The FTC Should Answer Its Call of Duty to Gamers

All too often, unscrupulous businesses weaponize the United States’ antitrust laws—which are only supposed to be utilized to protect consumers against higher prices and other consequences of monopoly power—for their own self-serving purposes. Professor Thomas DiLorenzo explained this problem more than a third of a century ago in a piece titled “The Rhetoric of Antitrust.” He wrote that “In theory antitrust regulation promotes competition in the marketplace but in reality its results are often anticompetitive. It is routinely used by businesses having problems competing.”

A key to understanding the difference between competition as a process benefiting consumers and competition as a misnomer for protecting those who are (or are afraid of) being outcompeted for consumer favor was revealed in an open letter on antitrust protectionism during the Clinton administration. The letter, signed by 240 professors across the country, made it clear that “consumers did not ask for these antitrust actions—rival business firms did.”

Although over twenty years have come and gone, this problem hasn’t gotten any better; antitrust protectionism has continued into the present day. The scrutiny the Federal Trade Commission (FTC) is currently giving the merger between Microsoft and game developer Activision is a testament to this sad reality.

As Joost van Dreunen from New York University’s Stern School of Business described the merger, “virtually no one opposes the deal, except Sony.” In other words, consumers are not against the merger. However, the biggest, most dominant firm in the video game industry wants it challenged. Why? This is because Sony would have its dominant position in video game platforms undermined by better and more flexible options for gamers that the Microsoft-Activision merger would make possible. Sony doesn’t even have to bear the costs of challenging the merger because the FTC is doing that for the company. As Tahmineh Dehbozorgi wrote in National Review: “Unfortunately, in this case, the FTC seems more interested in defending Sony’s dominant market position than in allowing a transaction that would enable Xbox to compete. Consumers that would gain access to new games from big and small developers, are getting hurt in the process.”

In other words, the FTC’s opposition doesn’t increase or maintain competition; it just keeps a rival to Sony (the largest firm in the video game industry) from getting closer to its scale in an industry where economies of scale are significant. When a larger (merged) rival becomes more efficient than when it was smaller, Sony would have no choice but to compete effectively with its more able rivals. That would increase competitive industry pressures and better serve gaming consumers, not harm them. That’s one of the many reasons why a slew of organizations and countries—including the European Union (which is not typically an ally of US businesses in the antitrust arena), Japan, Brazil, Chile, Serbia, and Saudi Arabia—have already approved the Microsoft-Activision merger. These groups and countries also ostensibly recognize that the deal would benefit consumers by adding a great deal of value to Microsoft’s Game Pass subscription service.

Game Pass—especially if it includes Call of Duty and other Activision games—can be cheaper and more flexible for many consumers, who would no longer have to buy each video game individually or purchase multiple consoles to get access to exclusive games. It would also allow consumers to try out games they are not sure they would like at a lower cost (as part of a bundle) than having to buy them up front.

Further, the proposed merger would create a new large-scale entrant into mobile gaming, giving Microsoft “a toehold in mobile gaming—where most people game and where Microsoft’s Xbox currently has virtually no presence.”

While Sony and the FTC continue to portray a “sky is falling” narrative about the Microsoft-Activision deal, Dehbozorgi noted that when Microsoft acquired Mojang, the company that developed Minecraft, nine years ago, none of the concerns came to be:

Since the acquisition, Minecraft has become one of the best-selling video games of all time. . . . The merger enabled Mojang to access greater resources and reach a wider audience through Microsoft’s distribution channels. Consequently, Minecraft became available on more platforms and cross-platform play became possible, breaking down barriers and fostering greater innovation in the industry. Microsoft has continued to invest in the game, adding new features and expanding its reach to new platforms.

Alas, the belief that monopoly abuses will follow in the wake of the Microsoft-Activision merger is more imaginative than proven. Even postmerger, Microsoft’s share of the market will be too low to give it that much power. Sony will remain the largest player in the market. While antitrust rhetoric often involves the “little guys” being abused by large firms, it is hard to see how Microsoft’s supposed efforts at abuse would work against a substantially larger firm that has dominated the gaming market for two decades.

Even what Sony is “selling” as the greatest competitive threat from the merger—making video game titles exclusive to Microsoft’s system—is difficult to take seriously, as Sony has done far more of that than any other console maker. If it would be monopolistic for Microsoft to utilize exclusivity, isn’t it worse that Sony—which has a far larger market share—has done exactly that? As legislators like Senator Kevin Cramer and others have noted, perhaps Sony should be the company in the FTC’s crosshairs, not Microsoft. Microsoft has even offered ten-year contracts as proof that it will not engage in these Sony-esque practices.

The Competitive Enterprise Institute’s Iain Murray has also noted several other important problems with the assertion that the Microsoft-Activision merger would be used to facilitate consumer harm. For instance, he has collected several public comments on the merger in the United Kingdom that deserve consideration. They include the following:

it is unlikely that Microsoft would make Call of Duty exclusive due to its multiplayer nature. Making Call of Duty exclusive to Xbox would only create a gap in the market that could be filled by a rival cross-platform shooter game; . . .

. . . the Merger will push Sony to innovate, such as by improving its subscription service or creating more games to compete with Call of Duty;

. . . the Merger is a reaction to Sony’s business model for PlayStation, which has historically involved securing exclusive content or early access to popular cross-platform gaming franchises . . .

. . . the Merger is pro-competitive in the mobile segment because it will create new options for mobile gamers and allow Microsoft to compete against Google and Apple, which are the two dominant mobile platforms.

Murray added:

Mobile gaming is a growth area. Microsoft/Xbox has virtually no presence in mobile gaming, while three quarters of Activision’s userbase, not to mention a sizeable portion of its revenue, derive from that area. This is most likely at the heart of the acquisition. Going from two large companies in the field to three is hardly a threat to competition.

As if these concerns with Sony and the FTC’s claims aren’t enough, Renata Geraldo has reported still more problems. She wrote that, while “The FTC is concerned Microsoft plans to withhold Activision titles, including Call of Duty, from Sony and other competitors,” Microsoft argues “it is not financially viable to remove Call of Duty from PlayStation.” Indeed, more profits are to be made from serving a rapidly growing market than from trying to squeeze its current customers. As Microsoft lawyers have argued (and Activision has echoed), “Paying $68.7 billion for Activision makes no financial sense if that revenue stream goes away . . . Nor would it make sense to degrade the game experience and alienate the millions of Call of Duty players who play together using different types of consoles.” While Sony turned down Microsoft’s offer of a ten-year guarantee against that very fear (Microsoft making Call of Duty an exclusive to its console), Microsoft has already completed such an agreement with Nintendo.

There are so many holes in the FTC and Sony’s opposition to the Microsoft-Activision merger that an analogy to Swiss cheese is in order. In fact, as Nate Sherer has summarized, the results are more likely to be 180 degrees from the imagined bogeyman: “the deal could well be a major victory for consumers and gamers alike, who are likely to benefit from expanded access, a greater selection of games, and lower prices.” So, we should leave it to gamers to decide which firms and combinations of offerings they prefer, rather than government antitrust regulators who may be carrying out their “Call of Duty” for powerful corporate rivals threatened with competition rather than for the consumers who would benefit from it.