What are the odds that on the very day Microsoft announced its $68.7 billion acquisition of Activision Blizzard Entertainment, the U.S. Federal Trade Commission and Department of Justice would announce their joint plan to review merger guidelines?
It was a coincidence, but the two departments couldn't sidestep the serendipity during a virtual press conference on Tuesday where more than one reporter asked how potential changes to antitrust laws could impact such a blockbuster deal.
Press conference organizers deemed the acquisition off-topic, and U.S. Assistant Attorney General Jonathan Kanter said "We want to be very clear. We don't have any comment on any pending or any merger out there - none of it."
That was the answer for DOJ and FTC Commissioners Noah Joshua Phillips and Christine S. Wilson, as well.
On the other hand, both governmental bodies want to collect public comments on the current state of merger and acquisition law, draft updated guidelines, and seek further comments all before the end of this year.
Microsoft's Activision Blizzard acquisition is unlikely to close until sometime later in 2023. Put simply, there's more than enough time for it to fall under scrutiny set by new FTC and DOJ merger rules.
A Big Deal
First, though, let's talk about the deal. Microsoft's prepared to pay almost $70B for Activision Blizzard, which not only brings games like Call of Duty, Overwatch, and Diablo under the Microsoft (and ostensibly Xbox) umbrella, it adds in World of Warcraft and even mobile games like the hugely popular Candy Crush (part of King). There are also massive amounts of intellectual property from Tony Hawk to Crash Bandicoot, and Skylanders.
The deal could put huge titles on Game Pass, Microsoft's popular games subscription service. Microsoft has no plans to break Sony's existing contracts with game developers within Activision Blizzard, but when those deals are up for renegotiation, how often will titles end up exclusively on Xbox?
These are all valid questions and they lead to concerns about monopolies and market overreach. On Twitter, someone reminded me that it's impossible for Microsoft to be a U.S. gaming market monopoly when its chief rivals are a Japanese company (Sony) and a Chinese firm (Tencent).
That's true, but the consolidation of game studios and Microsoft's growing ownership of content creation, delivery systems, and consumption platforms might give the FTC and DOJ pause -- especially if the government changes how we should be thinking about monopolies in a digital age.
Deal-making in the Digital Age
Officials from both the DOJ and FTC repeatedly referenced how current merger and acquisition law is out of step with our digital reality. The digital revolution has rebuilt industries from the inside out, noted one.
Assistant AG Kanter said it was time to see if the rules are "fit for purpose." Merger guidelines drafted in 2010, the official noted, were not up to the task, failing to consider, for instance, the data aggregation that would result from digital giants smooshing together.
Microsoft's Blizzard Acquisition is clearly a product of our digital age, and it will surely feature at least some data aggregation (all those WoW members might eventually be signing in with their Xbox account IDs). Yet more reason for the acquisition to fall under the umbrella of forthcoming guidelines, no?
Remaking the Rules
If you look at the U.S. government's six areas of inquiry and how much they hope to redefine, it's clear how much difficulty Microsoft might face.
There's the purpose and scope of mergers and what metrics we currently use to assess if a merger would substantially lessen competition or create a monopoly. The agencies want to revisit those definitions through the lens of a modern, digital economy. It also wants to look at "horizontal" mergers (companies producing the same thing) and "vertical" mergers (companies producing different products potentially along the same market path, i.e. movies and the theaters that show them).
Since Microsoft is both a gaming studio owner and console manufacturer, the acquisition of Blizzard could be considered both horizontal and vertical. The FTC and DOJ are especially concerned about the latter, noting that the overall efficiencies of any such merger can be overstated, without addressing potential harm.
They'll be looking at the definition of market concentration as a measure of competitive effects. Are they overweighting the existence of direct competition (think Microsoft vs. Sony) when considering the direct impact of, say, a $67.8 billion market consolidating deal?
Capture the Market Flag
The DOJ and FTC want input on whether such mergers pose a threat to innovation. There will always be independent game developers, but the more game companies consolidate, the harder it is to compete. Microsoft's resources will always outstrip those of the nearest indie game builder.
When Microsoft gobbles up Activision Blizzard, it takes one more major gaming employer off the market. There may not be fewer jobs, but the ability for a potential employee to shop around for the best job offer might be diminished. The FTC and DOJ call this a monosomy, a market situation in which the product or service of several sellers is sought by only one buyer, and it's something they want to examine.
Microsoft's Blizzard acquisition might sail through, of course; soon we may wonder how we ever lived without World of Warcraft on Game Pass. But it's also possible that the entire process will be dipped in a new FTC and DOJ antitrust solution, asking the deal to pass a new kind of antitrust litmus test. What will the world look like when the ink is finally dry?