Is Microsoft building a gaming monopoly?

Yesterday morning, Microsoft announced plans to acquire Activision Blizzard, publisher of games ranging from the Duty series to Candy Crush Saga, for $68.7 billion. Microsoft says the move would make it the third-largest gaming company by revenue, after Tencent and Sony. Already a giant in the market, the company would gain even more influence over the way games are made and distributed. That’s assuming regulators approve — something that’s not guaranteed amid new push to explore potential tech monopolies.

After a damaging antitrust case in the 1990s, Microsoft has largely escaped more recent antitrust criticism directed at tech companies like Apple, Meta and Amazon. But the company has been steadily building its power in the game world in recent years. In 2021, it completed an acquisition of ZeniMax Media, making it owned by subsidiaries such as precipitation creator Bethesda Softworks for a total of 23 first-party game studios. Meanwhile, Microsoft has expanded its Xbox brand into a gaming service that includes both consoles and PCs. The company recently revealed that its Xbox Game Pass subscription service had grown to 25 million subscribers after launching in 2017. With the Activision Blizzard acquisition, it would integrate a massive game publisher into that system.

That new market power could raise eyebrows with the US Department of Justice and the Federal Trade Commission, which will have to approve the merger. While neither agency has commented on the recent announcement, they have pledged to examine tech sector consolidation more carefully – a joint process launched yesterday to review the approval process. Microsoft is anticipating resistance and has budgeted for a longer timeline for the process, planning to close in fiscal year 2023.

Microsoft’s acquisition of Activision Blizzard fits in the form of a vertical merger: where two companies offering complementary services join forces, such as a major telecommunications company buying a media production company. In this case, it’s a major game studio joining a major game store front and console company. (Since Microsoft already owns several first-party game studios, there is also a level of horizontal merger, bringing together directly competing companies.)

The new generation of antitrust activists has recently focused on vertical mergers. Last September, the FTC has revoked Trump-era guidelines that agency chairwoman Lina Khan said she falsely attributed beneficial effects, such as increased efficiency, to them — claiming they provided benefits to consumers “misplaced.”

A merger in the video game industry may not seem as immediately dangerous as something like a sprawling Amazon retail monopoly or a locked up mobile app store. But Microsoft’s growing power in games could diminish the incentive to work fairly with third-party developers who rely on products like the Xbox and Game Pass to reach players. It could also increase Game Pass’s dominance and leverage to increase prices for subscribers.

“It’s all about the Game Pass subscription model,” explains Matt Stoller of the American Economic Liberties Project. “Anyone who doesn’t have mass distribution will find it increasingly difficult to produce and distribute games.”

Stoller believes there is a precedent for blocking Microsoft’s merger as anticompetitive. he quotes United States v. Paramount Pictures, a landmark decision of the Supreme Court of 1948 that focused on Hollywood studios’ control over movie distribution and the theaters where they were shown. The resulting consent decree banned studios from also owning theaters and imposed other restrictions, such as an end to “block bookings,” forcing theaters to book movies in advance. (The decree was officially ended in 2020 after a judge ruled it was “unlikely” the studios would exercise the same monopoly power today.) paramount importance The decision “created an open market for creative content,” Stoller says — it’s credited with helping fuel the rise of television and freeing actors from restrictive contracts by reducing studio power.

Stoller sees Paramount-esque consolidation in games today. “What you find here is that it was an open market for game content, but it’s increasingly closed off in walled gardens,” he says, while acknowledging that companies like Nintendo have long had closed ecosystems. The recent rise of game streaming, a system that allows companies to exert even more control over how content is distributed and played, could further consolidate the industry.

“Game streaming giants will make it much harder for independent game producers to get to market,” Stoller warns. And Microsoft is one of the biggest players in that space thanks to its cross-platform Xbox Cloud Gaming service (formerly xCloud).

This doesn’t necessarily mean that regulators — or lawmakers who have shown a broad interest in tightening merger rules — will be hostile to Microsoft’s merger. The company’s acquisition of ZeniMax didn’t meet much resistance in Europe or the US — although the latter was still operating under the Trump administration at the time, putting less weight on antitrust. Rep. Ken Buck (R-CO), a prominent Republican proponent of antitrust reform, tweeted yesterday that he had received “encouraging” assurances from Microsoft that the deal would not reduce competition. “They have suggested that they put an emphasis on title access and competition in the marketplace, as well as the individual gaming experience,” Buck said:.

Buck’s comment touches on one of the key splits in recent antitrust debates: whether anti-monopoly efforts should narrowly focus on the direct effects on consumers or on the market as a whole. As Khan has pointed out, combining two complementary services not necessarily confer benefits on end users. But even if it does, it could have ripple effects that change the way games are made and played, putting more pressure on developers to play by Microsoft’s rules. And in an age of renewed suspicion of monopolies, that could raise more red flags than usual.

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