Level playing field

In January Microsoft offered $68.7bn, or $95 a share, for a company that says it has nearly 400m monthly players in 190 countries.^{4MicrosoftMicrosoft to acquire Activision Blizzard to bring the joy and community of gaming to everyone across every device18 Jan 2022} On 8 December the Federal Trade Commission voted 3-1 to try to stop the purchase.^{1Federal Trade CommissionFTC seeks to block Microsoft Corp.'s acquisition of Activision Blizzard, Inc.8 Dec 2022,2CNBC, via NBC BostonFTC sues to block Microsoft's acquisition of Activision Blizzard8 Dec 2022} Activision’s shares fell as low as $73,^{2CNBC, via NBC BostonFTC sues to block Microsoft's acquisition of Activision Blizzard8 Dec 2022} almost a quarter below the offer, which is the market’s way of saying it has read the complaint and is not sure who wins.

The FTC’s case is that Microsoft, which makes the Xbox, would own Call of Duty, World of Warcraft, Diablo and Overwatch,^{1Federal Trade CommissionFTC seeks to block Microsoft Corp.'s acquisition of Activision Blizzard, Inc.8 Dec 2022} and could then raise prices, degrade the games on rival consoles or withhold them altogether. “Microsoft has already shown that it can and will withhold content from its gaming rivals,” said Holly Vedova, director of the agency’s Bureau of Competition.^{1Federal Trade CommissionFTC seeks to block Microsoft Corp.'s acquisition of Activision Blizzard, Inc.8 Dec 2022} We think the worry is real but the remedy is wrong. Regulators should take enforceable promises to share the games, and keep the injunction for the day Microsoft breaks them.

Begin with what the FTC has going for it. The agency points to Microsoft’s earlier purchase of ZeniMax, parent of the studio behind Starfield and Redfall. Microsoft made several of its titles exclusive afterwards, despite assurances it had given European authorities.^{1Federal Trade CommissionFTC seeks to block Microsoft Corp.'s acquisition of Activision Blizzard, Inc.8 Dec 2022} A firm that has changed its mind once about sharing games has not earned unlimited trust. Add Game Pass, its subscription service, and its cloud-gaming offer,^{1Federal Trade CommissionFTC seeks to block Microsoft Corp.'s acquisition of Activision Blizzard, Inc.8 Dec 2022} and the theory of harm is not silly: control the content and you own the cheapest way into the console.

Yet the case has a gap where a market ought to be. By Microsoft’s account Xbox is in third place, behind Sony’s PlayStation and Nintendo’s Switch.^{2CNBC, via NBC BostonFTC sues to block Microsoft's acquisition of Activision Blizzard8 Dec 2022} Brad Smith, Microsoft’s president, said the firm was “as excited about this deal as Blockbuster was about the rise of Netflix.”^{2CNBC, via NBC BostonFTC sues to block Microsoft's acquisition of Activision Blizzard8 Dec 2022} The line is a little too neat, but the arithmetic is on his side. A third-placed firm that buys a popular shooter is not obviously cornering a market. It is trying to climb out of third place, which is what competition looks like from the inside.

The more useful point is that the problem can be priced. Microsoft has offered Sony a legally enforceable 10-year contract to put each new Call of Duty on PlayStation on the day it arrives on Xbox. It has struck a similar deal with Nintendo and made the same offer to Valve for Steam.^{3Video Games ChronicleMicrosoft says it's ready for a court battle after FTC sues to block Activision deal8 Dec 2022} Mr Smith said Microsoft had offered “proposed concessions to the FTC” earlier in the week, and that “while we believed in giving peace a chance, we have complete confidence in our case.”^{3Video Games ChronicleMicrosoft says it's ready for a court battle after FTC sues to block Activision deal8 Dec 2022} Bobby Kotick, Activision’s chief executive, told staff that the claim of anti-competitive harm “doesn’t align with the facts.”^{3Video Games ChronicleMicrosoft says it's ready for a court battle after FTC sues to block Activision deal8 Dec 2022}

The sceptic will say promises are cheap, and that ZeniMax proves it. That is the FTC’s best argument and it deserves a straight reply. A contract is not a promise to a regulator. It is a promise to a counterparty with lawyers, a motive and a court date. Sony, whose objections to the deal Microsoft has been at pains to downplay,^{2CNBC, via NBC BostonFTC sues to block Microsoft's acquisition of Activision Blizzard8 Dec 2022} would be an alert enforcer. A rival with its own money at stake is worth more than an agency guessing what the seller will do in 2030.

None of this means the FTC is wrong to look. Cloud gaming and subscriptions are young markets, and a firm with a library of hits would be a tough competitor in both. But the agency has to show the harm is likely, not merely imaginable. A block resting on the idea that a buyer might one day behave badly would fit nearly any merger in the business.

The sensible outcome is a settlement with teeth: long contracts, same-day releases, a monitor and a penalty for breach. Microsoft has said it welcomes the chance to argue its case in court,^{3Video Games ChronicleMicrosoft says it's ready for a court battle after FTC sues to block Activision deal8 Dec 2022} and a trial would be a poor use of everyone’s time if the contract already says what the judge would order.

Gamers want one thing from this fight, which is to buy a game for the console they already own. A contract delivers that sooner than a verdict, and with fewer lawyers.