By Raphael Dionis, LL.M. 2022
On January 18, 2022, Microsoft sent shockwaves through the video game industry by announcing its acquisition of video game developer Activision for $68.7 billion.1 By Microsoft’s own account, this acquisition will turn Microsoft into the third largest gaming company by revenue, behind Tencent and Sony.2
Activision develops video games for all major video game consoles, including Microsoft’s Xbox, whose main competitors are Nintendo’s Switch and Sony’s PlayStation. While Nintendo has innovated to compete based on mobility, the other two console makers are competing based on the same elements: graphics, power, processing, and speed.3 As a result, Sony and Microsoft compete more directly with each other than with Nintendo.4
Horizontal mergers (i.e., mergers between competitors at the same level of the supply chain) raise more concerns when the merging firms have substantial market shares.5 Here, the horizontal merger effects on the video game production market are unlikely to raise concerns because Microsoft has little market power prior to this acquisition.6 However, the acquisition raises several antitrust concerns on the vertical merger side, the acquisition of a video game producer by the platform (console market). These issues could lead the Federal Trade Commission (FTC)—one of the two U.S. antitrust enforcement agencies—to attempt to block the deal. The ability of Microsoft to make popular games exclusive to its platform could be grounds for such an attempt, as a small number of high-quality exclusive games have a huge impact on console sales.7 Assuming that each video game genre is a separate market and taking the example of first-person shooter video games (FPS), the acquisition of Activision by Microsoft poses an antitrust question because Activision is the leading FPS developer, with its Call of Duty franchise dominating the market.8
The FTC and the Department of Justice’s Antitrust Division have recently taken a more aggressive stance towards consolidation in the technology sector.9 However, courts remain the ultimate decision-makers and, to prevent a corporate acquisition, Section 7 of the Clayton Act imposes the ultimate burden on the Government to show that the acquisition may substantially lessen competition.10
To analyze vertical mergers’ harm to competition, courts balance consumer benefits with consumer harms.11 This burden to prove a probable lessening of competition is particularly difficult to meet in vertical merger cases because probable harms will be weighed against contrary evidence, which includes “evidence related to the motivation for the challenged merger.”12
Microsoft is aware of the risks that come with the acquisition because of its potential power to render game franchises exclusive to Xbox, and it has addressed them, pledging not to do so.13 This constitutes evidence of motivation, which could go a long way should the deal be challenged.
In addition to this, as in AT & T Inc., business reasons could force Microsoft to deal with its competitors. Activision and Sony not striking a deal could have severe consequences on Microsoft itself: losses of revenues from the sale of Activision’s games and loss of customers from non-Xbox players moving to other franchises altogether.14 This is because Sony is the biggest player on the console market.15 So, it makes more business sense for Microsoft to open its hit titles to popular platforms, making the likelihood of anticompetitive effects of the acquisition even smaller and hurting the FTC’s case.16
The FTC recently re-expressed its distaste for behavioral remedies, which is what Microsoft is proposing in guaranteeing not to make Activision’s games exclusive to Xbox, even though the agency accepted such remedies on numerous occasions in the past.17 However, the FTC might have to accept this remedy in this case as, in light of the AT & T Inc. precedent, courts are unlikely to block the acquisition because of Microsoft’s market power.
The quick reactivity of the market could also be an issue for the FTC: it made its second request for more information in March, but the market had already reacted to the Microsoft deal, with Sony announcing its acquisition of Bungie, another major game developer, on January 31, 2022.18 This acquisition could allow Sony to compete with Microsoft in the video game development market following the Activision acquisition and lead Sony to have new exclusive games of its own.