Friday, December 9, 2022

FTC's Microsoft-ActivisionBlizzard complaint misleads about Bethesda post-acquisition history and reminds of Apple Arcade antitrust class action dismissed in Northern District of California

Over the years, and especially over the past couple of years, this blog has commented on a number of antitrust complaints--but also on a similar number of motions to dismiss such lawsuits. Seen through that lens, the FTC's complaint In the Matter of Microsoft Corporation, a corporation, and Activision Blizzard, Inc., a corporation (PDF) comes across as anemic from start to finish, unusually repetitive for such a short document, and generally unsubstantiated. It is no better than I expected when commenting on the FTC's announcement.

Reading the thing made me feel sorry for the staffers who were ordered for purely political reasons to make something out of thin air. They must have had to swallow their pride in authorship and quality legal work, which I have no doubt they would be capable of performing if only they had a case.

Not long after I finished reading, I felt eerily reminded of another antitrust complaint involving games, platforms (iOS), and even the subscription model (Apple Arcade): Pistacchio v. Apple. That one was dismissed in the Northern District of California never to be seen again. At the motion-to-dismiss stage, I expressed doubts about that complaint surviving the motion to dismiss and voiced concerns that it might "simply have been an overly ambitious and somewhat premature case"--while I viewed other App Store-related complaints far more favorably at the same stage.

The two primary shortcomings of the Pistacchio lawsuit also apply to the FTC's "case" against Microsoft's purchase of Activision Blizzard King:

  • Gerrymandered market definition:

    That one deserves some attention because an antitrust claim premised on the wrong market definition is doomed.

    • "Microsoft and Sony control the market for high-performance video game consoles." That would be an interesting collective dominance claim, but not in that order as Sony is far ahead and may temporarily just be affected by chipset shortages. The FTC does not state any objective criterion for the alleged difference in performance. Frames per second? CPU cycles? They point to Nintendo charging less for its product, which can have any number of reasons including Nintendo's challenges in competing with Sony. Tesla also charged less than Ferrari despite accelerating a lot faster.

      They came up with "performance" as a differentiator because paragraph 68 of the complaint can't substantiate a clear delineation by audience. The claim about "more mature content for more serious gaming" is something that with my games industry background (once the first person to work for Blizzard outside the United States) and my own experience playing games I have to reject: it's just not true that mature content implies or fosters serious gaming. There is no mature content in chess, yet it is serious; and at the end of a recent post I showed my Candy Crush level map (well over level 1,400). I guarantee you that it took "serious gaming" to get there. I would encourage the FTC to play Supercell's Hay Day up to the point where one can join a "neighborhood" and participate in "neighborhood derbies" in a multi-league system. That's where one can see and meet many people who basically let a farming game dictate their schedule to an extent you would be hard-pressed to find on Call of Duty.

      By contrast, non-serious games with mature content are about as old as gaming itself. Here's one example from 1983. The school-shooting game that passed Apple's app review just weeks after the Parkland rampage (mentioned here) was brutal, but presumably not a "serious" challenge for gamers.

      Anyway, there is plenty of mature content for the Nintendo Switch.

      If one can arbitrarily limit a market with three players to a two-horse race, one can also come up with some reason to claim that one of them has a monopoly. That would be Sony, the only vocal complainant...

      In another fit of pity with FTC counsel, I feel they just didn't have the chance to rethink (or simply abandon) their litigation strategy after Nintendo signed a 10-year Call of Duty contract with Microsoft. Nintendo is actually competing in that market (and even if it was only considered a potential new entrant into an arbitrarily defined segment, it couldn't just be ignored as long as Nintendo keeps trying).

    • What's even a lot worse--and even more reminiscent of one of the deficiencies that doomed Pistacchio v. Apple--than "high-performance video game consoles" is the part about "AAA games." There, again, the FTC presents no objective criterion. In the end, it's about budget. Actually, games like Candy Crush and Minecraft became extremely successful despite (at least initially) small budgets. Consumers do not care about game makers' budgets (and often wouldn't even be able to tell whether one game costs more to make than another); they want to have fun. That's why it's not a suitable market definition, and if the courts of law accepted it, it would set a dangerous precedent (which is why they won't do it).

      The FTC complaint does not explicitly designate AAA games as a relevant product market, but the way the concept is referenced throughout the complaint--dozens of times--is tantamount to a market (or industry) definition.

    • "Multi-Game Content Library Subscription Services" as a market definition is strikingly similar to the "iOS Subscription-Based Mobile Gaming Services Market" at the center of the failed Pistacchio complaint. Apple--a company I don't often agree with--successfully argued that you cannot define a market "by the way that users pay for it: a subscription fee." Apple gave various examples in that case for courts rejecting such approaches.

  • Prediction of future relevance of nascent product category:

    The FTC seeks to justify its complaint that has no basis in merger law as it stands with the need to take risks at "a pivotal time for the industry." Recognizing that "[t]oday, video game software typically runs locally on the player’s gaming device," the FTC then points to marketing statements and visions according to which cloud gaming is going to be huge somewhere down the road.

    In Pistacchio, the problem was that Apple Arcade had not been around for long enough to really substantiate anticompetitive harm. Of course, in merger reviews the question is not what happened in years past but whether there is a reasonable apprehension of a substantial lessening of competition. That standard is lower than in a unilateral conduct or cartel case, but it is not low enough that regulators can block transactions based on the mere prediction of a fundamental change of consumer preferences. If that became the standard, one could block pretty much any acquisition of an Artificial Intelligence company these days.

    I have traditionally--since my opposition to Oracle's acquisition of Sun Microsystems in 2009 (because of the MySQL open-source database)--been in favor of considering the potential of nascent competitors in a merger context. In that regard, I think the current FTC and I have similar views. But when a nascent product category has not had much appeal beyond a niche, and when even Fortnite isn't a smash hit as a cloud gaming title because most people would only want to play it locally, it's very, very difficult to make a case against a merger.

In an antitrust litigation in a federal district court, the FTC's complaint would be very likely to be dismissed for market definition reasons alone, and the exceedingly speculative perspective on the supposedly bright future of cloud gaming would be another ground for dismissal. But I will now share some other observations:

  • As I already explained in yesterday's post, the FTC's reference to what happened after Microsoft's acquisition of ZeniMax/Bethesda is weak. Like those gerrymandered market definitions, it reflects the bankruptcy of the FTC's theory, but in one way it's even worse: the FTC is playing a political game here and trying to mislead those who read the complaint, such as journalists. If one doesn't know some additional facts and doesn't interpret the FTC's wordings very carefully, it inaccurately sounds like Microsoft had reneged on its commitments to the European Commission:

    "12. Microsoft’s past conduct provides a preview of the combined firm’s likely plans if it consummates the Proposed Acquisition, despite any assurances the company may offer regarding its plans. In March 2021, Microsoft acquired ZeniMax Media Inc. ('ZeniMax'), the parent company of the well-known game developer and publisher Bethesda Softworks LLC ('Bethesda'). Microsoft assured the European Commission ('EC') during its antitrust review of the ZeniMax purchase that Microsoft would not have the incentive to withhold ZeniMax titles from rival consoles. But, shortly after the EC cleared the transaction, Microsoft made public its decision to make several of the newly acquired ZeniMax titles, including Starfield, Redfall, and Elder Scrolls VI, Microsoft exclusives."

    All that the FTC actually says is that Microsoft denied an economic incentive to make titles exclusive. The FTC does not say--but it misleads people into concluding--that Microsoft didn't honor its commitments.

    As I already explained yesterday--but what is even more important now in light of the actual complaint--Microsoft has published a document (PDF) that shows the only actual promise was not to turn then-existing titles into exclusives--and that promise was kept as I had already shown in another post based on a table I found in a UK filing. Microsoft had in fact told the EC that exclusives could happen in the future, which would then be determined based on a variety of factors.

    A couple of exclusives merely prove the rule that generally cross-platform availability makes economic sense.

    If the FTC is concerned about Call of Duty, then the solution is to make sure that future Call of Duty titles will also be made available on the PlayStation. If the FTC is concerned about future titles that are not "AAA games" at this point, it has no case today. The FTC should also ask itself whether Sony's strategy centered around exclusive content actually contributed to those decisions on Bethesda titles that had not even been released at the time of that acquisition.

  • The FTC has deposed Microsoft and Activision Blizzard executives, and it had been preparing this complaint for months. While there are some redacted passages, their context does not suggest in the slightest that the FTC found any "smoking gun" that seriously contradicts the arguments made in favor of the merger.

  • The FTC can obviously focus on its own theories and allegations in its complaint and leave it to Microsoft to respond, but the complaint would definitely be more convincing if the FTC hadn't failed to recognize and address Sony's exclusive--and very acquisitive--content strategy. When a circumstance is so relevant to the case, you would normally expect the complaint to address it somehow. As I mentioned further above, it's possible that even those few Bethesda titles that were released post-acquisition as Microsoft platform exclusives would have been made available on all platforms if Sony didn't emphasize exclusives as aggressively as it does (except when it keeps a low profile for tactical reasons). I also mentioned this--and showed a tweet by famous (and now Sony-exclusive) game developer Hideo Kojima--in another recent post.

  • Where the FTC definitely would have lost me (if it hadn't already) was paragraph 121 (alleged absence of countervailing factors):

    "Respondents cannot demonstrate that the Proposed Acquisition would likely generate verifiable, cognizable, merger-specific efficiencies that would reverse the likely competitive harm from the Proposed Acquisition."

    As an app developer who has been impacted by the mobile app store tyranny, I'm extremely disappointed to see the FTC ignore (for litigation purposes) the procompetitive dimension of the deal with a view to mobile app stores. In October this blog was first to point to what Microsoft said in a filing with the UK Competition & Markets Authority about "[s]hifting consumers away from the Google Play Store and App Store on mobile devices." After I wrote about it, many dozens of media around the globe reported on it as well.

    Later, even John Gruber--the "King of Apple Bloggers"--said in a Twitter debate with Epic Games CEO Tim Sweeney that "[a] Microsoft [app store on iOS] would be great" (I showed that tweet in a post on the Brazilian decision clearing the transaction).

    A few days ago, Microsoft published a five-page write-up (PDF) by Yale professor Fiona M. Scott Morton (who disclosed in the first footnote that she is "serving as an economic expert on behalf of Microsoft in connection with their proposed acquisition of Activision Blizzard") on principles to apply to platform mergers, with a particular focus on Microsoft and Activision Blizzard King. On page 4, she explains how Microsoft's purchase of Activision Blizzard King is key in order to compete with the incumbent mobile app stores. Of course, the first step is to force Apple to allow rival app stores, and for Google to allow them to effectively compete. That's what I also explained in my reaction to the American Economic Liberties Project's misguided press release that urged the FTC to block the deal. In Europe, that will happen because of the Digital Markets Act (DMA); and in the U.S. it hopefully will because of the Open App Markets Act (OAMA). The professor explains in her paper that "in an ideal world the DMA would just smoothly lead to the entry of app stores, [but] the real world is likely to be bumpier." And that's where Microsoft can make a difference, but it needs mobile games like Candy Crush to "help break the mobile app distribution bottleneck."

    At the beginning of her paper, the professor declares herself "a contributor to the modern antitrust movement that aims to take on market power in all sectors of the economy, including digital platforms." In other words, she's not an antitrust minimalist or traditionalist. But as she explains, "big" doesn't mean "bad." The latter requires a theory of harm.

And a credible theory of harm is what the FTC lacks here. As I wrote yesterday, the FTC is suing for the sake of suing, and maybe hoping that its predictable defeat will better enable it to advocate new legislation.

But before we get there, the case is going to be adjudicated by Administrative Law Judge (ALJ) D. Michael Chappell (the FTC's only ALJ at the moment). In a couple of weeks he--and the rest of us--will see Microsoft's response to that fundamentally flawed complaint.