Thursday, October 6, 2022

Brazil grants unconditional clearance to Microsoft-ActivisionBlizzard, says its job is to protect consumers rather than Sony and Google; U.S. FTC may rule in late November; UK CMA sets schedule; EU Commission sent out questionnaires

There's a flurry of activity surrounding the worldwide merger reviews of Microsoft's acquisition of Activision Blizzard. Let's look at the latest news jurisdiction by jurisdiction:

  1. Brazilian antitrust authority CADE grants unconditional clearance in decision that stresses three times that the task at hand is to protect consumer welfare and the competitive process, not individual competitors (i.e., Sony and Google)

  2. U.S. Federal Trade Commission may decide by late November, FTC staff reportedly has "significant concerns"

  3. European Commission has sent out Phase 1 questionnaires--response deadline: October 10

  4. UK Competition & Markets Authority (CMA) published administrative timetable--issues statement due this month

Brazilian antitrust authority CADE grants unconditional clearance in decision that stresses three times that the task at hand is to protect consumer welfare and the competitive process, not individual competitors (i.e., Sony and Google)

Brazil has become the second country in the world--after Saudi Arabia, which did so in late August--to approve the transaction. That's significant: a large market (more than 210 million inhabitants, a significant number of which enjoy purchasing power at a level with key Western markets), and a jurisdiction that is slowly but surely becoming ever more relevant to the enforcement of competition rules (and intellectual property rights).

A few hours ago, late on Wednesday by local time, Brazil's competition authority--Conselho Administrativo de Defesa Econômica (CADE), which translates as Administrative Council for Economic Defense--granted unconditional clearance. There's a short version that communicates the decision "to grant approval, without restrictions, to the present merger." That one makes reference to the detailed statement of reasons, the public redacted version of which I plan to digest more fully.

The Brazilian process was very transparent, with public versions being published of each and every submission and order. Sony argued that Activision's Call of Duty was a must-have title for the PlayStation and constituted a market of its own; Microsoft pointed to Sony's practice of acquiring "blocking rights" so that certain content cannot be made available on other gaming consoles (such as Microsoft's Xbox).

To the extent they were made public, Google's answers to CADE's questions didn't seem to raise concerns, but it has now become known that Google met with EU Commission officials and is opposing the deal, which I attribute to Google's opposition to Microsoft's plans to open up mobile game distribution.

With Sony and Google being known to oppose the deal, they would just need Apple to join them in order to form an "infernal trio" of walled-garden advocates. It's just that Apple may have too many other antitrust matters on its plate. Without mentioning Sony and Google by name in that particular context, the Brazilian decision calls them out on their anticompetitive intentions. There are three paragraphs that stress the "central objective of CADE's efforts" ("o objetivo central da atuação do Cade"), which is that of every competition authority in the civilized world: to protect, in the interest of consumer welfare, the competitive process ("concorrência") (as the United States Court of Appeals for the Ninth Circuit also emphasized in its FTC v. Qualcomm decision), "not to defend the interests of particular competitors" ("e não a defesa de interesses particulares de concorrentes específicos").

Paragraphs 342 and 352 make that point in connection with Sony's primary claim (vertical foreclosure as a result of vertical integration, voicing fears that some key content like CoD might not become available on other consoles than the Xbox). Paragraph 362 is part of the final set of conclusions.

CADE thoroughly analyzed a variety of markets potentially affected by the transaction:

  • a) development and publication of games:

    • a.1) publication of games for all devices (without segmentation), on worldwide and national scale;

    • a.2) publication of PC games, on worldwide and national scale;

    • a.3) publication of games for consoles, on worldwide and national scale; and

    • publication of games for mobile devices, on worldwide and national scale.

  • b) digital game distribution:

    • b.1) digital game distribution for personal computers and consoles (without segmentation), on worldwide and national scale;

    • b.2) digital game distribution for personal computers, on worldwide and national scale; and

    • b.3) digital game distribution for consoles, on global and national scale.

  • c) console games market, on global and national scale;

  • d) national online advertising market:

    • d.1) online advertising (without segmentation between search ads and display ads);

    • d.2) online display advertisements; and

    • online in-game advertisements;

  • e) national market for licensing of consumer products (merchandising).

CADE says in para. 358 that the analysis of horizontal overlaps in the markets for game publishing, game distribution, online advertising, and licensing (merchandising) did not show in any one scenario that there would be significant supply-side distortions giving the combined entity market power, in each case because the combined market share is below 20% and/or in light of low variations of the Herfindahl-Hirschman index, which is the most commonly used measure of market concentration in merger contexts.

With respect to vertical effects, CADE asked itself (para. 359) the question of whether Microsoft would have the ability or incentives to foreclose any of the vertically related or complementary markets subsequently to the consummation of the transaction. And in each of those regards, the answer is "no":

  • Para. 360: Despite the combined entity having significant market share in consoles and digital game distribution, it wouldn't have any incentives to complicate the access of competing game publishers to its platforms, as this would harm the Xbox ecosystem and make Microsoft's console less attractive to consumers.

  • Para. 361: As for downstream market forelosure, Activision Blizzard's games--particularly the Call of Duty series--are relevant and popular, but not essential for Microsoft's competitors in the console and digital game distribution markets to have. In other words, there's no must-have product there. Even in a hypothetical scenario of Microsoft making Activision Blizzard's titles exclusive to Microsoft's ecosystem, there wouldn't be a substantial reduction of the intensity of competition in the relevant markets.

  • Para. 362: Even in a hypothetical scenario in which some PlayStation users would migrate to the Xbox because of Call of Duty (again, hypothetically) becoming exclusive to Microsoft's platforms, CADE cannot see how that scenario would represent a threat to the competitive process in the console market as a whole. (That paragraph is one of the three that stress it's about protecting competition, not competitors.)

  • Para. 363: In the game publishing market, especially the one for mobile devices (which Microsoft has made clear (and CADE doesn't mention here) is its primary reason for buying Activision Blizzard), the aggregate market share falls far short of the thresholds that would raise competition concerns.

Therefore, CADE concludes that the potential vertical integration or complementary effects between Microsoft's and Activision Blizzard's businesses that the transaction will create or reinforce do not entail significant risks to the competitive process, as no factors have been identified that would lead to vertical foreclosure (para. 364). As a result, no merger remedies had to be imposed (para. 365).

All of the above makes a lot of sense to me.

U.S. Federal Trade Commission may decide by late November, FTC staff reportedly has "significant concerns"

A Seeking Alpha article refers to a DealReporter story according to which the FTC's review is currently at the staff level, but with staff (according to unnamed sources) having concerns, it will be escalated to the Bureau of Competition and finally to the five commissioners in the weeks ahead. Once again, Sony and Google are mentioned as the most important complainants, and the FTC is apparently talking to them as well. Hopefully the FTC will seize that opportunity to also discuss with those parties how to open up game (and in Google's case, app) distribution on their respective platforms.

DealReporter says a decision could be made by late November. In other words, we'll see then whether the FTC will accept the fact that there is no credible theory of harm here, or whether the FTC will come up with some novel and aggressive theory to litigate for the sake of just demonstrating that it is against any major acquisition by a Big Tech company, regardless of the merits of a given case.

The U.S. government has recently had a bad track record in the courts of law on its attempts to block mergers. That is bad for the credibility of U.S. antitrust enforcement, and I hope the FTC will avoid a surefire defeat in this case, as there are some very important issues where consumers (and, only by extension, competitors) need the FTC to do its job, and to do it forcefully and successfully.

European Commission has sent out Phase 1 questionnaires--response deadline: October 10

The Policy and Regulatory Report (PaRR) reported yesterday evening that the European Commission's Directorate-General for Competition (DG COMP) has given third parties (such as those walled-garden advocates named Sony and Google) until Monday (October 10) to respond to questionnaires concerning this merger.

The potential effects that the EU's competition regulator is looking into appear to be somewhat similar to the horizontal and vertical integration questions and hypothetical scenarios (such as Call of Duty becoming an Xbox exclusive) that Brazil's CADE analyzed--and rather distinct from the potentially unprecedented types of theories the FTC staff is reportedly working on. Unlike the UK's Competition & Markets Authority (see the next section), it appears that DG COMP has already understood that cloud services used for game backends are interchangeable, though the Commission does ask respondents to comment on that (framkly, the answer couldn't be much clearer: those services are just a commodity).

The October 10 deadline is simply reflective of the EC's tight schedule for Phase 1 reviews. The merger was formally notified to the EU last Friday, though informal talks not only between the Commission and Microsoft, but also with complainants Sony and Google were obviously held before. The Phase 1 decision is scheduled for November 8, which is simply the statutory deadline.

Based on what is known so far (which is primarily the PaRR story I mentioned), I consider it very likely that the EU process will be fair and reasonable, i.e., the Commission won't block this merger. The same reasons for which Brazil's CADE cleared the deal actually apply to the European situation as well. It's a big deal in economic terms, but doesn't really raise competition concerns by any legally defensible standard. Let's see what the EC announces on November 8.

UK Competition & Markets Authority (CMA) published administrative timetable--issues statement due this month

Last month I didn't mince words when I criticized the UK's antitrust authority CMA for getting even the most basic facts wrong in its Phase 1 decision--despite actually being a fan of the CMA's work on some other issues such as mobile app stores. I thought about it particularly hard because I'm no stranger to the parties to this deal: I was the first person to work for Blizzard outside the United States and managed sales and marketing for their first #1 in a major sell-through ranking (Warcraft II - Tides of Darkness in Germany; I'm listed in the credits of that one and a couple of other Blizzard titles) and Microsoft is the first client of my consulting business that I ever disclosed on this blog (a fact that never prevented me from disagreeing with them on specific topics, be it on standard-essential patents in 2010 or on German patent reform last year). So, I really didn't want to comment too harshly on the CMA's Phase 1 decision, but its degree of absurdity left me with no other choice.

On Tuesday, the UK CMA poblished its Phase 2 schedule (PDF). They're currently "[g]athering information, issuing questionnaires, [conducting] third party hearings." Sometime this month they will publish an "issues statement." I really hope--in the interest of the proper administration of justice and the CMA's credibility--that it will be a lot better than the Phase 1 decision. Seriously, when comparing CADE's clearance decision to the CMA's Phase 1 decision, it feels like the UK--not Brazil--is a so-called emerging market...

"Main party hearings" would take place in December, and all parties would get to make submissions before the CMA's provisional findings and potential (only if required) remedy proposals, which would come in January. Should the CMA seek remedies, there would be a related hearing (also in January). Further submissions by all parties would be accepted in February, and the statutory deadline for the final Phase 2 decision is March 1, 2023.