Microsoft’s Proposed Acquisition of Activision Blizzard Could Be A Game Changer for Antitrust Challenges of Digital Market Mergers
Federal antitrust enforcers may be on the verge of rewriting the code for challenges to mergers in digital markets as they decide whether to challenge Microsoft’s bid to acquire Activision Blizzard.
Microsoft’s recent announcement that it intends to acquire video-game publisher Activision for $75 billion sent shockwaves across the video-game industry and generated plenty of headlines. This is the latest acquisition by Microsoft in the video-game space and comes close on the heels of its purchase of Bethesda Softworks last year. If the Activision Blizzard acquisition is approved, Microsoft will become the third largest company in the video-game industry, trailing only Sony and Tencent.
Increased market concentration has always been a touchstone of the antitrust analysis of mergers and acquisitions. Historically, the U.S. Department of Justice (“DOJ”) and the FTC have focused on several suggestive facets of market concentration in making their merger enforcement decisions. Under the 2010 Horizontal Merger Guidelines and the 2020 Vertical Merger Guidelines, the federal antitrust enforcement agencies have looked at market overlaps between the merging firms, increased market share in those markets in a combined firm, and the potential for lessened competition, higher consumer prices, and lower output.
In this traditional analytical framework, a viable challenge to a combined Microsoft-Activision could be an uphill battle. Sony and Tencent will still exist if the acquisition is allowed to proceed, and a number of large independent game publishers will still sell very popular games, such as Electronic Arts and Rockstar Games, at least for now.
The question is whether the DOJ or FTC will seek to apply a different analytical framework to a merger in digital markets like the modern video-game industry. Their joint Request for Information on Merger Enforcement, released on January 18 and described in our previous post, seeks public comment on potential revisions to the merger guidelines and may provide clues as to how the agencies may analyze potential anticompetitive effects of a combined Microsoft-Activision.
- Does the nature of digital markets require different merger analyses?
This fundamental question underscores merger enforcement in digital markets, where enforcers must evaluate prospective harm to competition in a competitive landscape that shifts as fast as an Xbox’s refresh rate. For example, Microsoft might argue that a combined Microsoft-Activision would allow its Xbox platform to better compete with Sony’s PlayStation platform by adding some of Activision’s popular games to Microsoft’s Xbox Game Pass subscription service. On the other hand, the merger could result in reduced competition in PC game platforms and distribution by consolidating Battle.net, Activision’s digital store and gaming platform, with the Microsoft Store and the PC Game Pass service. Microsoft might theoretically be better able to compete with Valve’s dominant Steam platform, but consumers would have fewer choices to play and purchase PC games. Therefore, the enforcers will have to decide whether potential short-term consumer benefits and “efficiencies” outweigh potential long-term anticompetitive effects like decreased choice, reduced innovation, and higher prices.
- Does the tendency of some digital markets to tip toward oligopoly or monopoly matter in evaluating mergers?
The rise of walled gardens in digital markets has spurred high-profile Congressional hearings and cases that have—so far—failed to increase competition in digital markets, at least in the United States. At present, a number of dominant walled gardens already exist in the video game industry—the iOS App Store for mobile games, Xbox and PlayStation for home gaming consoles, and Steam for PC games—where strong network effects reduce consumer switching. Microsoft-Activision could further “tip” the video game industry toward a more concentrated market where consumers are locked into future “meta” platforms across multiple devices and emerging platforms, including virtual and assisted reality products. Thus, antitrust enforcers must decide whether they act now or take a wait-and-see approach, the latter of which has dominated U.S. antitrust enforcement for decades—to much public criticism. The FTC’s post-closure challenge to Facebook’s acquisition of WhatsApp and Instagram, which is now proceeding to discovery, may be a sign of enforcers taking a more prophylactic approach.
- Is market share of a relevant product market sufficient to assess market power in digital markets?
Traditionally, market definition is the first step in antitrust analysis to evaluate market power, including the combined market power of merging firms. However, many antitrust scholars, such as Herbert Hovenkamp, have commented that courts and antitrust enforcers should “avoid the error of continuously expressing market power in terms of a market share of a relevant market” in digital markets. In other words, use the right tool for the job. Therefore, Microsoft-Activision’s market share of the video game market as a whole might not raise concerns. However, if the DOJ or FTC consider other indicia of market power, such as the network effects associated with the hundreds of millions of consumers that use the Xbox platform and Windows as well as the potential effects of other lines of business associated with video games, like Microsoft’s Azure cloud computing platform, a different conclusion might emerge from a more wholistic picture of the complex competitive forces in modern digital markets.
Given the federal antitrust agencies’ apparent interest in revamping merger analysis in digital markets, Microsoft’s proposed acquisition of Activision Blizzard could see a more aggressive response from enforcers than other tech mergers in recent history. State antitrust enforcers have also demonstrated that they will challenge mergers even when the federal agencies do not. See our previous coverage of various states’ challenge to the T-Mobile-Sprint merger. Whether this deal changes the game of antitrust in digital markets remains to be seen.
Written by David Golden
Edited by Gary J. Malone