Is Microsoft building a gaming monopoly?

Yesterday morning, Microsoft announced its intention to acquire Activision Blizzard, a publisher of games ranging from 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, after Tencent and Sony. The company, already a market giant, would have even more say in how games are made and distributed. That’s assuming regulators approve it – not guaranteed amid renewed pressure for scrutiny of potential tech monopolies.

After a damaging antitrust case in the 1990s, Microsoft has largely escaped more recent antitrust criticism directed at tech companies like Apple, Meta and Amazon. But the company has steadily strengthened its power in the gaming world over the past few years. In 2021, it completed an acquisition of ZeniMax Media, giving it ownership of subsidiaries like Fall manufacturer Bethesda Softworks for a total of 23 proprietary game studios. Meanwhile, Microsoft has integrated its Xbox brand into a gaming service that spans both consoles and PCs. The company recently revealed that its Xbox Game Pass subscription service grew to 25 million subscribers after its launch in 2017. With the acquisition of Activision Blizzard, it would bring a huge games publisher into this system.

This new market power could raise eyebrows at the US Department of Justice and the Federal Trade Commission, which will have to approve the merger. While neither agency has commented on the recent announcement, it pledged to take a closer look at tech industry consolidation, yesterday launching a joint process to begin revising the approvals process. Expecting resistance, Microsoft has budgeted an extended timeline for the process, expecting it to wrap up by fiscal year 2023.

Microsoft’s acquisition of Activision Blizzard fits the form of a vertical merger: where two companies that offer complementary services join forces, like a large telecommunications company that buys a media production company. In this case, it’s a big game studio joining a big showcase and game console company. (Since Microsoft already owns several first-party game studios, there is 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 retracted Trump administration-era guidelines that agency chair Lina Khan said erroneously attributed useful effects such as increased efficiency to them — calling claims that they provide benefits to consumers “misguided”.

A video game industry merger may not seem as dangerous as a sprawling Amazon monopoly or a locked down 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 Xbox and Game Pass to reach gamers. It could also increase Game Pass’s dominance and leverage to raise subscriber prices.

“It’s all about the Game Pass subscription model,” says Matt Stoller of the American Economic Liberties Project. “Anyone without mass distribution will find it increasingly difficult to produce games and get them distributed.”

Stoller thinks there is precedent for blocking Microsoft’s merger as anti-competitive. He quotes United States v Paramount Pictures, a landmark 1948 Supreme Court decision that sought control of Hollywood studios over film distribution and the theaters where they were screened. The resulting consent decree banned studios from also owning theaters and imposed other restrictions like ending “block booking,” which required theaters to reserve movie listings in advance. . (The executive order was officially repealed in 2020 after a judge determined that studios were “unlikely” to wield the same monopoly power today.) Primordial The move “created an open market for creative content,” Stoller says — it is credited with helping fuel the rise of television and freeing actors from restrictive contracts by reducing the power of studios.

Stoller sees Paramount-like consolidation in games today. “What you find here is that it used to be an open market for gaming content, but it’s increasingly closed in walled gardens,” he says – although he acknowledges that companies like Nintendo have long maintained closed ecosystems. The recent rise of game streaming, a system in which companies can exert even more control over how content is distributed and played, could further cement the industry.

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

That doesn’t necessarily mean regulators — or lawmakers who have expressed broad interest in tightening merger rules — will be hostile to the Microsoft merger. The company’s acquisition of ZeniMax met with no substantial resistance in either Europe or the United States – although the latter were then still operating under the Trump administration, giving less antitrust leverage. Rep. Ken Buck (R-CO), a prominent Republican supporter of antitrust reform, tweeted yesterday that he had received “encouraging” assurances from Microsoft that the deal would not lessen competition. “They suggested that they were going to emphasize access to titles and market competition as well as the individual gaming experience,” buck said.

Buck’s comment touches on one of the major divides in recent antitrust debates: whether antimonopoly efforts should focus narrowly on direct effects on consumers or on the market as a whole. As noted by Khan, the combination of two complementary services is not it necessarily provide 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 a time of renewed suspicion of monopolies, that could raise more red flags than usual.

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