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Digital Transformation Antitrust Tech

Microsoft stands to lose the gaming game to Sony as FTC moves to block Activision deal

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By Kendra Barnett, Associate Editor

June 14, 2023 | 10 min read

The gaming industry is facing increasing antitrust scrutiny as its influence – and technological footprint – grows.

Broken gaming controller

The FTC is suing to prevent Microsoft from acquiring Activision Blizzard

The US Federal Trade Commission (FTC) on Monday sued Microsoft in an effort to block the tech giant’s $69bn acquisition of gaming titan Activision Blizzard, citing anti-competition concerns. The move put new levels of pressure on Microsoft in what could be the largest consumer tech deal in decades.

The development could throw a wrench into Microsoft’s strategic plans – and may also represent a growing appetite for antitrust action in the US.

The FTC said in a statement that it feared the organizations had not met certain legal thresholds required to close the deal. “Microsoft and Activision Blizzard have represented in the past that they cannot close their deal due to antitrust reviews of the transaction in other jurisdictions. But Microsoft and Activision have not provided assurances that they will maintain that position. In light of that, and public reporting that Microsoft and Activision Blizzard are considering closing their deal imminently, we have filed a request for a temporary restraining order to prevent them from closing while review continues.”

Microsoft has said it’s happy to work with regulators to get the deal through. In a statement shared with The Drum, Brad Smith, the company’s vice-chair and president said: “We welcome the opportunity to present our case in federal court. We believe accelerating the legal process in the US will ultimately bring more choice and competition to the market.”

The proposed deal, announced first in January 2022, aims to help Microsoft boost its gaming division – which includes PC products and the popular Xbox line. The operation has not been able to keep pace with competitors like Sony – which makes PlayStation – in recent years.

The announcement was met with mixed responses from regulators across the globe. While the EU greenlit the deal, the UK’s regulatory body, the Competition and Markets Authority, moved to block the deal in April of this year. The country’s regulators said the agreement would impede healthy competition in the burgeoning cloud gaming space. However, Microsoft appealed the decision in May and is awaiting a decision.

Microsoft also appealed a previous effort by the FTC to stymie the acquisition – last year, the agency sued to stop the deal through an in-house court. This approach has limitations, however; the FTC has filed this new challenge in federal court in order to obtain a restraining order to hamper the completion of the deal.

Microsoft and Activision, it would seem, will have to continue to put up a fight if they want to go through with the deal.

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A lot to lose, a lot to gain

For Microsoft, the stakes are especially high. Acquiring Activision Blizzard – one of the top gaming publishers on Earth, behind popular names like Candy Crush and Call of Duty – would significantly expand its library and gaming capabilities. “For Microsoft, acquiring Activision Blizzard would provide access to a vast library of intellectual property, loyal player communities and established gaming studios,” says Greg Kahn, the chief executive officer at GK Digital Ventures and an expert in media, entertainment and advertising.

What’s more, the arrangement could empower Microsoft to take a bigger bite out of the nascent web3 gaming space. “Microsoft’s play for Activision Blizzard also represents a chance to become one of the technology leaders in metaverse-related content and services,” Kahn says. “As companies like Roblox demonstrate the commercial power of immersive gaming and new marketing opportunities within those spaces, Microsoft would take a step back on that front … without Activision Blizzard.”

In a broader sense, the deal would align well with Microsoft’s holistic gaming strategy, which Kahn says seeks to expand its presence across screens and platforms, attract new gamers, strengthen the company’s gaming tech ecosystem and bolster subscriptions to its Xbox Game Pass program – an increasingly critical revenue driver. In essence, an Activision acquisition would position Microsoft for longer-term success in the gaming market.

And for Microsoft, that market is still tough, with Sony posing the biggest threat. Losing out on its acquisition of Activision, would in many ways spell victory for the Japanese gaming behemoth. Kahn stresses that Sony, as well as other players like Nintendo, are “widely considered to have a stronger gaming library.”

The questions at the heart of the debate

The FTC’s latest lawsuit seeking to block the acquisition is a symptom of growing antitrust appetite globally, some experts say.

“Regulators are paying closer attention to mergers and acquisitions, particularly in the tech sector, to ensure fair competition and prevent monopolistic practices. While it's difficult to say definitively whether the [Microsoft-Activision] deal will be consummated, the FTC’s actions indicate a potential concern regarding the consolidation of power in the gaming industry,” says Kahn.

He, for one, suggests that the FTC might be operating from a place of unjustified suspicion rather than rational argument. “It’s hard to see the FTC’s logic, apart from a general policy of viewing massive deals with greater suspicion than they used to just a few years ago,” he says.

It’s a concern commonly echoed by advocates of open markets. “This action seems to … [advance] ideas of what regulators believe the market should be rather than evidence of consumer harm or the actual consumer experience,” says Jennifer Huddleston, a tech policy research fellow at Cato Institute, a DC-based libertarian think tank.

When it comes to the FTC case, much of the current debate over the Microsoft-Activision deal involves definitions of the relevant market. The FTC’s definition of that market is fairly narrow, including only high-performing gaming consoles PlayStation and Xbox – it excludes PCs, mobile devices and cloud platforms.

The FTC’s limited definition of the appropriate market misconstrues the deal’s impact on marketplace competition, Huddleston suggests, because “to the consumer, there are a wide range of gaming options and many factors that may lead them to choose one particular platform over the other. Consumers have a range of options and the market continues to evolve with mobile gaming and other popular options.”

But consumers themselves are wary of industry consolidation, too. But it’s not just regulators who are ever-more wary of competition in the gaming market. According to research released last month by Morning Consult, half of all US gamers – defined as adults who played video games in the past month – worry about the possibility that larger gaming studios will become too powerful. Around the same percentage are concerned about monopolization in the industry and that exclusivity deals could render some games less accessible.

The growing influence of gaming

Competition concerns in the world of gaming could be rising as the industry grows.

As the gaming industry grows and expands into the regions of emerging tech – especially in the realms of decentralization and spatial computing – it’s becoming a greater force in the world of media. It’s eating up bigger slices of advertisers’ budgets and reshaping how players in the space think about content and influence. This growth could be part of the reason that regulators are eyeing the Microsoft-Activision deal with such scrutiny.

Whether or not Microsoft’s acquisition of Activision goes through, Kahn says, will have broad implications in adland: it could “shape the ideas of the ‘attention economy’ that is currently being fought over by investors as well as established and emerging brands, media and tech companies.”

Whether the FTC can come to an agreement with leaders at Microsoft and Activision remains unclear.

Kahn, for his part, however, is optimistic: “I believe the deal will ultimately go through. Microsoft has made significant concessions and promises and the FTC simply wants more to make sure this doesn’t look like a free pass. Plus, Microsoft’s lawyers have made a pretty good case so far in outlining how this deal won’t allow it to necessarily dominate the gaming industry.”

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