It just takes a Twitter or Google News keyword search to see that the U.S. merger review process concerning Microsoft's $69B purchase of Activision Blizzard is at a crossroads, not in terms of whether it will ultimately happen, but whether litigation can be avoided. There are multiple overlapping news cycles ranging from "the FTC will sue to block the deal" to "Microsoft is prepared to defend the deal in court" to the New York Post story according to which a split (2-2) vote at the FTC is quite a possibility, in which case the transaction would go through (here's my analysis of the NY Post piece).
Activision Blizzard stock (NASDAQ:ATVI) closed up by 0.75% yesterday, though the intraday high was above 2%. The spread ($76.33 vs. $95) is still substantial, and it has more to do with uncertainty about how long it will take for the deal to close than with doubts about the defensibility of the transaction or Microsoft's determination. From the perspective of risk arbitrageurs, a protracted merger process simply binds funds that could in the meantime be used to bet on multiple other transactions.
A secondary factor is that Wall Street doesn't believe all of the world's antitrust regulators will make their decisions strictly on the merits. The legal standard is not whether the acquirer is "a Big Tech" or the price of the acquisition--it's whether there would be a substantial lessening of competition. If a leader in a highly concentrated market snaps up a contender, there may be a theory of harm. Here, the video games market is fragmented, Microsoft is only #3 in consoles, and it's primarily about mobile games, a market in which Microsoft has a very limited presence while Apple--without even having to make any games--generates more profits from games than anybody by virtue of its app tax.
The question of whether a company the size of Microsoft should be barred from acquiring a company the size of Activision Blizzard regardless of how merger law works is a political one. But even if one ignored the legal dimension and focused on politics, there is no point in attempting to block the merger.
If we want to talk politics, we have to look at how the stakeholders--gamers, developers, and game industry employees--would be impacted by one decision or the other. In that regard, two op-eds published yesterday are instructive. Microsoft president Brad Smith contributed an opinion piece to the Wall Street Journal (paywalled), and Communications Workers of America (CWA) president Chris Shelton took to The Hill.
Mr. Smith's article says in the headline that the transaction "is good for gamers", and then acknowledges that "[t]he Federal Trade Commission reportedly plans to sue Microsoft to stop [its] proposed acquisition of Activision Blizzard." This means that Microsoft has an apprehension that there could be something to those rumors. It doesn't look like the FTC reached out to Microsoft after those articles with a clear denial. That in and of itself is disconcerting.
The one sentence that many readers will most likely remember is that Sony is "as excited about this deal as Blockbuster was about the rise of Netflix." Taken out of context, it could be misinterpreted as a plan to displace the PlayStation, but the opposite is the case: Microsoft reiterates that Sony can have a ten-year contract ensuring the continued availability of Call of Duty on the PlayStation. The disruption that Microsoft has in mind is all about game distribution--about making more games available to more gamers ("offering consumers the option to subscribe to a cloud gaming service that lets them stream a variety of games on multiple devices for one reasonable fee")--not about dethroning the PlayStation maker.
Sony just seeks to perpetuate a business model that appears to come down to a mix of network effects, exclusive first- and third-party titles, and milking their locked-in customers. On a German games website, games-specialized journalist Sanel Rihic vented his frustration over Sony's prices and explained why he might switch to the Xbox just because he's tired of all those price increases, restrictions, and the lack of backward compatibility. Mr. Rihic also finds it outrageous that Sony reserves the right (under its terms of use) to--and actually does--remove media content from customers' libraries even though they purchased it and thought they could keep it forever, apparently because of some license agreement between Sony and a third party having expired.
But Microsoft-ActivisionBlizzard is less about consoles than about the mobile games market. With a view to the importance of mobile games, it makes sense to refer to Activision Blizzard as Activision Blizzard King (King.com is the Candy Crush maker). That is not a tactical choice by Microsoft or just an editorial decision on my part: Epic Games (of which Sony is a minority shareholder) consistently refers to the company as Activision Blizzard King (ABK) in its filings in the antitrust dispute with Google in the Northern District of California.
Game distribution on iOS and Android is a duopolistic "Goopple" tyranny. The app tax, unreasonable app review rules (which I have formally complained about), the inconsistent application of those rules, and restrictions on advertising (Apple's App Tracking Transparency) are its most harmful effects. Competition is the answer, and Microsoft's plans--coupled with legislative, regulatory or judicial intervention that enables third-party app stores to compete on a level playing field--can create opportunities for the developer community at large.
Yesterday's WSJ op-ed doesn't go into much detail (obviously due to space constraints) on those plans, but here's a CNBC interview from earlier this year that focuses on the idea of a universal app store:
I'm a gamer (see my Candy Crash campaign trail--well over level 1,400--toward the end of another blog post) as well as a developer. And while I'm not a games industry employee per se, I was the first person to work for Blizzard entertainment as a consultant and representative outside the United States. As an independent contractor, I obviously couldn't have unionized--but I was working with Blizzard's full-time employees (at the time the headcount was approximately 50) on a daily basis.
The headline of CWA's op-ed describes Microsoft-ABK as "a merger that helps the workers" and urges the FTC to take into consideration that the CWA was able to work out a labor neutrality agreement with Microsoft, which post-merger "would allow workers at Activision to freely and fairly make a choice about union representation."
Today, Quartz (qz.com) published its analysis of the labor aspect of Microsoft-ABK: Going against Big Tech’s anti-union grain, Microsoft is making good on its promise of "neutrality"
Quartz considers it very signifcant that "[n]early 300 quality assurance workers for ZeniMax Online Studios are voting to join the Communication Workers of America (CWA), the largest communications and media union in the country that counts over 700,000 members," which "would create the largest video game industry union in the US, and the first official US union under Microsoft."
CWA's president argues that unionization is a structural solution (as opposed to a behavioral remedy such as a promise to treat a certain group of stakeholders fairly). Similarly, a 10-year enforceable license agreement for the PlayStation version of Call of Duty can be categorized as a structural remedy as I wrote yesterday.
If the FTC seeks to protect the competitive process and achieve a positive outcome for stakeholders, its focus should be on solutions rather than litigation, though the latter may be a boon for lawyers and indirectly benefit the $3B popcorn industry...
