Why did a competition authority change its mind on one aspect of this merger?
In January 2022, Microsoft announced its plan to acquire Activision Blizzard for $68.7 billion. Activision Blizzard is one of the largest games publishers in the world and famous for titles such as Call of Duty and World of Warcraft. Sales revenue from Call of Duty: Modern Warfare II was over $10 billion within ten days of its release in 2022. Given Microsoft’s ownership of the Xbox, one of the three devices that dominate the market for gaming consoles, the deal was always likely to raise competition concerns.
Potential competition issues
Following Phase 1 and 2 merger investigations by the Competition and Markets Authority (CMA) a number of competition issues were raised. One particular concern was in the market for gaming consoles and the potential impact of the merger on the future availability of Call of Duty (CoD). Some of the key findings of the initial research undertaken by the CMA were that:
- Sony’s PlayStation was a much closer rival for the Xbox than the Nintendo Switch, which tends to offer more family-orientated games.
- PlayStation users spend significant amounts of gametime playing CoD.
- Game availability is a key factor that influences console purchase decisions.
- Twenty-four percent of PlayStation users who play CoD stated that they would not purchase future versions of the console if CoD was unavailable on the platform.
These findings suggest that there are commercial incentives for Microsoft to limit the availability of CoD on the PlayStation. For example, the newly merged business could make future versions of the game exclusive to the Xbox – total exclusivity. Alternatively, it could adopt a policy of partial exclusivity. For example, it could only make versions of CoD available on the PlayStation that exclude some of its more popular features.
There are costs to Microsoft of implementing a policy of total or partial exclusivity. For example, 76% per cent of PlayStation users who play CoD stated that they would not switch consoles if future versions of the game were made unavailable. By making CoD exclusive to Xbox users, Microsoft would lose revenue from forgoing potential sales of the game to this group of users. The firm may also suffer reputational damage if there was a social media backlash against an exclusivity decision.
However, these costs of implementing a policy of exclusivity could be outweighed by the potential benefits. These include:
- The additional sales of consoles as some users switch from the PlayStation to the Xbox to gain access to CoD.
- the sale of CoD and other games to these additional Xbox users.
To quantify these costs and benefits, the CMA used a financial model that includes information on the amounts of money users typically spend on the Xbox platform and CoD over a five-year period. This ‘lifetime value of customers’ model found that it would be profitable for Microsoft to implement a policy of exclusivity post-merger.
The CMA also noted that in the majority of cases where Microsoft had previously acquired gaming studios, the subsequent release of games had been made exclusive to the Xbox.
Following its analysis of the case, the CMA published its provisional findings on the 8th February 2023. One key finding was that the merger would harm consumers, as it would lead to a substantial lessening of competition in the supply of console gaming services. The CMA argued that the acquisition should proceed only if Activision Blizzard sold off the parts of its business responsible for producing CoD. This is a structural remedy.
Microsoft rejected these findings and argued that the financial modelling used by the CMA was based on inaccurate data. In its formal written response to the competition authority the company argued that:
- The potential gains from a policy of exclusivity had been calculated over a five-year period whereas the costs (i.e. the forgone sales of CoD) had only been calculated over a one-year period. More accurate analysis should compare both the potential gains and losses over a five-year period.
- When more recent data are used to calculate the amounts of money users typically spend on the Xbox platform and CoD over a five-year period, the figure is lower than in the original work by the CMA.
Revised CMA findings
Having adjusted its analysis to take account of these criticisms, the CMA published an update to its Provisional Findings on 24th March 2023. In this update the competition authority stated that:
The analysis now shows that it would not be commercially beneficial to Microsoft to make CoD exclusive to Xbox following the deal, but that Microsoft will instead still have the incentive to continue to make the game available on PlayStation.
Therefore, just six weeks after publishing its Provisional Findings the CMA changed its conclusion and stated that the merger would not result in a substantial lessening of competition in the market for the supply of console gaming services in the UK.
In response to these changes an ex-CMA lawyer stated that:
This is extremely unusual. Restating your provisional findings is something ‘you would rather die than do’.
It is important to remember that the investigation by the CMA also raised concerns about the impact of the acquisition on competition in the cloud gaming market. These concerns remain unaffected by these updated findings and a final report will be published by the CMA at the end of April.
Competition authorities from 16 different countries/regions are also investigating the deal, including the Federal Trade Commission in the USA and the European Commission. It will be interesting to see if these authorities agree on the potential impact of the merger on competition.
- Under what circumstances could a merger result in a substantial lessening of competition?
- Summarise the thresholds that have to be met by a potential merger before it is investigated by the Competition and Markets Authority.
- Explain the direct and indirect network effects that exist in the console gaming market. To what extent do they create barriers to entry?
- Outline some different ways that Microsoft could introduce a policy of partial exclusivity for the Call of Duty franchise of games.
- What would be the impact of a policy of exclusivity on the cross price elasticity of demand between Xbox and PlayStation consoles?
- Outline the difference between behavioural and structural remedies for merger.
- Discuss why the acquisition of Activision by Microsoft might reduce competition in the cloud gaming market.