As of this month, the Federal Trade Commission (FTC) will seek to block Microsoft from acquiring video game publisher Activision Blizzard — a $69 billion deal that has recently attracted much attention. In the process, the Commission will suppress market competition and decrease consumer choice. FTC action comes as the agency fears that Microsoft will use its power to withhold content made with Activision from its competitors and ultimately exert substantial control over their content. However, these concerns are groundless upon economic analysis of the case.
The deal will not hurt the gaming economy, but rather increase competition and benefit consumers greatly. By merging Xbox and Activision games in one space, Microsoft’s cross-platform, cloud-based subscription model will ultimately spur competition among console and game software providers. As the American Consumer Institute (ACI) points out, it will also expand access to gamers, and lower costs.
As a case in point, consider a report by professor Joost van Dreunen at New York University providing insights into the economic benefits that would ensue from the deal. In that report, van Dreunen explains that the merger will increase competition among apps and software providers. Improved competition will benefit consumers of all consoles and platforms due to cross-play functionality, and will encourage more platforms to diversify their revenue models.
The FTC’s concerns that the deal will give Microsoft an unfair advantage are dubious. According to Dreunen, Microsoft would have an aggregate market share of 12 percent post-merger (up from 7.8% pre-merger). It would still be smaller in terms of sales than game software leaders Sony and Tencent. Although being the third largest gaming company is no small feat, such a standing does not constitute market dominance.
Dreunen notes that near monopolistic power could result from input foreclosure of rival console gaming platforms, but only in a gaming market that is products-based. Over time, gaming has become less of a products-based market and more of a service-based one — which involves different economics. The “tipping” that could occur from a platform excluding others from accessing a game cannot happen, as in a service-based market publishers derive much of their revenue from other forms of content that they can monetize, such as subscriptions, full game downloads, season passes and digital expansions (additional content created for a game).
Microsoft has already pledged to keep popular titles available on other consoles like Sony’s PlayStation, including access to Call of Duty, for the next ten years. This arrangement isn’t just for the sake of the acquisition or to assuage the concerns of the FTC. As Dreunen points out, Microsoft would be disincentivized to foreclose inputs that its rival console platforms share (i.e., Call of Duty), as it would “reduce the size of its audience because it would erode existing positive network effects.”
To expand its audience and reap the benefits of positive network effects, Microsoft offers a cloud-based subscription model (GamePass) that affords customers access to hundreds of games to play on various devices such as PCs, phones, tablets and TVs starting at only $9 per month. This model opens the gaming market to more users, increases their choice of what to play and how and encourages other platforms to compete by offering more services for a larger audience. Dreunen also argued that when Microsoft’s GamePass started to see success, Sony updated its PlayStation subscription to offer diverse price points and packages to a larger audience. Through competition, both Xbox and PlayStation users saw increased choice and benefits such as lower prices.
If the merger takes place, Microsoft would then be able to include Activision’s games, including popular titles Call of Duty, World of Warcraft, Diablo and Overwatch. This development would result in many more gamers being able to play such popular games. No longer would gamers have to choose between the big game consoles for titles, but also among other devices, like phones, as added options. As three quarters of Activision’s gamers and more than a third of its revenues come from mobile offerings, Activision mobile gamers could then take advantage of the reduced prices and cross-platform play that come with Microsoft’s subscription.
Furthermore, the acquisition of Activision Blizzard would reduce the dominance that gaming and app stores currently have in the gaming market. Dreunen points out that these platforms have policies that favor first-party content over third party game publishers, thereby weakening the third-party publishers’ negotiation position. Without Microsoft as a potentially strong rival, the current dominance of existing platforms within the mobile games market will likely remain.
These points are supported by analysis from Yale University professor Fiona Scott Morton, who pointed out that these businesses’ app stores take 30 percent of game developers’ in-app purchases, which lowers the return on investing in them. Microsoft’s entrance into the mobile games market would increase competition to attract developers with lower fees. This shift would lead to more and better games for consumers as small and medium-size developers would increase in visibility.
Microsoft’s proposal to acquire Activision is no small deal, but it’s not one that will reduce competition or exploit Activision or consumers. Microsoft’s cloud-based subscription will continue to spur competition between console and game software providers, which will bring more access to games, lower prices and positive network effects. The FTC should consider the situation economically rather than in baseless fear.
Nigel Reid is a Policy Analyst with the American Consumer Institute, a nonprofit education and research organization. For more information about the Institute, visit us on www.TheAmericanConsumer.Org or follow us on Twitter @ConsumerPal.