Good Defense Wins the Game (Premium)

With Microsoft now mounting its defense of the challenged Activision Blizzard bid, a key truth remains unchanged. There is no solid rationale for opposing this deal.

Yes, there are two sides to every story. But that doesn’t mean that both sides have merit. And in this case, it is Microsoft’s argument that rings true. And Sony’s that rings hollow.

Look, we always knew that antitrust regulators from around the globe would challenge this acquisition, and for good reason: Microsoft is willing to pay an astonishing $69 billion to gain entry into a mobile gaming market in which it has no presence today whatsoever. This is why Microsoft announced upfront that it didn’t expect to conclude the deal until the end of its 2023 fiscal year, which was 18 months away at that time.

But we also always knew that there were no valid concerns about the acquisition. That Activision Blizzard would emerge as a better company because of its new leadership. That Microsoft has already proven itself to be a credible caretaker of previously separate brands like GitHub, LinkedIn, and Minecraft. And that when the deal was finalized, Microsoft would not overtake any of the companies that currently dominate the videogame market. Instead, Microsoft will still remain well behind competitors like Sony that understandably wish to continue enjoying not just their dominance but also the abuses that helped cement their lead.

On that note, it has been interesting—and, frankly, depressing—watching regulators from the U.S., EU, and UK trip over themselves to protect this Japanese-based videogame powerhouse. This is not why any of these regulatory bodies exist: instead of protecting a dominant foreign power, they are supposed to protect competitors and/or consumers from the market abuses that occur when there is an entrenched monopoly in place in a given market. And there is one, named Sony. And when this acquisition concludes, there still will be one. Again, Sony.

There’s also an irony—OK, hypocrisy—at play here: Sony’s publicly stated fear is that Microsoft will turn crucial Activision Blizzards games or franchises into Xbox exclusives, a fear that is easily answered by regulatory bodies requiring the software giant not to do so. But that’s not really what Sony’s worried about. Instead, it is Sony that wields exclusives as a weapon to maintain its own dominance and the firm is simply not interested in tasting its own medicine. Sony doesn’t want Microsoft to do what it has been doing for decades.

Sony also argues that Microsoft “dominates” cloud gaming right now, which is one of those things that is both true and absolutely irrelevant. It’s like Apple complaining that Amazon “dominates” the market for tablets that cost less than $100 and that this is somehow a threat to the iPad. But those markets are so small as to not threaten their own dominance in the markets that matter. And in cloud gaming’s case, it’s widely understood that this offering will never be more than a tiny slice of the overall videogame market. Sony’s dominance in consoles will continue uncurtailed, and it will continue to reap more rewards than Microsoft ever will in cloud gaming.

But let’s imagine for a moment that cloud gaming will one day render standalone videogame consoles irrelevant. Fine. Microsoft has put in the R&D hours and dollars and has built out its services in ways that Sony, soft and happy in its own market dominance, has not. This is how markets get disrupted, and there is no reason to artificially prevent the expansion of a new product line just because the current dominant player doesn’t like it. Sony is free to innovate in cloud gaming—and to make its own acquisitions too–if it’s worried about this potential future. Heck, it’s free to leverage the innate advantages of its PlayStation dominance to do so as well.

While we’re fantasizing, imagine now that instead of the U.S. government suing Microsoft in the late 1990s for abusing its market power in PCs by hobbling Netscape that it instead sued Netscape to prevent the web browser from harming Windows. That’s not literally what’s happening today with Microsoft and Activision Blizzard—Microsoft is a wealthy, established company with lots of money to spend—but it’s curiously close. Seeing today’s regulators actively protecting a dominant power that isn’t even from their own jurisdictions should alarm anyone who cares about competition and basic fairness. That’s not how the system is supposed to work.

And to make that point, Microsoft president Brad Smith appeared in Brussels this week. He came equipped with two crucial agreements with competitors, Nintendo and NVIDIA, both of which decided to partner, not convince regulators to fight on their behalf: Microsoft has agreed to bring Call of Duty to Nintendo’s platforms for ten years and it will bring its PC-based Xbox titles to GeForce Now, a competing cloud gaming solution. But Mr. Smith also had a third agreement in his pocket, literally, one that hasn’t been signed by the other party.

“We haven’t yet reached an agreement with Sony,” he said. “I hope we will. I walk around with an envelope that contains the definitive agreement that we sent to Sony two days before Christmas. I’m ready to sign it at any time. And if Sony doesn’t like the words, we’re ready to sit down and pull out a pen, or a version of Microsoft Word, and its cut-and-paste features.”

There, Smith is referring to the fact that Microsoft offered Sony exactly the same 10-year Call of Duty commitment that it offered Nintendo. Left unsaid, Sony didn’t even refuse to sign it. It simply refused to even acknowledge it.

Smith was in Brussels for a series of meetings with EU antitrust regulators. And in a press conference, he enumerated through the facts that these regulators, videogame fans, and its competitors need to know. Sony, for all its fearmongering, controls an 80 percent share of the console market in the EU, compared to just 20 percent for Xbox. “Globally, it’s about 70/30,” Smith added. “In Japan, it’s 96 to 4.” (These figures exclude Nintendo, of course, because the EU has said that it only considers the PlayStation and Xbox to be direct competitors.)

“While there are some fluctuations over time, these numbers have been remarkably steady for two decades,” Smith continues. “Even last year, when Sony suffered constraints in its supply chain and it saw its numbers dip, they came back strong in the fourth quarter as their supply chain recover. By our calculation, on a global basis. Sony outsold Microsoft in the fourth quarter by a margin of 69 to 31, pretty much consistent with the global market shares we’ve seen for 20 years.”

Between PlayStation and Xbox, there are about 120 million consoles in the EU, and Smith noted that bringing Call of Duty to Nintendo and NVIDIA GeForce Now would make those titles available to another 150 million people there. “[That is] 150 million more people, 150 million devices, that don’t have access to Call of Duty today,” Smith said. “That is a future where competition flourishes, where innovation moves forward.”

Microsoft also addressed the exclusivity issue that Sony seems fixated on. There are currently 286 titles that are exclusive to PlayStation right now, compared to just 59 on Xbox. So Sony has almost five times as many exclusives as does Microsoft. As interesting, 58 Xbox titles are available on PlayStation, but only 2 PlayStation titles are available on Xbox.

Looking at the broader videogame market, which was worth almost $200 billion in 2022, mobile is by far the biggest segment and is, in fact, bigger than the rest of video gaming combined. Mobile gaming accounted for $103.5 billion last year, with Tencent ($32.5 billion), Apple ($14.8 billion), and Google ($12.4 billion) the top three firms by revenue. Console gaming accounted for $53 billion, followed by PC gaming at $38.2 billion. And cloud gaming? Just $2.3 billion.

Doing a bit of loose math, one might calculate that Sony accounted for 35 to 50 percent of all console revenue, or at least $20 billion, factoring in Nintendo. That would place Sony in second or third place behind Tencent and Nintendo and well ahead of Apple or Google. Microsoft doesn’t even make this list, but if Xbox revenues are less than half of Sony’s, it’s probably somewhere around $8 billion for a distant sixth-place finish. Whatever the numbers, acquiring Activision Blizzard would lift its percentages in each market, but it won’t catapult Microsoft up in the list.

But then Smith communicated what Microsoft is trying to accomplish with this acquisition quite succinctly.

“For us at Microsoft, this has never been about spending $69 billion so that we could acquire titles like Call of Duty and make them less available to people,” he said, countering Sony’s bogus claim. “That’s actually not a great way to turn a $69 billion asset into something that will become more valuable over time. To the contrary, since day one, we have been focused on one thing, using this acquisition to bring more games to more people on more platforms and devices than ever before, to bring more competition into gaming than ever before. [This] is, in fact, true to the roots of the very first day when we announced this acquisition 13 months ago.”

The EU should approve the acquisition, setting the stage for similar approvals in the U.S. and the UK. There is no solid rationale for doing otherwise.