Microsoft & Activision Blizzard: competition authorities move towards merger control

Microsoft & Activision Blizzard

Since Microsoft announced its acquisition of Activision Blizzard, the largest independent video games’ developer and publisher worldwide, competitors and national competition authorities alike have been busy, around the world, in assessing the potential substantial lessening of competition that such a large deal may entail. Let’s dive in, and assess where this acquisition is at, in each country in which the competition authority is investigating its impact on competition in the respective national market.

1. Understanding the video games industry

Video games and interactive media, though the newest of entertainment genre, generate the largest annual revenue of all entertainment sectors, at USD180 billion worldwide. This industry’s size is greater than that of the movie, book and music industries combined.

The term ‟video games” is used, generically, to refer to any interactive software product that is built for the primary purpose of entertaining the person who interacts with that software. This definition does not cover any interactive software used for the primary purpose of gambling. Indeed, gambling-related software is, perhaps somewhat confusingly, referred to as ‟gaming” within that industry.

Here, we focus strictly on video games. An industry registering a compound annual growth rate of around 10 percent, over 2022-2030.

Video games, which are classified by genres (such as action games like Super Mario Bros, adventure games like Tomb Raider, role playing games like the Final Fantasy series, simulation games such as Second Life, sports games like FIFA Online, strategy games like League of Legends, casual games like Angry Birds) are played on the following platforms:

  • personal computers (‟PC”) and PC operating systems (‟OS”) such as Windows OS (which is the OS for which most PC games are designed);
  • smartphones and tablets, on which mobile games are downloaded from two predominant platform markets Apple’s AppStore and Google’s Google Play;
  • social networks, on which games designed for distribution and interaction on a particular social network are distributed (Facebook, in particular, plans to monetise Horizon Worlds, its metaverse platform, NFT store and software marketplace, with an aggressive 47.5 percent commission rate on all in-app purchases), or
  • new platforms, such as virtual reality (i.e. technologies meant to provide the user with a virtually rendered, three-dimensional world that will track the user’s eye orientation and change the visuals accordingly, such as Oculus, which Facebook purchased for USD2 billion in 2014) and augmented reality (i.e. technologies that are capable of layering video game worlds on top of the real world, through either the use of a smartphone’s built-in technologies, such as Pokemon Go, or of dedicated wearable devices, such as Google Glass).

Gamers access video games three ways: they can purchase the game for a set price (that premium purchase price model is the most traditional business model, still used for the Grand Theft Auto V and Assassin’s Creed franchises); or they can subscribe, on a monthly (sometimes yearly) basis for access to a game (Blizzard Entertainment’s World of Warcraft is perhaps the most successful game that utilises this subscription model); or they download games which are free to play, but may have to execute microtransactions in order to obtain discrete pieces of content (for example, a player may spend a dollar on a new sword for a character, or on a vanity item such as changing the color of their character’s hair, like in the most popular PC game in the world – Riot Games’ League of Legends – which sells a variety of items that can customise the base game, which, itself, is given away for free).

To get all these games out in the public domain, and provide them to end-users, a microcosm of entities work together via the following supply chain:

  • Developers develop games – like producers do in other entertainment industries such as film, television, recorded music and theatre – undertaking everything from the writing of software code to the creation of characters, artwork, landscapes, narratives, etc. (such as Naughty Dog, Respawn Entertainment and Gearbox Software);
  • Publishers are responsible for providing games to, and operating them for, the end users – historically their responsibilities included funding game development, paying for production of physical disks or cartridges, marketing the game, distributing the game to retail outlets, handing returns as well as customer support; but, today, with the twin advents of digital distribution and live service games, publishers can also provide technology resources such as server infrastructure, transaction processing, fraud prevention, in-game economy management, and live game execution (such as Activision Blizzard, Ubisoft and Nintendo);
  • Distributors play a role similar to publishers, in that they are responsible for distributing the game to end users and processing financial transactions – but they do not fund a game’s development, usually do not engage in marketing and exercise little control over the game’s players or its economy (the best-known game distributors are Apple’s AppStore, Google Play, the Windows 10 Store and Steam), and
  • Console manufacturers – namely Sony (43 percent market share), Microsoft (20 percent of the console market) and Nintendo (37 percent of the market) – are not only distributors, developers and publishers, but also tightly control which games get distributed on their respective consoles (via the obligation to comply with the console manufacturer’s requirements).

Now that we have set the scene, for this video games’ industry which should reach worldwide revenue of USD220 billion by 2024, let’s dive into the acquisition of Activision Blizzard by Microsoft.

2. A USD69 billion deal: Microsoft announces its future acquisition of Activision Blizzard

By way of press release published on 18 January 2022, Microsoft disclosed its intention to acquire Activision Blizzard (the ‟Acquisition”), the largest game publisher and independent creative studio worldwide, born out of the 2008 merger between Activision and Vivendi Games, which owns franchises such as Call of Duty, Diablo, Warcraft, Guitar Hero, Candy Crush and World of Warcraft.

In an all-cash transaction valued at USD68.7 billion, inclusive of Activision Blizzard’s net cash, Microsoft expressed its will to acquire the publisher for USD95 per share. The Acquisition would be the largest tech merger in the history of the United States (‟US”).

As set out in this press release, ‟when the (Acquisition) closes, Microsoft will become the world’s third-largest gaming company by revenue, behind Tencent and Sony” and ‟the (Acquisition) is subject to (…) completion of regulatory review and Activision Blizzard’s shareholder approval”.

On 28 April 2022, such shareholders voted overwhelmingly in favour of approving the Acquisition, paving the way for the video games industry’s largest-ever purchase to date.

However, for the Acquisition to complete, by the expected date of June 2023, Microsoft and Activision Blizzard still need regulatory approval in the regions they do business in, including the US, the United Kingdom (‟UK”), the European Union (‟EU”) and China, Activision Blizzard noted in a recent SEC filing.

Indeed, up to 9 different national competition authorities have analysed, or are analysing, the Acquisition, for merger control clearance. This implies that several conditions and decisions may apply to the same set of facts. As of early September 2022, only the Saudi Arabia competition authority has cleared the merger entirely with no commitments, although the proceedings at the other national competition authorities are following their own course, as follows:

  • Conselho Administrativo de Defesa Econômica” in Brazil: seeks information and comments;
  • European Commission (‟EC”) in the EU: seeks information and comments, in particular from competing firms, and awaits a European notification filing, by Microsoft, for the Acquisition (with commentators already suggesting that the EC should use theories of harm, to assess whether the Acquisition complies with EU competition law);
  • Federal Trade Commission in the US: seeks data from undertakings, in particular with respect to the potential labour impact of the Acquisition, especially in the aftermath of the sexual harassment lawsuits filed by a state agency, as well as by several female employees, against Activision Blizzard, describing its ‟frat boy culture” and accusing its leadership of failing to take action;
  • Competition & Consumer Commission in Australia: findings on final decision/statement of issues to be released on 15 September 2022 were delayed and this authority will announce a proposed decision date in due course;

3. The CMA strikes first and starts an in-depth Phase II investigation of the acquisition of Activision Blizzard by Microsoft

Upon receipt of a merger notice, provided by Microsoft and Activision Blizzard, in relation to the Acquisition, in compliance with section 96(2A) of the UK Enterprise Act 2002 (the ‟Act”), the CMA launched a merger inquiry, as well as an invitation for comments on the transaction from any interested party, on 6 July 2022, pursuant to section 107(1) (i) of the Act. In its notice, the CMA clarified that, in its Phase I investigation, it will be considering whether it is, or may be, the case that the Acquisition, if carried into effect, would result in the creation of a relevant merger situation under the merger provisions of the Act and, if so, whether the creation of that situation may be expected to result in a substantial lessening of competition within any market, or markets, in the UK, for goods and services.

In its summary of Phase 1 decision, and its press release, both published on 1 September 2022, the CMA concluded that, after examining a range of evidence, the Acquisition met the threshold for reference to an in-depth Phase II investigation, giving rise to a realistic prospect of a substantial lessening of competition in ‟gaming consoles, multi-game subscription services and cloud gaming services”. In particular, the findings of the Phase I investigation were that:

  • the Acquisition may substantially reduce either current of future potential competition in the console market, where Microsoft is one of the three players with its Xbox, especially in view of the existing strong network effects (i.e. attracting users who want to play high-quality games, often with friends, as well as high-quality content from game developers, who want to make games for consoles with a large user base) in this market;
  • the Acquisition may limit access to cloud infrastructure, and to an OS license (especially Windows OS, which is the OS for which most PC games are designed), to new entrants in cloud gaming services (i.e. a technology that allows complex games to be accessed on remote servers and streamed directly to a device), such as Amazon Luna, Netflix, Google Stadia, Blacknut, NVIDIA GeForce Now, and publishers like Ubisoft, and
  • the Acquisition may limit the emergence of, and access to, multi-game subscription services (i.e. services which allow gamers to access a catalogue of games for a fixed, often monthly, fee, by either downloading and playing on consoles, such as Xbox Game Pass, or streaming games, stored on cloud-based gaming libraries, from cloud infrastructure, such as Amazon Luna and Google Stadia) to new entrants, such as Sony, Nintendo, Amazon, Apple, Electronic Arts, Ubisoft, NVIDIA, Netflix, Utomik, Blacknut and Google.

This significant lessening of competition, caused by the Acquisition (which is a significant transaction due to its purchase price of USD68.7 billion), identified by the CMA, would result from the fact that:

  • Microsoft has a strong gaming ecosystem, from Xbox gaming consoles; to the OS Windows OS; passing by its multi-game subscription service, Xbox Game pass; and its premium games’ store, Xbox Store; as well as its game publishing business which boasts 24 game development studios, which make games such as Minecraft, Forza, Elder Scrolls and Halo, for Xbox and other consoles, PC and mobile devices; and Azure, its leading cloud platform that offers a wide range of cloud computing services to, in particular, the video games’ industry;
  • Activision Blizzard is the largest independent game developer and publisher, developing gaming content for consoles, PC and mobiles, and owner of the three most popular franchises Call of Duty, World of Warcraft and Candy Crush (which collectively account for 82 percent of its net revenues), and
  • under theories of harm (i.e. the most important ways in which the Acquisition could harm competition), Microsoft may withhold or withdraw Activision Blizzard’s content – including popular games such as Call of Duty – from other consoles or multi-games subscription services and may leverage its broader ecosystem, together with Activision Blizzard’s game catalogue, to strengthen network effects, raise barriers to entry and ultimately foreclose rivals in cloud gaming services (like Microsoft already did, upon its acquisition of creative studio Bethesda in 2021).

As a result of the initial concerns found in the Phase I investigation, the CMA was considering whether to accept undertakings under section 73 of the Act. It gave Microsoft and Activision Blizzard until 8 September 2022 to offer an undertaking that might be accepted by the CMA.

Since no such undertaking was offered by Microsoft and Activision Blizzard by 8 September 2022, the CMA referred the Acquisition for an in-depth Phase II investigation pursuant to sections 33(1) and 34ZA(2) of the Act, on 15 September 2022.

Such Phase II investigation, during which the CMA’s inquiry group will assess whether the Acquisition would result in a substantial lessening of competition within a market or markets in the UK, will finalise by 1 March 2023.

The world-dominance approach of Microsoft, in its way of doing business in the video games’ industry, will be tempered by the merger control processes currently being conducted by these various national competition authorities – with the CMA firmly at the forefront of this regulatory exercise – and their respective outcomes, which may range from full clearance, to obligations to provide commitments, to merger blocks. At any rate, video games’ professionals must pay attention to these various national merger controls, and the outcome of the Acquisition, since they will offer invaluable in-depth knowledge in the structuring and workings of the video games’ market and players.

Crefovi’s live webinar: Microsoft & Activision Blizzard acquisition & merger control – 21 September 2022

 

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