Merger & Acquisitions

Ideology or Antitrust? U.S. FTC and U.K. CMA Move to Block Microsoft / Activision Deal

Criticism of regulators enabled by nature of this $68.7 billion deal and the state of gaming.


On April 26, 2023, the U.K.’s Competition and Markets Authority (“CMA”) announced its decision to block Microsoft’s purchase of global gaming leader, Activision, “over concerns the deal would alter the future of the fast-growing cloud gaming market, leading to reduced innovation and less choice for U.K. gamers over the years to come.” The next day, Activision CEO, Bobby Kotick, very publicly criticized “regulators”—in particular, the CMA and FTC Chair, Lina Khan—for making decisions based on “ideology” rather than what’s best for the economy.

But is that a fair assessment of what the intervention by antitrust enforcers in the U.S. and U.K. regarding Microsoft’s January 2022 $68.7 billion deal to buy Activision all about? Have the regulators really been captured by an “ideology” that is leading them to challenge this transaction and to forsake their assigned mandate to be stewards of a competitive economy, as Kotick alleges?

A serious answer to these questions, of course, would require a sufficient description of the ideology that is supposed to be driving Lina Khan’s FTC (and presumably the CMA as well) to challenge this deal, but Kotick never does that. But a lane enabling such criticism (and the companion aspersion cast upon the antitrust agencies for the rumored meeting between Khan and Sarah Cardell, CEO of the CMA, in D.C. last week) has been opened by the nature of the transaction itself, the industry in which it’s occurring, and the limitations of antitrust analysis to grapple with how business is done in the digital age.

Proof of likely recognizable anticompetitive effects if the acquisition closes (read: price increases or output restrictions) is the mother’s milk of a successful merger challenge by an antirust enforcer in a U.S. court. When enforcers bring cases that lack those commonly recognizable expected harms to competition, proponents of the deal are empowered to attack the decision to intervene as ad hoc and beyond the bounds and purposes of antitrust law or worse, driven by some ideology that for some reason is hostile to Microsoft or Activision or mergers or private business writ large.

We’ve said the nature of this transaction and the state of the gaming industry is what enables criticism and suspicion of antitrust enforcement. Here’s how: the transaction is “vertical,” that is, as things stand, Microsoft and Activision are not direct rivals in the same relevant market (at least not principal rivals). The merger, therefore, has little or no “horizontal” effect; no significant “head-to-head” competition is likely to be lost or an immediate increase in market share realized.

Seen vertically, Microsoft, operates the Windows platform for PC’s, makes a game console platform (Xbox) and provides the dominant cloud gaming platform (Xbox Cloud Gaming and Azure). Activision’s game titles can be played on all of these platforms. Microsoft—no stranger to antitrust wrangles with the federal government (see our previous article on Microsoft’s response to the FTC’s opposition to the deal)—sought to allay fears that it would restrict Activision’s enormously popular games to its own platforms even before the Federal Trade Commission filed its administrative complaint to block the deal by offering deals to rival console platform operators, Nintendo and Sony, to make Activision’s marquee title, Call of Duty, available on their most popular consoles.

In the past, this may have been enough to push a vertical deal over the finish line. Since the 1980s, vertical mergers have benefitted from imbibing too much Chicago School economics, a symptom of which is the over-application of the “one monopoly rent” principle. This has effectively immunized acquisitions of complementary lines of commerce by platform monopolists who are presumably constrained to earn only one monopoly rent along the entire chain of distribution. As with most Chicago School principles, a specific set of rarely encountered conditions must be present for the strong version of the principle to hold.

A more useful version of the same insight is embodied in Joseph Farrell and Phillip M. Weiser’s “ICE” principle[i], where, absent a market failure, platform operators will “internalize complementary efficiencies” by promoting technical interoperability, building in modularity, and making their platform available to complementary users at efficient and competitive prices. A vertical acquisition by a platform monopolist, therefore, that draws a challenge from a U.S. antitrust enforcer can be thought of as a case in which the “ICE breaks,” that is, some condition exists that creates the incentive for the platform operator to restrict competition in the complementary market. This can occur, for example, when the complementarity is incomplete, in the sense that the platform is a sufficient but not necessary input for the complement, which surely is the case for video games.

The CMA published a 20-page summary of their decision to block Microsoft/Activision, stating its concerns over protecting innovation and choice in the cloud gaming market. Notably, such a “market” hardly exists. None of the usual market share or concentration metrics encountered in merger analysis are available. Nonetheless, the CMA predicted that the market would reach $14 billion by 2026 and $1.25 billion in the U.K. alone, surpassing music sales. Microsoft, it found, already dominates the cloud gaming market, controlling 60-70% of global cloud gaming services.

In February 2023, the CMA provisionally found the merger could make Microsoft even more powerful in cloud gaming. In finally blocking the deal, the CMA has shown an unwillingness to allow Microsoft to standardize terms and conditions for using games, believing cloud gaming should evolve through the “dynamism and creativity” engendered by a competition. To understand the CMA’s concerns, consider the issues raised not just by “cross-play,” the feature mentioned above wherein games may be played on several different platforms, but also by “cross-progression” (the ability to recall the player’s state when moving from platform to platform) and “cross-wallet” (the ability to make in-game purchases on different platforms). Cloud gaming is popular because it facilitates the ability of consumers to use multiple devices (phones, tablets, etc.) to cross-play, cross-progress, and cross-purchase. Empowering Microsoft as the arbiter of these features—either as publisher of the most popular games (post merger), operator of the most ubiquitous gaming cloud platform, or both—is the competitive danger the CMA and FTC seek to avoid. Microsoft has vowed to appeal the decision in the U.K., but its appeal rights there are quite limited.

Because these incipient effects will occur in a nascent market, some commentators have suggested that the antitrust authorities should articulate protecting innovation as their reason for blocking the deal. Protecting innovation is a necessary element of preemptive intervention in nascent markets, but by itself lacks economic content and cannot be quantified. At least by articulating the absence of conditions on which vertical acquisitions are viewed as benign, an intervention would continue in the tradition of an antitrust regime that hews closely to the economic realities of competition and is therefore resistant to being attacked as ad hoc or ideological.

The FTC and CMA clearly share overlapping beliefs about the danger of the Activision acquisition to competition in what the FTC calls the “cloud gaming subscription services” market. We wait to see whether the companies will call off the merger at this point and, if not, whether the FTC will succeed in its challenge.



[i] Modularity, Vertical Integration, and Open Access Policies: Towards a Convergence of Antitrust and Regulation in the Internet Age by Joseph Farrell, Economics, University of California, Berkeley, and Philip J. Weiser, Law and Telecommunications, University of Colorado, Nov. 15, 2002, revised September 2003, published by the University of California at Berkeley, Department of Economics. Read the paper.

Photo by Alexander Cifuentes on Unsplash





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