Microsoft’s Activision Blizzard Purchase Isn’t Great, But Isn’t An Illegal Monopoly Either

Microsoft’s Activision Blizzard Purchase Isn’t Great, But Isn’t An Illegal Monopoly Either
The cover for Monopoly Madness, available on all platforms, not just Xbox (Image: Ubisoft)

Yesterday’s announcement of Microsoft’s plan to purchase Activision Blizzard King for nearly $US70 ($97) billion immediately sparked discussions about antitrust laws and monopolies, financial terms that pop up whenever a high-profile company purchases another high-profile company. While the merging of Microsoft and Activision feels like far too much power being consolidated under one roof, once you understand what a monopoly is, it’s pretty clear this isn’t it.

In economics a monopoly occurs when a single entity, be it a person, company, or government, establishes complete control over the supply of a product or service. In order for you to have a monopoly on pies, for example, you would have to be the only person in the market creating and selling pies. Perhaps other potential pie makers don’t have access to ingredients. Or maybe no one else in the market wants to make pies, leaving you as the only game in town. In this hypothetical situation, you are the master of pies. As the master of pies, you have the ability to set the market price. If no one else can or is willing to challenge you in the marketplace, you can charge whatever you want, or as much as your customers are willing to pay. That’s the simple, economical definition of a monopoly.

The legal definition of a monopoly is a bit more broad. In order to attract the negative attention of an organisation like the Federal Trade Commission (FTC), a company doesn’t need to completely dominate a market to the exclusion of all competition. It just needs to possess significant market power. We’re not talking about brand recognition or having a large stable of well-known AAA video game franchises here. We’re talking about having enough power (and little enough competition) that a company can set inordinately high prices for its products.

No matter which version of a monopoly we’re talking about, economic or legal, the lack of competition is a key characteristic and concern. Healthy competition makes for a healthy marketplace. If someone else is selling the same thing you are selling, you are motivated to find ways to make the thing you are selling better than theirs. That’s how innovation happens. If you’re the only one making, say, an annual NFL-licensed football video game, there’s more of a chance this year’s version will just be last year’s version with a fresh coat of paint.

Fostering healthy competition is exactly the reason why the U.S. Congress passed the Sherman Antitrust Act of 1890. A trust was an arrangement in which shareholders of multiple companies in a single industry, oil for example, sold their shares in said companies to a single entity in exchange for a percentage of profits. The resulting single entity would then have control over the oil market, being able to set prices and gouge consumers as it saw fit. The first antitrust law, the Sherman Act, gave the government the power to take measures to break up unlawful trusts.

The Sherman Act was followed by the Federal Trade Commission Act, establishing the FTC, and the Clayton Antitrust Act, further prohibiting monopolistic practices including predatory pricing and anticompetitive mergers. Those two acts, both passed in 1914, along with the Sherman Act, continue to regulate U.S. businesses to this day.

Aside from the Federal Trade Commission’s normal scrutiny of any big corporate merger or acquisition, it’s unlikely that Microsoft’s proposed purchase of Activision Blizzard King will raise any red flags in terms of antitrust laws, any more than Microsoft’s purchase of Bethesda parent company Zenimax Media did back in 2020. Both the European Commission and the U.S. Securities and Exchange Commission found Microsoft’s $US7.5 ($10) billion Bethesda buyout raised no competition concerns, and the Activision Blizzard King sale should follow suit.

Why not? For one, there is no dearth of competition in the video game industry. From a software standpoint there are plenty of studios, big and small, creating games across multiple platforms, and Microsoft owning Call of Duty, World of Warcraft, Overwatch, Diablo, and Starcraft isn’t going to change that.

And yes, Microsoft is one of the big three console makers, but nothing is stopping another company from stepping in to offer something new. Would it succeed? Probably not, but that’s a result of the way the industry has evolved over the past several decades rather than some shadowy back room agreement between Microsoft, Nintendo, and Sony. Probably.

If you want a more qualified answer, IGN spoke to Gamma Law’s David Hoppe, a media/technology law expert, who called the Microsoft/Activision deal an example of “vertical integration.”

“The acquisition is another example of so-called ‘vertical integration’ in the video game industry–a console manufacturer (distributor) acquiring a game developer (producer). Of course, this is the largest such deal in games industry history, but U.S. courts have historically been unwilling to apply restrictive antitrust principles to vertical transactions,” Hoppe told IGN.

Microsoft buying Activision Blizzard King is a huge deal that some consider a sign of the industry’s inevitable consolidation, but it’s not hugely anti-competitive and certainly not a step toward total domination of the video game industry. Even if Microsoft manages to create the ultimate collection of high-profile publishers, swallowing up the likes of Electronic Arts or Take-Two, it’s not a monopoly until the FTC sings.

Unless Microsoft purchases Ubisoft, current licence holder of Hasbro’s Monopoly board game. Then we’re all screwed.

Comments

  • The article is correct, legally, however all it does is illustrate the failings of current anti-monopoly law, which is almost completely disinterested in vertical integration.

    Vertical integration, however, is profoundly anti-competitive because its purpose is to remove competition from the production cycle by locking both suppliers and customers into exclusive supply agreements and making it more difficult to shop around. The more suppliers you can lock in the fewer options your competitors and consumers have to buy from and the more control you ultimately have over retail pricing.

    Furthermore, you can also shift profits as required to undermine competitors in associated niches. Such as where Australian supermarkets were offering 16 cents a litre off fuel deals by cross-subsidising from profits in the main grocery business and therefore sending independent petrol stations out of business. In the petrol station case regulators ultimately had to take action, but usually the profit shifting is far more subtle, happening behind the scenes, between tax jurisdictions and between business divisions.

    Vertically integrated companies take advantage of the fact that they only have to justify one part of their business to regulators rather than the whole thing. Apple gets away with being a vertical monopoly because in any individual market segment there are other companies operating, completely ignoring the fact that Apple is in fact extracting profits from the same people in small bites at every stage of the consumption chain.

    Apple’s vertical integration is a tactic that in retail consumer law would be banned as drip pricing – sure, pay $1000 for your iPhone, but then find yourself locked into an Apple ecosystem of both big and small extra charges as they take an extra 30% from each microtransaction, and then it’s just easier to buy Apple HomeKit instead of a cheaper Amazon Echo, and then you’re up for a new iPhone again next time because you can’t take your apps with you cross platform, and so on and so on.

    This article, as is typical of such arguments, confuses what is legal with what IS. It’s only true to say that “it’s not a monopoly until the FTC sings” if you accept that the FTC is the sole arbiter of the common meaning of words in the English language.

  • The part that bothers me is a lot of folks at Kotaku we’re pushing the narrative that Sony was a monopoly not that long ago or at least parroted the notion that Sony’s exclusives were monopolistic in nature.

    • Why does that bother you?

      I mean, every newspaper and television station in the country has dozens of commentators offering different opinions about just about everything. Do you lose sleep over the fact that they don’t have a borg-like editorial line either?

      Or did you imagine that Kotaku was written by only one person?

  • “We’re talking about having enough power (and little enough competition) that a company can set inordinately high prices for its products.”

    The videogame publisher-console manufacturer cabal already does that, never mind a monopoly.

    • Inordinately high prices? Pfft. When Street Fighter II sold on SNES/Megadrive for over $100, THAT was when prices were crazy. Most games of the 16 bit generation were in the $70 region brand new, which is what I pay for most AAA games 20+ years later.

      Some games tried it on at the start of this generation – RRP of $120+ – but that seems to be correcting itself pretty quickly.

  • Gaming also has another great price equalizer in the form of Piracy – most people do the right thing, but if the industry got too greedy for it’s own good, I reckon piracy numbers would start to rocket.

    I suppose that’s similar to other physical retail items like shoes/handbags/collectibles etc, the big difference being that (besides virus risks and ineffective instantly cracked DRM) the game is still a 1:1 copy.

    Surely publishers would factor that in.

    • To me, it feels like piracy is a much riskier proposition nowadays. In the golden age of piracy the worst you could normally expect was to get a virus that could later be swept away easily enough just by downloading the latest virus definitions and running Norton once a week.

      Nowadays every exe you download opens you up to possibly having a root kit installed, your identity stolen, your hard drive encrypted with ransomware and your PC slaved to a botnet running DDOS attacks and cryptocoin minining.

  • Child labour isn’t illegal in some counties either so using the law as a basis for an argument to say something isn’t that bad is not a the basis of a sound argument. Microsoft is buying up gaming companies to strangle the competition and to create a dominate market position. Capitalism is based on companies competing by expanding, easiest way to compete is grow so big that you strangle the competition. In the short term this might be good for games that subscribe to game pass but in the long term it’s anti consumer as once Microsoft has dominate market positions they are sure to start to squeeze more money out of every subscriber. It’s not a case that Microsoft are good or bad they are just another giant corporation seeking to make money which is what they are in business for. It shows how weak the antitrust laws are these days that this deal is allowed to go ahead as would guess it give MS massive power in games industry. Be good to see some more critical analysis of these business deals which do not really benefit gamers. Look at what Disney has done to the movie industry, churning out movies like commodities to fill a gap in a production schedule. I find this to be another step on the road to the commodification of everything.

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