The FTC Has No Business Trying To Stop Video Game Company Mergers
It’s one of the most competitive industries in the world, and there’s no good reason to stop Microsoft from acquiring Activision Blizzard.
Thursday night, hardcore action/adventure fantasy game Elden Ring took home top honors at The Game Awards 2022. Rival game God of War: Ragnarok took quite a few honors home as well. The two of them won pretty much any category in which they were nominated.
While this was happening, the Federal Trade Commission (FTC) announced that it would take action to attempt to block Microsoft (which owns several game companies and the Xbox gaming platform) from acquiring video game company Activision Blizzard, the publisher of well-known games World of Warcraft and the Diablo series. The FTC argues that a union of these two massive tech companies could "harm competition" in the video game marketplace.
I brought up the winners of The Game Awards because neither Elden Ring nor the God of War series is published by any of Microsoft's gaming companies, nor by Activision Blizzard. They are published, respectively, by Bandai Namco Entertainment (publishers of the Dark Souls series and owners of Pac-Man) and Sony Interactive Entertainment (which owns Xbox's rival gaming platform PlayStation). In fact, only one game that won an award last night, As Dusk Falls, was published by either company (Microsoft's Xbox Game Studios).
The video game industry is massive and very, very competitive. That makes the FTC vote yesterday to attempt to stop this merger extremely strange, and the justification behind it shows that either the FTC doesn't really grasp the industry it's attempting to oversee or, more likely, that it just really doesn't want big companies to get bigger and is looking for any sort of justification to intervene.
The FTC argues that through this $69 billion deal, Microsoft will be able to suppress competition from rival consoles by making Activision Blizzard games exclusive to its platforms. It did so before when it purchased ZeniMax, the parent company of Bethesda (which gamers will recognize from the ubiquitous Elder Scrolls series), and then decided to make several upcoming games Microsoft exclusives. The FTC fears that it will do so again with future Blizzard Activision games and use it "to harm competition in multiple dynamic and fast-growing gaming markets," says Holly Vedova, director of the FTC's Bureau of Competition.
What the FTC describes here is how the home video game market has operated since the days of Nintendo, PlayStation, and earlier Windows gaming in the 1990s all the way up until now. And during this timeframe, the video game market has grown bigger and more competitive, even with all of these platforms hosting exclusive games.
It's such a profound misunderstanding of the gaming industry. Platform exclusives happen because the industry is so competitive that it is one of many avenues for a company to have an advantage. In the 1990s, if you wanted to play a Final Fantasy game, you were on a PlayStation. If you wanted to bounce around in Mario Kart, you were on team Nintendo. If you wanted to zoom around with Sonic the Hedgehog, you were on a Genesis.
Video game consumers were not being deprived of choices. If anything, because of the pricing involved, consumers had so many choices that most avid gamers couldn't actually afford to purchase all the available choices. The purpose of these exclusives is to try to steer players to certain platforms with promises of access to the types of games they'd enjoy.
The FTC argues, "With control over Activision's blockbuster franchises, Microsoft would have both the means and motive to harm competition by manipulating Activision's pricing, degrading Activision's game quality or player experience on rival consoles and gaming services, changing the terms and timing of access to Activision's content, or withholding content from competitors entirely, resulting in harm to consumers."
All of this is weirdly removed from the current state of Activision Blizzard, which has been rocked with management scandals and transitions over widespread sexual harassment claims and abuse of employees. The value of Activision Blizzard shares dropped 37 percent in 2021. The players themselves have been complaining about the degrading of Activision's game quality over the past few years. World of Warcraft subscription numbers have been declining since 2016, and the company stopped publicly reporting them in 2015. The last expansion, Shadowlands, was given fairly unfavorable reviews by players. A newly released expansion, Dragonflight, is getting some better early scores, but it'll be time to see how the experience shakes out. Similarly, Overwatch 2, the sequel to the once-well-liked team shooter game, is getting absolutely trashed by players for not really improving or adding that much to the original. And none of that comes even close to the player response to Diablo Immortal, a mobile game that will probably be remembered more for its predatory real-money microtransactions than anything involving actual gameplay.
All of this is to say that the average Activision Blizzard game consumer probably doesn't see himself or herself being well-served by the company's status quo. Therefore, if the purpose of these actions from the FTC is to allegedly protect the consumer from big, bad corporate behavior, it's rather bizarre to see how little the actual experiences of consumers are mentioned in the FTC's 23-page complaint.
The weirdest thing about the complaint is how it attempts to justify federal intervention in this merger by narrowing down the scope of the gaming industry. For example, it insists that the small number of gaming console companies and AAA gaming companies necessitates intervention.
But in reality, there are more than 3,000 video game software development businesses just in the United States. Microsoft is a massive company, but its share of the gaming market was just 6.5 percent in 2020. Adding Activision Blizzard would have brought it up to 10.7 percent.
While that's a significant chunk of the industry and a huge amount of potential revenue and profits, it does not create any sort of a threat of monopolistic behavior that justifies an antitrust response. The reason the FTC complaint twists itself into knots trying to narrow the scope of the market is to stop Microsoft from pointing to all of the thousands of alternatives consumers can turn to if they don't like Microsoft's practices.
The video game industry is one of the most competitive marketplaces in the world right now. It is utterly bizarre for the FTC to step in to stop a company that is chock full of problems from being acquired by another company that can perhaps fix them.