The mystery of FTC blocking Microsoft-Activision Blizzard merger

Microsoft’s proposed $69 billion acquisition of game studio Activision Blizzard, which releases the Call of Duty franchise and Candy Crush (via King, a division it has acquired) for a whopping $69 billion, is heading into dire straits. The US Fair Trade Commission has filed a lawsuit to block the merger. This objection seems to stem more from anti-big business dogmas than potential harm to consumers.

At $69 billion, it’s one of the largest deals in the tech universe, with AOL buying Time Warner for $182 billion in 2000, at the height of the Dotcom Bubble. Microsoft is valued at over $2 trillion and can probably afford to spend that kind of money on a worthwhile acquisition. The simple fact is that gaming is a huge and growing segment of entertainment: the worldwide revenue of the film industry is $ 40 billion, the global revenue of games is four times that. This explains why Microsoft is paying everything to Activision Blizzard, when $8.5 billion was all Amazon had to pay for the acquisition of the venerable MGM, with its James Bond franchise, Hobbit and a rich library of 1987 classics like the Pre-1987 Wizard of Oz and Gone with the Wind had already been sold to Ted Turner and Warner Media.

Gaming is undergoing a structural shift, accelerated by the emergence of high-speed, low-latency telecoms, namely 5G. High-quality gameplay used to require dedicated consoles or high-end PCs, and people who wanted to play games had to buy both this hardware and the games. The new trend is to host the game in the cloud, which gamers can access over high-speed networks, for a monthly subscription. Microsoft hopes to ramp up its subscription service, Game Pass, by taking over its library of games with Activision Blizzard.

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This is far from an assured business model. Google recently discontinued its Stadia cloud gaming service and will complete refunds in early 2023. Why the regulator should step in to dampen early moves in a high-growth company that may never get off the ground is anyone’s guess unless it’s motivated by a belief that Big Business, especially Big Tech, is inherently nasty.

One alleged concern is that Microsoft would limit the availability of Call of Duty on rival platforms, primarily Sony’s Play Station. Microsoft has said it will continue to make Call of Duty available on Sony’s Play Station and further that it will be available on Nintendo’s Switch, where it is currently not offered.

Entertainment is globalizing faster than other businesses. Movies are made for multiple markets. K Pop avatars are thrilling fans all over the world. At the moment, American, Japanese and European companies dominate gaming. But China’s Tencent is a big player, which could get even bigger. This is a consideration for competition regulators.

European competition authorities blasted the Siemens-Alstom merger, but European political leaders question whether that was a wise move given the giant Chinese players in this space and the need to develop European companies that have the world as their home. market, rather than Europe. Whether a company dominating the European market would dominate the global market is questionable.

There’s another reason why the US FTC’s move to block the merger between Microsoft and Activision Blizzard is a bit odd. The kind of merger that restricts competition is a horizontal merger between companies competing in the same space. Vertical mergers, where a company buys its input supplier, will only increase efficiency, unless the acquired company is some sort of monopoly supplier of inputs to all players in the acquirer’s industry.

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The only way to extract potential harm from vertical mergers is for the regulator to determine that the acquirer will not restrict rivals’ access to the target’s business output. In this case, Microsoft voluntarily agreed to make Activision Blizzard’s offerings available to rival platforms.

Modern companies span the globe. Global scale offers companies unique economies of scale, superior revenues and profits, enabling them to fund moonshot projects that ordinary companies simply cannot afford. It is much better to regulate behavior to ensure competition and fair trading practices than to embrace structural remedies that preclude market dominance and, in the process, extraordinary economies of scale.

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