Assessing the World’s Largest Gaming Acquisition under Eu Competition Law

• Jurisdiction: European Union
• DOI: 10.1093/jeclap/lpad019
• Date: 31 May 2023
• Pages: 203-219
• Year: 2023
• Published By: Oxford University Press

I. Introduction

On the 18 January 2022, Microsoft announced its intention to acquire Activision Blizzard for about $70bn. If approved, it will be the largest acquisition in the gaming industry to date, through which Microsoft seeks to spur its growth in the mobile, PC, console, and cloud gaming sector, as well as attaining ‘building blocks for the metaverse’.¹ Due to the increasing concentration in gaming sectors,² Microsoft launched a campaign, promising openness, and the promotion of competition, for relevant gaming markets.³ In a hurry to brand the acquisition as unproblematic, commentators,⁴ and Microsoft,⁵ dismissed potential antitrust concerns. Competitive assessments demonstrated that this perspective was premature, as regulators quickly extracted additional commitments from Microsoft. This article outlines the regulatory concerns and challenges of Microsoft’s proposed acquisition, demonstrating that the Commission ought to question the assessments that have already been made to avoid repeating the same mistakes as might already have been made in several Big Tech acquisitions.⁶

Key Points

• Microsoft’s Activision Blizzard acquisition will soon be decided on by the European Commission.

• This article discusses the Commission’s decisional practice relating to market definition in gaming markets.

• It demonstrates that the approach to defining gaming markets ought to be overhauled by pursuing a genre delineation.

• Based on this delineation, input foreclosure and harm to innovation for game genres, ecosystems, and metaverse development are assessed.

Following a brief introduction of Microsoft and Activision Blizzard, Section II assesses the Commission’s decisional practice in gaming markets prior to this case. It will be illustrated that previous market delineations are only suitable as superficial market assessments, providing little value for the substantive assessment of the acquisition at hand. This will be complemented by the identification of actual relevant markets and competitive constraints, demonstrating that market delineations based on game (sub-)genres are inevitable. Section III discusses the most likely theories of harm. This is because the Commission is required to focus, in its assessment, on the most likely concerns of the acquisition,⁷ namely vertical (anti)competitive input foreclosure, concerning Activision Blizzard’s Call of Duty (CoD) Warzone game title and the CoD franchise, followed by the horizontal theory of harm of significant impediment to effective innovation competition. The analysis will highlight a regulatory predicament. Namely, possible justifications for the vertical theory of harm may constitute harm for the horizontal theory, outlining that an unconditional acquisition approval may not be possible under EU competition law. Section IV concludes by summarising the findings and suggesting measures to address the identified concerns.

The objective of this article is twofold. On the one hand it serves to illustrate the validity of the most prevalent theory of harm (input foreclosure), from the point of view of a (sub-)genre market delineation. This contributes to the market definition debate in gaming, which is increasingly at the locus of attention due to the development of the metaverse being based on building blocks stemming from or being tested in the gaming sector.⁸ On the other hand it provides a counterbalance to the Competition & Markets Authority’s (CMA) assessment that overly relies on cloud gaming, which does not constitute a market in itself, but merely a distribution method serving as a feature, complement, or input in the wider gaming sector.⁹ Instead it is submitted that the European Commission may yet have an opportunity to rectify the shortcomings of the CMA by addressing the significant impediment to effective innovation competition outlined in Section III.B.¹⁰ The flawed nature of the CMA’s assessment is not just demonstrated by its overreliance on cloud gaming but even more so by ignoring Microsoft’s stated objective to attain building blocks for the metaverse through the acquisition. To date the CMA is yet to provide any competitive assessment relating thereto.

At present the CMA has narrowed the scope of its assessment, finding that Microsoft may not have an incentive to foreclose access to Activision Blizzard’s CoD, whilst holding on to its cloud gaming theory of harm.¹¹ The CMA’s conclusion is expected by the end of April 2023. Other regulators have approved the acquisition following superficial assessments,¹² with some still pending.¹³ The CMA’s reduction of scope follows Microsoft’s dispute of the profitability concerning a foreclosure strategy,¹⁴ a tale that ought to be enjoyed with caution given the value Microsoft places on CoD.¹⁵ In any case, this competitive concern is addressed by the fact that Microsoft committed to license CoD and other games of Activision Blizzard’s catalogue for 10 years to Sony,¹⁶ Nvidia,¹⁷ as well as cloud gaming providers such as Ubitus,¹⁸ and Boosteroid.¹⁹ Whilst this may address the concern of input foreclosure, with rivals being unconvinced of the adequacy of the proposed measures,²⁰ it fails to address the significant impediment to effective innovation competition. Whilst speculations exist that the offered remedies may be sufficient to receive the Commission’s approval,²¹ which may be distracted by the hopes of pathing the way for a competitor in the app store market,²² we ought to remind ourselves of the last time regulators failed to understand and adequately address the wider effects of an acquisition by approving a critical false positive in Facebook/WhatsApp. In failing to address the harm to innovation posed in relation to gaming ecosystems and metaverse development in Microsoft’s Activision Blizzard acquisition, regulators may be setting themselves up for a false positive more than three times the acquisition value of Facebook/WhatsApp, whose market definition may be shaping the trajectory of a multi-trillion metaverse industry, that has its roots in gaming. Prior to this analysis, a brief introduction of the parties establishes a common basis.

Microsoft is a company known to most and Activision Blizzard is a renowned name in the gaming industry. Microsoft achieved a worldwide revenue of $168.09bn in 2021.²³ Whilst it is best known for providing PC operating software, about 10 per cent of its 2021 revenue, $15.37bn, is attributable to its gaming segment.²⁴ Microsoft has continually increased said gaming segment, most notably through the 2014 acquisition of Mojang, the publisher of Minecraft, for $2.5bn, as well as the 2020 acquisition of ZeniMax Media, a video game holding company, for $7.5bn.²⁵

Additionally, the acquisitions of Skype for $8.5bn in 2011 and of LinkedIn for $26.2bn in 2016 demonstrate Microsoft’s wider focus on social networking, whilst highlighting the inorganic attainment of metaverse building blocks.²⁶ Such building blocks may constitute markets or inputs on the metaverses’ seven layers. To exemplify, the metaverse experience layer is comprised of the building blocks gaming, virtual concerts, and virtual fashion, to name a few.²⁷ Microsoft’s existing control of these undertakings on metaverse layers and building blocks, as well as the general range of its business segments,²⁸ indicates the potential for conglomerate concerns.

The acquisition target, Activision Blizzard, reported a worldwide revenue of $8.803bn in 2021.²⁹ This was spread across the following segments: console, PC, mobile and ancillary, and others, respectively accounting for $2.637bn, $2.323bn, $3.182bn, and $0.661bn.³⁰ Its largest revenue was in the Americas, with $4.931bn, followed by Europe, Middle East and Africa (EMEA) with $2.797bn.

Activision Blizzard owns the publishers and the IP to almost 40 game titles, including most notably CoD, Candy Crush, Diablo, Hearthstone, Overwatch, StarCraft, and World of Warcraft (WoW).

II. Relevant markets

Identifying relevant markets, according to the Commissions Notice,³¹ serves as the first step to determining competitive constraints, whilst also constituting the foundation for any theory of harm. In delineating the relevant market, the Commission considers a relevant geographic and product market. This article will begin by defining the relevant geographic market as such is—in comparison—a straightforward assessment in contrast to the product market(s).

A. Geographic market

In past decisions concerning markets for digital game distribution,³² publishing of game software,³³ as well as licensing and publishing of music related to video games,³⁴ markets were always considered to be ‘at least [European Economic Area] EEA-wide’,³⁵ if not global.³⁶ The exact geographic market was left open, as each concentration was compatible with the internal market.

An argument in favour of an EEA-wide geographic market delineation is that servers for major online games³⁷ are usually operated EEA-wide, creating homogenous conditions for all EEA users. However, the same argument may also be used in favour of a global geographic market, as the content of a particular game is usually globally homogenous. For instance, indicated by the fact that, games permit cross-region accounts transfers or work on abolishing the regional concept entirely. Furthermore, complementary products, i.e., the game ecosystem markets such as streaming, content creation, and other entertainment services, are global, departing from an EEA-wide market definition. Other geographic metrics such as price differences,³⁸ or the lack thereof, are becoming somewhat irrelevant for digital games and free-to-play, demonstrated by the comparably insignificant revenues of pay-to-play games in 2020.³⁹

Speaking for an EEA-wide market definition is that cross-server play or the ability to play in a different geographic region is hampered by internet connections and not by gaming capabilities, indicating a global market, if infrastructure...