games like Call of Duty on competitor’s platforms.[43] However, it is still possible the FTC could play hardball.[44]
President Biden has vowed to confront this consolidation wave in the interest of healthy and open competition.[45] Legislators like Sen. Elizabeth Warren have also brought attention to antitrust concerns and have pushed back against unfair competition.[46] Additionally, the Chair of the FTC, Lina Khan, has also shown interest in reforming antitrust regulations and taking on industry consolidation.[47]
Consolidation in the video game industry has been on the rise, and the outcome of the Microsoft-Activision deal could be a good indicator of what is to come.[48] If regulators strike down the merger, it would be a good sign for those against consolidation. It would draw a line in the sand and could slow the pace of acquisitions in the industry.
On the other hand, if the deal is successful, it could hasten the process and encourage competitors to snatch up more and more studios. If a deal of this scale goes through, it might embolden companies. Additionally, in an attempt to compete, others in the industry may attempt to fight fire with fire. Already, Sony has announced that they are purchasing Bungie, the studio that created Halo for Microsoft back in the day.[49]
It is unclear what the outcome will be, but the industry will surely be watching and taking cues. Phil Spencer, the head of Xbox, has said he thinks there will be fewer console exclusives in the future, implying that they may eventually go away.[50] Letting people play in any way they like, on any platform they like, could be a good thing for the industry. However, it is hard to share his optimism as the company makes one acquisition after another, further consolidating the industry.
Footnotes
