Microsoft, Activision Blizzard likely to argue procompetitive benefits surpass concerns about video game merger

Microsoft and Activision Blizzard are likely to tell antitrust regulators that their $68.7 billion merger will expand access to more users, make more games available and lower consumer costs.

The company says it will do this by moving more gaming products onto Microsoft’s subscription streaming service, eliminating the need to buy games that work on a particular console and broadening the number of games available because consumers won’t be limited to playing games tied to Microsoft’s Xbox, Sony’s PlayStation or Nintendo’s Switch.

The merger is vertical, where Microsoft is buying a company in its supply chain. Microsoft makes one of the consoles on which video games are played, and Activision Blizzard makes video games.

In a vertical merger, the primary concern is foreclosure, where the parent company refuses to sell the acquired company’s products to the parent’s competitors. In this case, would Microsoft refuse to allow Activision Blizzard’s games to be played on Sony and Nintendo’s consoles, or make it more expensive for customers to do so?

Microsoft has said the business model for acquiring Activision Blizzard only works if its games are available on multiple platforms. The government could resolve the concern by insisting on a behavioral remedy requiring Microsoft make Activision Blizzard games available to all competitors at reasonable prices. But both the Federal Trade Commission and the Department of Justice have expressed dissatisfaction with behavioral remedies because they don’t permanently resolve potential harms and need to be monitored, sometimes for years.

Phil Spencer, the head of Microsoft’s Gaming division, wrote in a blog post that, "upon close, [Microsoft] will offer as many Activision Blizzard games as we can within Xbox Game Pass and PC Game Pass, both new titles and games from Activision Blizzard’s incredible catalog.”

Microsoft’s subscription and streaming service, called Game Pass, has 25 million users. It's a multi-tiered subscription system, with a cheaper option giving subscribers access to hundreds of downloadable games on their newer Xbox consoles. The more expensive option, Game Pass Ultimate, contains all the benefits of the lower tier, and lets subscribers stream those hundreds of games via the cloud to their other devices like PC, phones and tablets.

Most console video games retail for $60, while Game Pass sells for $9.99 a month and Game Pass Ultimate sells for $14.99 a month. There is a PC only option which also sells for $9.99 a month.

Call of Duty, one of the most successful Activision Blizzard franchises in video game history, has been available on both Xbox and PlayStation in the past.

Spencer said in a tweet Jan. 20 that Microsoft intends to honor Activision Blizzard’s existing agreements with Sony. He’s shared his desire to keep Call of Duty on PlayStation with Sony executives, as well.

The longer-term business model, according to Spencer’s blog post, is to grow a product similar to Netflix that allows players to subscribe to a monthly service and choose from hundreds of games and play them on any device, rather than buying them individually. Spencer said the acquisition of Activision Blizzard allows the tech giant to “accelerate [its] plans for Cloud Gaming, allowing more people in more places around the world to participate in the Xbox community using phones, tablets, laptops and other devices you already own.”

If Microsoft’s claims about the pro-competitive benefits can be sustained, antitrust regulators might have a difficult time blocking the deal under traditional antitrust laws. The agencies usually view increased output, greater consumer access and lower costs as a pro-consumer benefit that would offset consumer harms, though pro-competitive benefits are rarely cited as surpassing anticompetitive effects if the merger is expected to harm competition.

The push to mobile

The merger has another potential benefit that looks beyond the vertical and horizontal aspects of this particular deal.

The deal could help video game developers escape from Apple and Google, who have been accused of holding a duopoly over game distribution for mobile phones through their App Store and Google Play Store.

Apple and Google take as much as a 30 percent fee from mobile game developers for purchases made through the App Store and the Google Play Store, or purchases made while inside an app itself.

If successful, Microsoft will grow its Game Pass service large enough that consumers can access and view games directly on their phones rather than through an app store, lowering the cost for developers. This wouldn’t happen immediately. Microsoft also takes a 30 percent cut from developers for Xbox digital game sales but the company has explored lowering that number in the past, and currently only takes 12 percent from PC sales.

Microsoft and Activision Blizzard will likely argue that the deal will bring much-needed competition to Google and Apple.

Elimination of double marginalization

Microsoft turns a profit from distributing video game consoles and Activision Blizzard turns a profit selling video games. Post-merger, Microsoft can eliminate or reduce one of these profit margins and pass the savings on to consumers.

This so-called elimination of double marginalization is usually seen as a pro-competitive by-product of vertical mergers. However, the FTC recently rejected the 2020 vertical guidelines that recognized the benefits of the elimination of double marginalization. The FTC and the DOJ are currently working on writing new guidelines  that will likely affect the antitrust agencies’ analysis of the deal, given the anticipated length of the review.

The deal’s expected 2023 end date implies that the companies understand there will be significant antitrust scrutiny.

Along with the vertical aspects of the deal, the merger is also horizontal as both companies make video games and the merger eliminates one of Microsoft's competitors, consolidating the US market for video game makers.

According to Ben Thompson, a tech industry insider who writes the Stratechery newsletter, Microsoft and Activision Blizzard combined represent about 11 percent of global video gaming revenue and about 25 percent of console and PC revenue, excluding hardware.

However, the antitrust agencies will likely look at national market figures in their analysis of the deal.

Thompson didn’t account for mobile gaming revenue in his calculation. Microsoft doesn’t have a very strong presence in the industry today but could use its size and gaming library to build one in the future through Activision Blizzard mobile subsidiary King.