Thursday, February 22, 2024

Goodbye to Call of Duty? The Frontlines of the War on Competition

According to estimates from the Competition and Markets Authority (CMA), approximately £5 billion was spent on the UK gaming industry in 2022. The CMA also predicted that there are around 45 million gamers in the UK on average and that more money has been invested in gaming than in any other form of entertainment.

Tencent, Sony, and Microsoft are the largest brands in this market. They compete with one another as they release games, gaming consoles, digital platforms, cloud gaming ventures, and other products. Myerson’s Technology Solicitors investigate the legal ramifications of Microsoft’s acquisition of Activision.

Microsoft’s proposed acquisition of Activision

In January 2022, Microsoft obtained the US computer game organization Activision Blizzard Inc for $68.7 billion. Call of Duty (CoD), Overwatch, World of Warcraft (WoW), and Candy Crush Saga are all developed by Activision, one of the largest third-party game developers worldwide. If it is completed, Activision’s acquisition will be the largest transaction in video game history.

There are many reasons why Microsoft is a household name in the gaming industry:

  • Microsoft’s Xbox console primarily challenges Sony’s PlayStation.
  • For PC gaming, Windows is the most popular operating system.
  • Microsoft owns their cloud gaming service, which gamers can use to buy a cheaper alternative to expensive gaming consoles.

Between 60% and 70% of all cloud gaming services worldwide use Microsoft accounts. Microsoft has a global cloud gaming infrastructure through Azure and Xbox Cloud Gaming.

Together with other competition authorities based in the EU and the US, The Competition and Markets Authority began an in-depth analysis of the proposed deal with Activision in September 2022 to determine the potential threat to competitors.

As a feature of the CMA’s investigation, they surveyed 40,000 gamers who play CoD on their PlayStation to perceive how significant the game is to them and how they would answer should the game becomes totally or, to some extent, exclusive to Xbox because of the acquisition. The investigation’s other components included:

  • Visits to sites.
  • Investigation of internal data.
  • Additional data gathered from cloud service systems and game publishers.

Why did the CMA launch an investigation?

Due to the close similarities between the two brands, competitors are concerned that the merger would weaken the crucial rivalry between Sony’s PlayStation and Microsoft’s Xbox. The main reason for this concern is that Microsoft would gain a competitive advantage by restricting Activision’s games to their consoles. Microsoft might even let its rival access more expensive, diluted, or delayed versions, affecting the service its competitors can offer its customers.

CoD is a game that is popular worldwide and is currently available on Xbox and PlayStation. Players may be persuaded to switch to Xbox because they will have access to the Xbox Game Pass, Microsoft’s monthly subscription, if CoD is removed from PlayStation or offered at a significantly higher price. Microsoft adopted the console-exclusive strategy in previous mergers with other gaming brands, such as Bethesda (whose gaming portfolio includes DOOM, Fallout, and Skyrim).

Competition authorities investigate the merger’s potential impact on gamers in their jurisdictions, even though the acquisition is a global transaction. Concerns that Microsoft’s Xbox would have exclusive access to Activision’s gaming portfolio led the US antitrust regulator, the Federal Trade Commission (FTC), to force a judge to block a deal in December 2022.

Microsoft was warned early in March 2023 by the European Commission, EC, about the acquisition’s potential anti-competitive effects; nonetheless, they are yet to arrive at a choice.

Contrary to the position taken by the CMA, it is assumed that the EC will not require Microsoft to sell any Activision assets in exchange for the merger and regulatory approval.

What action can the CMA take?

The Competition and Markets Authority stated in February 2023 that it believed the acquisition could significantly reduce UK-based competition for console gaming and cloud gaming, leading to “higher prices, fewer choices, or less innovation for UK gamers.”

The CMA believes that the acquisition may make Microsoft a stronger competitor in cloud gaming, which could negatively impact gamers in the UK who cannot afford expensive consoles because cloud gaming platforms are especially accessible to gamers with lower incomes.

The CMA has the authority to conduct investigations into activities that may violate competition law, impose legally binding measures, distribute fines for noncompliance, and prohibit directors.

The Competition and Markets Authority has proposed three structural solutions in addition to stopping the Microsoft-Activision deal:

  • Selling the particular Call of Duty-related business.
  • Getting rid of Activision, which owns Call of Duty; or
  • Selling off Blizzard Entertainment and Activision (the company that owns Warcraft).

Behavioural remedies, which aim to control the future conduct of the merged business by, for example, monitoring licensing agreements with other providers, are another more appealing option for Microsoft. Conduct cures assist with mitigating worries from Microsoft’s rivals.

However, behavioural remedies are typically used only in situations where the divestitures mentioned above are impractical or where the behavioural measures will preserve significant customer benefits that the structure remedies would otherwise eliminate. The CMA does not believe this is the case for the Microsoft-Activision merger.

What happens next?

Microsoft has made several announcements demonstrating its willingness to offer appropriate licensing deals to competitors (and its reluctance to divest the thriving CoD franchise) in response to the CMA’s response and the EC’s caution.

Microsoft has stated that it will ensure that Sony, Steam, Nvidia, Nintendo, and others have equal and long-term access to Call of Duty to preserve the merger’s benefits for gamers and developers.

Microsoft announced that they had entered into a 10-year licensing agreement with Nintendo and Nvidia at the end of February 2023, granting them access to all Xbox games and Activision titles on their Switch console and GeForce Now service. A merger with Activision is required for the deal with Microsoft, Nintendo, and Nvidia.

Sony has received the same offer from Microsoft; However, an agreement has yet to be reached, and Sony reportedly strongly opposes the acquisition.

Due to competition, companies are compelled to develop cost-effective, novel goods and services. Gamers worldwide would see skyrocketing prices, fewer games, lower quality, and worse service on gaming platforms and consoles if Microsoft and Sony’s rivalry were to dissolve due to the merger.

Despite the merger, Microsoft would still fall behind Tencent and Sony in terms of gaming revenue. Therefore, Microsoft and Sony’s rivalry would only get stronger due to the merger.

Summary

The games becoming exclusive to the Xbox console is the Competition and Markets Authority’s primary concern. However, the CMA may be satisfied, given Microsoft’s promise to license CoD to rivals.

In a merger valued at $3.6 billion in 2022, Sony purchased Halo creator Bungie. Bungie’s games remained playable on a variety of platforms throughout this acquisition. As a result, it has been observed that significant deals are concluded without games becoming console exclusive. With the Microsoft Activision deal, gamers can only hope for the same result.