FTC sues to block Microsoft gaming acquisition

I think this will be landmark case. First two-sided/platform market case tried as antitrust that I am aware of here.

So a two-sided market is a market structure in which when one company sells a product to two different groups of customers linked by indirect network effects. That means that as more members of customer group 1 adopt the product, the product becomes more valuable to customers in group 2, and vice versa.

The video game console business' two customers are end consumers (video game players) and content producers (game companies who pay for the right to develop).

Two fascinating economic arguments that can be made here. First, Microsoft is buying up all the big game studios (recently acquired Bethesda in addition to this acquisition), which makes them not potential customers of Sony and Nintendo, their big competitors in the console space. So they could cause a death spiral for their competitors, where game companies and end consumers will both find the competing systems less valuable due to a lack of game developers that could spur end consumers to buy the system.

Second, they appear to be restructuring the market as a whole, becoming more reliant on first party content, which could result in the end of the two-sided market structure altogether. This is terrible for end customers, as they have been subsidized for years by this structure, as their price sensitivity is much higher than the video game companies, and, in two-sided markets, you often subsidize the customers from the higher price sensitivity market.

 

Yeah, two-sided markets and competition are actually areas in which I work. I suspect that Microsoft is going to argue that one of their competitors in this market, Nintendo, relies on first-party content (games they develop themselves and are only available on their consoles), and that nobody has an objection. The counter to that will be that Nintendo developed that IP internally and that this content was never available on their competitors' systems. Taking content that used to be available on competitors and restricting it (as they have already done with Bethesda's content going forward) is a different situation. Sony losing access to Call of Duty and Overwatch after already losing access to Fallout, Elder Scrolls, and (coming soon) Starfield could legitimately knock them out of the market as a console company.

Another interesting component of this is the entry of Valve into the console space. Valve is a PC content producer that developed the platform for a lot of PC games. They are essentially trying to enter the space by moving PC games into more of a console experience utilizing a network of different manufacturers to create console-like computers. This could break either way. It could be used by Microsoft to say "See, the industry is changing, and we won't be suppressing that development just by changing with it to compete better with new entrants," or it could be used by the government (probably with the cooperation of Valve) to say "See, entrants are trying to move into this space with innovations, but they might lose access to content that are necessary to gain a foothold in the market."

 

Agree on all of those. I think there will be a lot of common ground to standard anti-trust, but what makes this unique is that I am not sure there has ever been a case in which the accusation is that they are acquiring their customers to wipe out a competitor. Maybe Comcast/NBC Universal, but Comcast was pretty convincing that they wouldn't restrict content from their competitors (many of whom were regulated local monopolies anyways), which was far more credible than Microsoft claiming the same, especially after what happened with Bethesda.

 

Fascinating guys. Thanks for the conversation.

 

Kinda interested if they will go after the LIV golf merger too. If they dont, I think that's the end of resistance to sports-washing in the US (unless China tries to buy something of course).

 

Yeah, that is an interesting one too because most sports leagues are essentially monopolies, but the league is technically not-for-profit (whereas the teams are for-profit). I suspect that fight is whether their market is something extremely broad (like entertainment), where clearly they aren't a monopoly, or something more narrow (like golf entertainment), where clearly they are.

 

Thank you for the explanation. I know almost nothing about how it all works, but if I understood correctly if Microsoft buys Activision Blizzard, then it will be the only winner of all that?
And I still can't understand how it will affect players. Will games be less quality and cheaper than they are now?

 

Probably the correct ruling. It’s not a monopoly or even duopoly so according to our laws, it was going to be a tough hill to climb.

I don’t mind that the FTC tried to stop it though, clearly it’s being done as a long term anti-competitive play to keep certain softwares off other platforms or make it otherwise disadvantageous to competitors (otherwise what’s the point?). They are promising to keep the Call of Duty games on other platforms for 10 years, but I don’t think that was even necessary for anti-trust (it would be like Disney having to guarantee Star Wars to Netflix or something).

The issue I have with it is XBOX seems to be a big money loser for Microsoft, but other MS businesses are subsidizing that business line to make acquisitions that would not be otherwise financially feasible in the industry (no chance Sony or Nintendo could do this acquisition, but the last place hardware maker can?). At a scale like $70B, an argument can at least be presented about the possible unfair business practices as to how the transaction is financed. But I guess with Electronic Arts and Take Two (so at least 2 other major software players not tied to a hardware) still being on the board the judge didn’t find the arguments compelling enough.