Sunday, November 13, 2022

SONYGATE: DG COMP faces worst case-specific credibility problem in history as PlayStation-loving EC official's tweet taints Microsoft-ActivisionBlizzard merger review, so-called clarifications don't help

At a time when the economy at large and society need the European Commission more than ever to enforce antitrust rules--now also the Digital Markets Act (DMA)--fairly and vigorously, it is extremely unfortunate that the EC's Directorate-General for Competition (DG COMP) must deal with its biggest credibility problem in history. It didn't arise in a minor context, but in an ultra-high-profile case (the merger review of Microsoft's $69B acquisition of Activision Blizzard King) and, worst of all, it directly relates to DG COMP's number one vulnerability, which is that it's often--quite often unfairly--accused of protecting competitors rather than competition and consumer welfare. Here, the beneficiary would be the undisputed leader of the gaming console market, Sony (and, by extension, Google).

The EC as an institution has certainly gone through worse. Here's a quote from the European Parliament's official website:

"Accused of corruption, misuse of power and fraud, the Santer Commission threw in the towel on 15 March 1999."

Compared to that, DG COMP has not had a Watergate, though the worst known excess resulting from its revolving-door problem, involving one of EVP Margrethe Vestager's predecessors in office, has been called the "Uber lobbying scandal" by Transparency International, an organization that believes the "European Commission['s] ethics rules are not up to scratch."

With what has happened this week, the EC lacks the moral authority to hand down a Statement of Objections (SO) against Microsoft-ActivisionBlizzardKing (should it have planned to do so in the first place, given that there is no legally defensible theory of harm anyway). And with statements that were issued yesterday, both the EC and its "Sonyboy" are digging an ever deeper hole for themselves as I'll explain further below. It's not just a lack of moral authority, but also that an appeal of a prohibition decision to the Court of Justice of the EU would be an uphill battle for DG COMP beyond the absence of a credible theory of harm. The judges--which have previously identified "procedural irregularities" in the Qualcomm case--would, at minimum, draw certain inferences from this.

On Tuesday, after the EU Commission announced that it had opened an in-depth investigation into Microsoft's acquisition of Activision Blizzard King (see my same-day commentary), Sony PlayStation fan Ricardo Cardoso--the deputy head of an EC unit--shared DG COMP's related tweet and added the following commentary:

"The Commission is working to ensure that you will still be able to play Call of Duty on other consoles (including my Playstation). Also on our to do list: update stock pictures. These gamers have wired controllers whereas Xbox and Playstation have wireless ones since about 2006!" (emphases added)

Many people absolutely correctly interpreted this as an admission of institutional bias. Sony has been lobbying regulatory authorities around the globe against the deal (and Google, too), with Sony known to argue primarily that Activision's Call of Duty is a "must-have title" Microsoft could allegedly leverage to monopolize the gaming console market. It is actually Sony who strikes exclusive deals all the time and acquires game studios; Microsoft has a track record of maximizing the reach of AAA titles like Minecraft, and would shoot itself in the foot by removing CoD from the PlayStation. But Sony makes that argument anyway, and while some regulators have seen through that smokescreen, others are still "investigating."

Yesterday (Saturday), two attempts to explain away the said admission of a Sony-friendly (rather than competition-preserving) agenda were made. Mr. Cardoso added a tweet:

"To clarify: I am not involved in the assessment of the merger and don't even work in the department dealing with mergers. As is clear from my profile my comments are personal and not a Commission position, whose decision will be taken on the basis of the facts and the law."

That is partly wrong, and what is not outright wrong misses the point. (Of course, I hope he is not wrong that the EC's "decision will be taken on the basis of the facts and the law.")

The issue is not whether "Sonyboy" is himself in charge of the merger review process. It's that he--as an EU official who was verified by Twitter as such--made a mission statement that starts with "The Commission is working to ensure ..."

He didn't say: "As a PlayStation fan, I hope the Commission will ..."

This is a credibility issue just on the basis that an EC insider plausibly claims to know what the Commission's objective is.

So, the test is not whether he's the one to decide. In the end, the decision will require a vote in the College of Commissioners, i.e., by all commissioners including the one Mr. Cardoso is working for (Thierry Breton). The only relevant question here is whether Mr. Cardoso is likely to know the EC's agenda, and--in a second step--whether that agenda reflects a bias that calls into question the fairness of the merger review (due process). To my dismay, both questions must be answered in the affirmative.

Let's look at Mr. Cardoso's Twitter profile (red underlinings added) (click on the image to enlarge):

  • He's got the blue checkmark, and in the EU, Twitter isn't selling checkmarks for $8/month yet, so he asked Twitter to be verified as an EU official.

  • The profile starts with his EC function (and by the way ends with with a link to the EC's website, not a personal homepage or whatever).

  • The "Views, mine" and "RT≠endorsement" disclaimers are irrelevant because, again, the only question is whether he was sharing on Twitter what he knew about the Commission's agenda.

  • And contrary to not having a professional involvement with EU merger reviews, his profile tells us that his responsibilities and interests include "industry" and "competition" issues as well as "gaming."

It is simply not true that his DG has nothing to do with merger reviews. The fact of the matter is that while DG COMP is in charge, DG COMP does discuss the issues in those cases with other relevant DGs, particularly if they have a relevant industry focus, and officials from other DGs are invited to DG COMP merger hearings. DG GROW is the Internal Market DG, and its responsibilities are more closely related to those of DG COMP than that of any other DG, especially under President von der Leyen, where competition chief Vestager and internal market chief Breton both have responsibilities for digital industry issues such as the DMA. I've heard from Brussels sources that Mr. Breton even has a de facto veto right (under an unwritten agreement) against major DG COMP decisions.

Mr. Cardoso's Twitter profile suggests that it's one of his unit's responsibilities to liaise with DG COMP.

He can can say whatever he wants, but there can be no reasonable doubt--based on the wording Mr. Cardoso used in the relevant tweet, the information in his profile, and the fact that DG COMP does discuss merger cases with other DGs, above all, with DG GROW--that what he tweeted on Tuesday was "inside baseball." It means that DG COMP entered into Phase 2 not with the open mind that is required from a due process perspective, but with the stated objective of using the merger control process to force Microsoft to make concessions regarding Call of Duty. Again, Mr. Cardoso was not expressing a wish, but telling the world--via Twitter--what the EC is up to.

Once upon a time, years before Mrs. Vestager was appointed to the Commission, the following happened at a DG COMP merger hearing (which followed an SO, so they were really close to the end of Phase 2 as opposed to that phase just having been entered):

Near the conclusion of the hearing, the DG COMP unit in charge of that merger review explained the issues in the given deal (which I won't name) with a slide deck. The final slide of that final presentation for the day said that the transaction would have to be blocked in the absence of a certain structural concession. The lawyer representing the acquirer was outraged and demanded that a copy of the slide be given to him immediately. He said: "This will be Exhibit 1 to my appeal [to what was then called the European Court of First Instance and is now called the EU General Court]."

I doubt that the Activision case will get to that stage, but should it happen, the Commission will look really bad in the eyes of the judges of the EUGC when Mr. Cardoso's tweet is shown. The judges won't buy any attempts by DG COMP to disavow it. It's a smoking gun, and here's a screenshot in case those tweets get deleted (click on the image to enlarge):

Also, TweakTown's Derek Strickland reported on the response he received--again, on Saturday--from EC spokeswoman Adriana Podesta:

"As you've correctly pointed out, Mr Cardoso works in the Director General for the Internal Market and not in the Directorate General for Competition. Mr Cardoso is not involved in the assessment of this transaction. Furthermore, as indicated clearly in his Twitter profile, he tweets in a personal capacity."

On Tuesday, Derek Strickland had already criticized "some of the European Commission's arguments" (for an in-depth investigation of Microsoft-ABK) as "really off" and particularly found it "not realistic" that Microsoft could use Activision Blizzard King games "to dissuade people from using non-Windows operating systems". I totally agree with that, but let's get back to Sonygate.

The EC's official response again misses the point. The question is not whether a Sony fanboy will decide the case, but whether the people who will decide started their Phase 2 investigation with an open mind--or with a pro-Sony agenda and a bias. As for him having tweeted in a "personal capacity," that applies to subjective opinions, but changes nothing about someone with "EU" in his Twitter handle, his EC role and a link to the EC's website in his profile, having started a tweet with "The Commission ..." and having revealed his institution's agenda ("our to do list").

Seriously, I can't see how DG COMP could really solve the problem other than by recognizing that there is no legally defensible theory of harm, and granting unconditional clearance. In that case, no one would be able to complain in the end, and "Sonygate" wouldn't matter. If the Commission tried to block the deal (which would require it to enter an SO) over CoD and/or the outlandish Windows-related theory that Derek Strickland finds "really off" and "not realistic," Mr. Cardoso would apparently have tweeted about what he knew was going to happen. If the Commission, at whatever stage of proceeding, reached an agreement with Microsoft (though the latter has so far declined to make concessions as the acquisition raises no legal issues) that would involve CoD, one would also have to assume that Mr. Cardoso indeed shared information on the Commission's preconceived notion (aka bias) and agenda.

I am writing this here just in my personal capacity and as an app developer who wants the EC to be able to enforce existing competition laws and the DMA against abusive platform operators (one of which may be Sony, though I haven't made a PlayStation game so far). Before writing this, I didn't discuss this with anyone and only found out about it on Twitter. Also, I don't have the blue checkmark yet, though I hope I will soon :-)