Anti-trust action against the Microsoft-Activision Blizzard deal is overkill

Why FTC should step in to nip early moves in a burgeoning business that might never take off is a mystery. Photo: AP
Why FTC should step in to nip early moves in a burgeoning business that might never take off is a mystery. Photo: AP

Summary

Consumer benefit, not dogma, should drive merger regulation.

Microsoft’s proposed acquisition of game studio Activision Blizzard, which brings out the Call of Duty franchise as well Candy Crush (through King, a division it acquired), for a whopping $69 billion is running into regulatory rough weather. America’s Fair Trade Commission has sued to block the merger. This objection seems to stem more from anti-big business dogma than any potential harm to consumers.

At $69 billion, it is one of the biggest deals in the tech universe, which has seen the likes of AOL’s purchase of Time Warner in 2000, at the height of the Dotcom Bubble, for $182 billion. Microsoft is valued at well over $2 trillion, and can probably afford to spend that kind of money on a valuable acquisition. The simple fact is that gaming is a vast and growing segment of entertainment: the global revenues of the movie business is $40 odd billion, the global revenue of games is four times as large. This explains why Microsoft is paying out what it is for Activision Blizzard, while $8.5 billion was all that Amazon had to pay for acquiring venerable MGM, with its James Bond franchise, Hobbit and a rich library dating from 1987 — its classics such as the Wizard of Oz and Gone with the Wind from times prior to 1987 had already been sold to Ted Turner and Warner Media.

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Gaming is undergoing a structural shift, accelerated by the emergence of high-speed, minimal latency telecom, namely 5G. High-quality gameplay used to call for dedicated consoles or high-end personal computers, and people who wanted to play games needed to buy this hardware as well as the games. The new trend is to host the game in the cloud, which gamers can access over high-speed networks, for a monthly subscription. Microsoft hopes to ramp up its subscription service, Game Pass, by acquiring the library of games with Activision Blizzard.

Now, this is far from an assured business model. Google recently shut down its Stadia cloud gaming service and will finish refunds by early 2023. Why the regulator should step in to nip early moves in a burgeoning business that might never take off is a mystery, unless it is motivated by the belief that Big Business, particularly Big Tech, is inherently nasty.

One supposed worry is that Microsoft would restrict the availability of Call of Duty on rival platforms, chiefly Sony’s Play Station. Microsoft has said that it will continue to make Call of Duty available on Sony’s Play Station and, further, that it would make it available on Nintendo’s Switch, where it is not on offer at present.

Entertainment is globalizing faster than other businesses. Movies are made for multiple markets. K Pop avatars thrill fans across the world. Right now, American, Japanese and European companies dominate gaming. But China’s Tencent is a big player, who could emerge ever bigger. This is a consideration for competition regulators.

The European competition authorities shot down the merger of Siemens and Alstom, but European political leaders wonder if that was such a wise move, considering the giant Chinese players in this space and the need to develop European firms that see the world as its market, rather than Europe. Whether a company that dominates the European market would dominate the global market is moot.

There is yet another reason why the US FTC’s move to block the Microsoft-Activision Blizzard merger is a little strange. The kind of merger that restricts competition is a horizontal merger, among companies that compete in the same space. Vertical mergers, in which a company buys its input supplier, just make for greater efficiency, unless the acquired company is some kind of a monopoly supplier of inputs to all players in the acquirer’s industry.

The way to take potential harm out of vertical mergers is for the regulator to stipulate that the acquirer would not restrict rivals’ access to the acquisition target’s business output. In this case, Microsoft has voluntarily agreed to make Activision Blizzard’s offerings available to rival platforms.

Modern businesses span the globe. Global scale offers businesses unique scale economies, superior revenues and profits, with which to fund moonshot projects that ordinary businesses just cannot afford. It is far better to regulate conduct to ensure competition and fair business practice than to embrace structural remedies that rule out market dominance and, in the process, extraordinary economies of scale.

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