Saturday, March 25, 2023

UK CMA determines (as did DG COMP) that Microsoft-ActivisionBlizzard presents no risk of vertical foreclosure in videogame console market: where do we go from here?

Yesterday the UK Competition & Markets Authority (CMA) announced an update to its provisional findings relating to Microsoft's acquisition of Activision Blizzard King. Based on new evidence--the most important part of which simply flagged an error in the economic analysis--the CMA has "now provisionally concluded that the Merger may not be expected to result in a substantial lessening of competition in the market for the supply of console gaming services in the UK."

This means that just like in the EU (see my previous post on this merger), the focus is now exclusively on cloud gaming. Sony's claim that Microsoft was buying ABK to pull Call of Duty from the PlayStation is no longer relevant. Theoretically, Sony can try to persuade the CMA to change mind again. There's a deadline for that (next Friday, 5 PM UK time). But that's not realistically going to happen.

It was a major surprise that made the ATVI stock go up by about 6% to reach a new high since the announcement of the merger. I commented quickly in the form of a Twitter thread (condensed thread view). But in some other way, it was not surprising. When the CMA's original provisional findings were released on February 8, I saw "major progress" and also found the agency's remedies notice "constructive." I know from my contacts in the financial services industry that fear of the CMA blocking the deal--and such a decision being difficult to overturn--accounts for the largest part of the spread (the difference between ATVI's stock price and Microsoft's offer). But in public statements as well as in private conversations, I've consistently rejected the notion of the CMA being irrational or ideological, despite having disagreed with them on certain questions at different points.

The CMA deserves great respect for this correction, for which it was not too late. What's next? Let's first focus on the UK process and then about implications for other jurisdictions (EU, U.S.)--and for Sony, the sole vocal deal critic.

What's next in the UK?

The console-related part of Microsoft's remedy offer to the CMA is no longer needed:

It all comes down to cloud gaming, where the fact that Microsoft has already concluded multiple access deals (with Nvidia, Boosteroid, and Ubitus) must be given considerable weight. The cloud gaming theory is about a very dynamic and "nascent" market, thus inherently fraught with uncertainty. That has implications for proportionality: compared to a theory of harm in an established market, any remedies based on a nascent market theory will normally be less aggressive.

At this stage an appeal is really just a theoretical scenario, but it's a fact that the narrowing of the case also makes any decision easier to appeal. The UK Competition Appeal Tribunal (CAT) affords the CMA a lot of deference, but not infinite deference. When there are different theories and the CMA says that in the aggregate of those theories there is an apprehension of a substantial lessening of competition (SLC), then the CAT will affirm unless it identifies procedural errors or anything downright irrational. The narrower the case, the less room there is for an opaque amalgamation of probability assessments. Here, it would come down to just cloud gaming--again, a nascent and dynamic market--and decisions by market participants of different sizes (Nvidia, Boosteroid, Ubitus; and Valve's statement that it doesn't need a deal with Microsoft because it trusts them) would make a blocking decision irrational in my opinion.

The CMA has said that it's on schedule. As the timeline chart toward the end of my previous post on this merger shows, that deadline is April 26. I've seen someone comment that the CMA now has more work to do because there'll be responses to the update to the provisional findings. I don't think so. Those responses are a formality, and the case is now smaller and simpler.

What's next in the EU?

I'm sure the European Commission's Directorate-General for Competition (DG COMP) is pleased to see that after four jurisdictions that cleared the deal on the fast track (Saudi Arabia, Brazil, Serbia, Chile), one of the more hesitant ones has also concluded that there is no PlayStation foreclosure risk. It also means that there is now an increased likelihood of a consistent set of remedies to be agreed upon in the two European jurisdictions.

DG COMP sent out questionnaires to market actors as Politico reported (I retweeted Samuel Stolton's tweet). The Commission still has almost two months left. I guess they'll more or less exhaust this deadline unless Sony saves everyone time, as I'll discuss further below.

What's next in the U.S.?

There are two litigations pending in the U.S.: the FTC's in-house adjudicative proceeding and a class-action-style lawsuit in San Francisco.

Technically, Sony's PlayStation foreclosure theory has been dismissed seven times by now. Besides the clearance decisions in Saudi Arabia, Brazil, Serbia, and Chile, and the EU Commission's and CMA's rejection of that theory, there was also an order on a motion to dismiss in the Northern District of California. United States District Judge Jacqueline Scott Corley didn't deem that theory plausible when she ruled on the so-called "gamers' lawsuit" that is actually a lawyers' lawsuit, or one might even say losers' lawsuit given their track record (click on the image to enlarge):

With the greatest respect, I don't understand why one of the world's best news agencies--Reuters--takes such serial losers seriously and mindlessly describes that lawsuit as a complaint brought by gamers when everyone can figure out that the driving force here are the lawyers. The worst-case scenario that those gamers face based on the complaint would come down to buying an Xbox and spending a little more money on a few games, and no one would profitably bring an antitrust lawsuit over that. I can see that any legal challenge to a merger of this magnitude is potentially newsworthy, but it should be possible to put things into perspective, even more so when lawyers have such a pathetic track record in challenging mergers. Ars Technica also talked to them, but they obviously don't play in the same league as Reuters when it comes to legal reporting (they have other strengths).

The class-action lawyers intend to file an amended complaint soon, but the news from the UK doesn't make things easier for them. Their next complaint is not going to plausibly allege a reasonable probability of foreclosure either.

Now, what about the FTC?

The FTC's Chief (and only) Administrative Law Judge (ALJ) D. Michael Chappell largely granted a motion to compel that the FTC brought against Microsoft and Activision Blizzard. But that's not going to change much because the FTC already received plenty of information before it brought that complaint. Its case is not going to improve now.

The FTC would be in good company if it joined the EC and the CMA in recognizing that there is no console-related theory of harm. It would be the right thing to do. It would be honest and honorable. And it would show that the FTC is not "ideologically blinded" as has been alleged. The FTC would emerge stronger from a partial withdrawal of its complaint. In a subsequent step it could then also accept cloud gaming-related access remedies and everything would be resolved without the FTC suffering another loss.

If the FTC voluntarily dismissed the console market theory, that would leave those losers in California as the "Flat Earth Society" with respect to PlayStation foreclosure...

What should Sony do?

Earlier this week I tweeted that Sony had lost control over the narrative, an observation that was picked up by GameRant, Windows Club (Brazil), and Game Eperience (Italy). With all that has happened since, it has been validated.

Sony's problem is that its own practices are now potentially coming under scrutiny. The question of whether Sony maintains a monopoly in the Japanese market (if one adopts its own preferred market definition of "high-performance videogame consoles") came up in the United States Senate:

Sony imposes very restrictive rules on game makers. Many of those who support Sony in the public debate over the acquisition of Activision Blizzard don't even have an idea and that's because Sony, also through contractual restrictions, prevents people from finding out. I quoted several passages from the Epic Games v. Apple judgment in a Twitter thread. Let me quote them again here:

"[F]or all Fortnite transactions via the PlayStation Store, Epic Games agreed to make additional payments to Sony above this commission rate based on the amount of time that PlayStation users play Fortnite cross-platform."

"Sony, for instance, enacts a cross-play policy that compensates Sony where players spend on other platforms but primarily game on Sony’s PlayStation platform. Meanwhile, Sony and Switch have enacted policies that limit the cross-wallet functionality across platforms."

"Cross-purchases allows Fortnite users to buy V-Bucks, or virtual currency, on one platform and spend them on another platform. Cross-purchases are not available on Sony or Nintendo platforms."

"Epic Games believed so strongly in cross-platform play that it threatened litigation against Sony for using policies and practices to restrict the same ..."

As many of my readers know, I've been following Epic v. Apple very closely and have read the ruling multiple times, word by word.

It is at least debatable whether Sony should ever have lobbied and campaigned against Microsoft's purchase of Activision Blizzard King, given that the positions Sony was forced to take to contrive a console theory of harm that is now dead in the water could be held against Sony--market definition included. But even if one were to conclude that it was worth trying in the beginning, the problem is that the traction it appeared to get made Sony unrealistic:

After the European Commission's Statement of Objections and the UK CMA's provisional findings, Sony should have worked out a deal. Instead, its lawyers probably told Sony to keep spending money--and it's not just that, but also that they'd like to try the long shot and maybe make history by blocking a huge merger.

Sony and its lawyers from Cleary Gottlieb have already lost quite some credibility with competition regulators now. They complained about Meta-Within, and the FTC lost in court. They presented an insane Call of Duty foreclosure theory, and it's been rejected in seven jurisdictions by now. The common pattern: Sony--despite its unique combination of assets and incredible market power--is indiscriminately afraid of Big Tech competitors, be it Microsoft or Meta. On Twitter I commented on Sony's rare combination of an inferiority complex and hubris:

While Sony missed the best opportunity for contributing to an amicable resolution of the issue, it would still make sense to simplify things for the EC, the CMA, and the FTC now by working out a deal and endorsing the acquisition on that basis (just like Nvidia did). Better late than never, and the window of opportunity is potentially closing fast now.

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