A Long Road Ahead for Call of Duty’s New Home

5.07.2023

CeCo EE.UU

In early 2022, Call of Duty, one of the world’s most popular games and the crown jewel of Activision Blizzard (Activision), was planning to join Microsoft’s Xbox family. The proposed merger between Activision and Microsoft was estimated to be $69 billion, the largest deal in gaming history. However, it is not an easy path for Call of Duty to find itself a new home through rigorous antitrust review.

On December 8, 2022, the Federal Trade Commission (FTC) filed an administrative complaint to block the Microsoft-Activision deal within the FTC’s adjudicative proceeding. As covered by D. Redel in his article, the FTC challenged that the merger would lessen competition within three relevant markets: high-performance consoles, multi-game content library subscription services, and cloud gaming subscription services. The agency argued that the transaction would tend to create a monopoly in these markets as it gives Microsoft the ability to withhold Activision’s games from competitors. On June 12, 2023, the FTC filed a complaint at the U.S. District Court for the North District of California, seeking to temporarily block Microsoft and Activision from consummating their deal.  On the next day, Judge Jacqueline Scott Corley issued a temporary restraining order (TRO) that put a hard stop to the Activision deal. After five days of hearing, Judge Corley will decide whether to continue restrain Microsoft and Activision from implementing their deal by July 18.

Notably, in its initial complaint, the FTC argued that Microsoft’s previous acquisition of ZeniMax illustrates future harm to competition if the Activision deal succeeded. In March 2021, Microsoft acquired ZeniMax, the parent company of Bethesda Softworks, which is known for the Fallout and Doom Eternal franchises. According to the FTC, Microsoft promised the European Commission (EC) that it would not withhold ZeniMax games from competing consoles during the merger review. After the transaction was completed, Microsoft made several new upcoming ZeniMax games exclusive to Microsoft’s own Xbox platform, including Starfield and Redfall. Thus, the FTC argued that Microsoft’s previous post-merger behavior cast suspicion on its current commitment to keep Call of Duty available on Sony consoles. In response to the FTC’s allegation that Microsoft “deceived” the European agency, the EC stated that Microsoft did not make any commitment to not release Xbox-exclusive content following its takeover of ZeniMax. Instead, EC’s clearance of the ZeniMax deal was based on the European agency’s determination that the transaction would not raise competition concerns. Even if Microsoft were to restrict access to ZeniMax games, competitors would not be denied access to an “essential input”, and they would still retain a “large array” of attractive content.

In response to the FTC’s suit, Microsoft made multiple public statements regarding its willingness to provide competitors with access to Activision games. During late 2022, Brad Smith, Microsoft’s President, said Microsoft had already offered a 10-year contract to Sony which would make Call of Duty available on PlayStation without any discriminatory terms.  In addition, according to Phil Spencer, Microsoft’s Gaming CEO, Microsoft will not take Call of Duty away from PlayStation as long as PlayStation exists.

CMA Blocked the Mega Deal

While the FTC first sued to block Microsoft’s acquisition, competition agencies around the world were also assessing the future antitrust impact of the Activision deal. In the UK, Microsoft filed its acquisition of Activision in January 2022. Beginning in September 2022, the Competition and Market Authority (CMA) conducted an in-depth review of Microsoft’s proposed merger. In April 2023, the CMA blocked the deal (see CeCo’s article here).

With regard to the console gaming market, while Microsoft will have the ability to foreclose Activision games from competitors, the CMA concluded that Microsoft will have no incentive to do so. Under CMA’s quantitative analyses and financial models, it would not be financially profitable for Microsoft to restrict access to Activision games from PlayStation. However, apart from the console gaming market, the CMA made a strong decision that there will be a high likelihood of lessening competition in the cloud gaming market. Through accessing Microsoft’s existing position, the CMA ruled that no strong competitor nor new entry currently exists to stand against Microsoft in the still-developing cloud gaming market. As a result, the CMA concluded that Activision games would be a “particularly important input” to cloud gaming services and any alternatives are not likely to offset the loss incurred to cloud gaming competitors by foreclosing Activision games. Ultimately, the British agency held that if Microsoft forecloses Activision games from competing cloud gaming platforms, it will distort the development of the new cloud gaming market and result in substantial anticompetitive harm.

In response to the CMA’s finding and inquiry, Microsoft proposed to make Activision games available on rival cloud gaming platforms for ten years. For example, Microsoft explained that it has signed a contract with Nvidia to make all of Activision’s games available on GeForce Now, a competing cloud gaming service, for at least ten years after the transaction. However, the CMA rejected Microsoft’s proposed remedy because it was confined only to “buying before streaming” model and excluded could gaming subscription model, which gamers could freely play any game with a monthly membership fee.

The CMA also concluded that Microsoft has low incentive to make the precious Activision games available to competitors in addition to its current advantageous position in the cloud gaming market. Furthermore, because Microsoft’s proposed remedy was “behavioral” under UK competition law, its implementation requires CMA’s enforcement and oversight. CMA’s report specifically pointed out that because cloud gaming is still an early-staged and growing market, future inherent competitive risk cannot be effectively captured. Accordingly, Martin Coleman, chair of the independent panel conducting the investigation, stated that Microsoft’s proposed remedy was not effective in resolving antitrust concerns and would replace competition with ineffective regulation. Microsoft quickly appealed CMA’s decision in May, and a hearing will be held in late July before a judge at the Competition Appeal Tribunal (CAT).

Approval from 38 Jurisdictions Around the Globe

Although Microsoft is facing legal battles with U.S. and U.K. agencies, as of June, its mega deal was approved by EC, China, Brazil, Chile and 34 other jurisdictions. In May, the EC approved Microsoft’s deal with the condition that Microsoft must allow Activision games to be available on rival cloud gaming services for ten years. Similar to the UK competition agency, the EC found that Microsoft has the potential to foreclose access to Activision games in the console, cloud, and subscription gaming service. Additionally, the EC was concerned about the anticompetitive effects of the transaction in the PC operating system market, as Microsoft might bundle Activision games with Windows, effectively discouraging consumers from buying non-Windows computers. Similar to the CMA, the EC found that Microsoft would have no incentive to foreclose Activision games from Sony because PlayStation has four times the market share than Xbox in the European Union. Additionally, the European agency found that the console gaming market, as to PC gaming, is much smaller in Europe than in other regions of the world. Even if Microsoft decides to foreclose Activision games, Sony could leverage its enormous size to fend off any anticompetitive effect. As to subscription gaming service, because Activision currently does not have any of its games available for subscription, there will be no change before or after the transaction.

Again, similar to the CMA, the EC found that the transaction could be anticompetitive in the cloud gaming market. If Microsoft forecloses Activision games on rival cloud gaming platforms, it could also strengthen its position in the PC operating systems market. Departing from its UK counterpart, the EC accepted Microsoft’s remedy of making Activision games available on competing cloud gaming platforms for ten years. Currently, Activision does not have any of its games streaming on cloud gaming services. Under EC’s view, allowing Activision games to be freely streamed on any cloud gaming platform would significantly improve the cloud gaming market, innovation, and user gaming experience. According to EC Commissioner Margrethe Vestager, Microsoft’s remedy would allow small cloud gaming providers to offer “AAA games” on their platforms that they cannot currently do with Activision games. Notably, comparing with Microsoft’s previous takeover of ZeniMax, which EC regulators stated that Microsoft did not make any commitment to make unreleased games accessible by rival platforms, Microsoft specifically promised to make “all current and future Activision PC and console games” available on all cloud gaming platforms.

On the other hand, the Brazilian antitrust agency, the Administrative Council for Economic Defense (CADE), approved the deal without imposing any remedy. Similarly to the EC, CADE held that Microsoft would have no incentive to withhold Activision games from other platforms because it would be economically adverse to Microsoft’s interest. Most interestingly, CADE pointed out that its main mission is to protect competition in Brazil and not the interest of competitors, which directly referenced to Sony. CADE concluded that Sony’s large market share along with its broad user base would not be affected by the Activision deal.

Similarly, in Chile, the competition agency, Fiscalía Nacional Económica (FNE), approved the transaction without imposing any remedy (see CeCo’s article here). In its assessment, the FNE ruled out any horizontal effects in the relevant markets, as none of them exceeded the concentration thresholds established in its Merger Guidelines. It also dismissed a series of vertical risks, input foreclosure, and tipping effects since its portfolio of video games, although significant, would not be sufficiently relevant in a segment where there is a significant number of competitors and high product differentiation at both the local and Latin American levels.

In Asia, Microsoft won the approvals of antitrust regulators in several countries. On March 28, 2023, the Japan Fair Trade Commission (JFTC) approved the Activision deal without any condition 18 days after Microsoft’s initial application. Similarly, China’s competition law authority, State Administration for Market Regulation (SAMR), approved the Activision deal without any condition. China’s quick approval of the deal came as a surprise. Despite Microsoft and Bill Gates’ long-time relationship with the Chinese regime, Activision ended its licensing agreement with local Chinese company NetEase in December 2022. Because NetEase refused to extend its agreement with Activision and no company has stepped in to take NetEase’s place, Activision’s games, including World of Warcraft and Overwatch, are currently suspended in China. China’s quick approval of the Activation’s deal illustrates some intent to restore the previous status quo. On May 30, South Korea’s Korean Fair Trade Commission (KFTC) unconditionally approved Microsoft’s proposed deal. Overall, 38 jurisdictions around the globe have approved the Activision deal by June 2023.

Conclusion

Despite the Microsoft-Activision deal having been approved in 38 jurisdictions, this transaction will not be fruitful without clearance from the FTC and CMA, which regulates a majority portion of Microsoft’s business. Looking ahead, Microsoft needs to persuade both the FTC Administrative Court and the CAT that its merger with Activision would not harm competition. On the U.S. front, Microsoft first needs to win its legal battle within the FTC’s administrative proceeding if no settlement can be reached. On the U.K. front, Microsoft must show the CAT that its proposed ten-year remedy would not be anticompetitive to UK’s cloud gaming market. Although Microsoft and Activision intended to close this deal as quickly as possible, they must first fight their antitrust battles across the Atlantic.

*Fengyuan Cao is a J.D Candidate at GW Law and M.A. Candidate at the Elliott School of International Affairs, Research Assistant for Professor William Kovacic

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