An Open Letter to the CMA

Disclaimer: the viewpoint expressed below is solely that of the author and does not represent an official position of lordsofgaming.net

This week, the UK’s Competitions and Markets Authority invited the public to express its views regarding Microsoft’s proposed acquisition of Activision-Blizzard-King. I took the opportunity to do so. The letter I sent to them, in its entirety, is below.

Microsoft Activision BLizzard

To the Competition and Markets Authority:

I want to begin my remarks by offering thanks to your organization and its members for your diligent efforts to ensure the betterment of consumers in the United Kingdom and, indeed, around the world. I would also like to thank you for allowing the public to share their thoughts on Microsoft’s proposed acquisition of Activision-Blizzard-King.

Before sharing my views on this proposed acquisition, I wanted to briefly share my background with the gaming industry to provide context for my remarks and lay bare any biases I may have. I have been a consumer in the gaming industry for well over 20 years. Throughout that time, I have owned multiple consoles manufactured by each of today’s leading console makers: Microsoft, Nintendo, and Sony. For the last year, I have also served as a writer for the journalistic outlet lordsofgaming.net.

At the start of this console generation, I decided to purchase an Xbox Series X over a PlayStation 5, having determined that I preferred the value proposition offered by Microsoft’s brand as an entry point into this generation of gaming. I anticipate that I will also purchase a Playstation 5 before the end of the current generation.

Having said this, I believe the provisional findings from the CMA’s Phase 1 review of the merger overstate the likelihood of harm from this acquisition and understate both the likelihood and magnitude of its potential benefits. In my view, the most likely outcomes of this acquisition will lead to more robust competition in the gaming industry for the betterment of consumers.

Impact on Console Platforms

In its issues statement, the CMA indicates that one of the focuses of its Phase 2 investigation will be the potential harms that may come to Xbox’s console competitors (particularly Playstation) should Xbox decide to use its ownership of Activision’s properties to try to win market share through exclusivity, pricing, or degradation of quality. I agree with the CMA’s assertion that Microsoft may have commercial incentives to do this to drive affinity for their platform.

With that said, given their public commitments to keep Call of Duty on PlayStation with feature and content parity, it is most probable that they will drive affinity by adding Activision’s catalog and future games to Game Pass, getting the product to consumers at a lower price point. In my reading, this approach would be beneficial for two reasons.

  1. Absent the merger, every consumer who wants to play games like this Call of Duty or the upcoming Diablo IV would need to buy them at full price. After the merger’s consummation, that option would remain available to every consumer, but consumers who owned an Xbox, a capable PC, or the capability of accessing cloud gaming would also have the option of playing the title through a more inexpensive subscription.
  2. Over time, this approach may lead to wider adoption of the Xbox console platform, tightening the current wide gap between Microsoft and Sony’s market share and, more importantly, market power. If the competition between these two console manufacturers were closer in the future, this would benefit consumers. I will provide just one example of why below, as I am confident other respondents will provide others.

One of the ways in which the magnitude of Sony’s current market lead harms consumers is in its ability to secure full or timed exclusives from third-party developers and publishers. Due to the commanding market lead it has gained over the past nine years, Sony is capable of securing favorable conditions on these deals in a way that Microsoft cannot.

The reason is simply arithmetic. To convince a third-party partner to enter into an exclusivity agreement, Sony must offer the partner more money than it would expect to lose by not releasing on Xbox (or by releasing on Xbox a year or more later). Microsoft, of course, would have to do the same.

However, this is typically only viable for Sony due to the drastic difference in installed bases on their platforms. With a total combined installed base of 150 million+, compared to Xbox’s 60-70 million, the circumstances in which such an agreement is commercially viable for Sony are far broader than they are for Microsoft.

While this is a legitimate business practice and part of Sony’s strategy for driving affinity for its console, it brings harm to any consumer without a PlayStation platform. Absent such agreements, I would have been able to play games like this Final Fantasy 7 Remake, Bloodborne, swear Marvel’s Spiderman on my Xbox. Instead, I had to buy a Playstation 4. Others of lesser means simply could not play them.

Were the competition between the two consoles closer, such deleterious exercises of market power would be rarer and more costly. This is just one of many examples of how closer competition between the two manufacturers would be welfare-enhancing.

Impact on Multi-Game Subscription Services

The CMA Logo

The CMA is making the prudent decision to investigate whether Game Pass, arguably the multi-game subscription service with the strongest reputation in the gaming industry today, will be so strengthened by the addition of Activision-Blizzard-King’s catalog as to foreclose current and future competitors. However, I believe a thorough investigation will lead to the conclusion that this addition to Game Pass, albeit considerable, will not lead to a substantial lessening of competition in the gaming market. This is for two reasons.

First, for the foreseeable future, the success of subscription services will be constrained by their competition with buy-to-play and free-to-play games. If, for example, Microsoft raised the price of Game Pass to $30 per month post-acquisition, consumers like myself would be likely to unsubscribe and instead purchase the games we want to play “a la carte.” These distribution models are alternatives available to consumers. With that said, even in a hypothetical scenario where one firm’s subscription service becomes dominant over its competitors’ services, it does not follow that that firm would wield undue market power. That firm would still need to compete on price, quality, and other fronts.

Second, even with the addition of Activision-Blizzard-King, Microsoft will not be the only firm capable of bringing a compelling subscription service to the market. Both of its current major console competitors have a significant trove of intellectual properties and franchises that could provide a strong foundation for a competitor to Game Pass. Indeed, Sony has already taken meaningful steps towards competing directly with Game Pass in restructuring its PlayStation Plus service.

In a hypothetical future in which subscriptions become the dominant way consumers choose to access games, competitors such as Sony and Nintendo could leverage their properties, partnerships with third-party developers and publishers, and acquisitions of their own to compete directly with Microsoft’s Game Pass offering . This direct competition would benefit consumers on every platform.

Impact on Cloud Gaming

Finally, the CMA communicated in its filing that it is also exploring “whether the merger could negatively impact the future of cloud gaming.” Further, the Authority indicated that a particular concern is whether Microsoft’s “multi-product ecosystem” may give it an insurmountable advantage over current and future competitors. This is another well-reasoned line of inquiry; however, to my mind, the dangers of regulating on these grounds are greater in likelihood and scope than potential benefits.

In my view, cloud gaming is so new and unproven as a consumer product that regulators should be very cautious about using their power in ways that might artificially prevent its growth. While cloud gaming is currently only used by a small percentage of gamers, as a technology, it has the potential to bring considerable benefits to consumers, developers, and publishers. Even now, it can reduce current points of friction preventing consumers from accessing high-quality games, such as the need to buy expensive consoles, PCs, or (in some cases) even controllers. Microsoft is also currently using its cloud ecosystem to reduce pain points for developers through efforts such as its ID@Azure program. If the CMA prevents the consummation of this acquisition, it may significantly stymie consumer adoption of this technology and thereby either delay or prevent the benefits it may bring to the industry.

Additionally, while the CMA rightly notes that Microsoft has a potential advantage in any future cloud gaming market due to its multi-product ecosystem, I think its concerns about that advantage are misplaced. To begin, I do not think one could reasonably argue that its advantage is so great as to potentially prevent other players from being able to compete meaningfully.

Second, and more importantly, the same factors that give Microsoft an advantage in cloud competition could also be described as efficiencies. As the members of the CMA will know, market efficiencies (including in digital markets) tend to benefit consumers, as eliminating costs in a supply chain most often leads to lower prices for consumers.

However, the CMA may not be aware that there is an analogue for this in the recent history of the gaming industry. Throughout the past console generation, there was a dramatic shift in consumer trends: namely, a significant majority of consumers now purchase games digitally rather than physically. To my mind, the primary reasons for this are market efficiencies and the reduction of friction. Developers and publishers reduce costs by physically manufacturing and shipping fewer discs and disc cases. Also, delivering content directly to consumers’ homes removes the need for a third-party retailer. These reduced costs are often passed along to consumers in the form of more frequent and dramatic sales than one would find at a physical retailer. These reduced prices, combined with the convenience of the ability to simply download a game from your couch, have led consumers broadly to prefer digital as means of product delivery over physical.

That Microsoft has a multi-product ecosystem that it may leverage to strengthen its offering for cloud gaming means that it has efficiencies that other firms may not. If that leads to Microsoft being the market leader in the future of cloud gaming, that can only be because Microsoft uses those efficiencies to pass along value to its consumers.

Conclusion

As a consumer who would directly and immediately benefit from the completion of this transaction, I ask the CMA to consider carefully the various efficiencies and consumer welfare-enhancing results of this merger as it continues its Phase 2 investigation. I am confident that, in your investigation, you will come to many of the same conclusions I have.

Thank you for your time.

With Gratitude,

Steve Perry

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