Wednesday, January 18, 2023

From the Unintended Consequences Dept.: Sony may live to regret the market definition and theory of harm in the Microsoft-ActivisionBlizzard merger context

As the saying goes, those who live in glass houses shouldn't throw stones. Sony is the only vocal complainer over Microsoft's purchase of Activision Blizzard King (NASDAQ:ATVI). Google was previously rumored to have met with regulators, but it's obvious that it just wants to be able to do "Project Hug"-style anticompetitive deals with an independent ABK that Microsoft would be unreceptive to. Nvidia is reportedly not against the deal per se. It appears to me they just want to opportunistically ensure that in the event others get a 10-year Call of Duty license (as Nintendo already has), they'll get one as well, though they don't have one now as far as I can see.

Earlier today I reported on some class-action lawyers' insistence on an immediate start of discovery in connection with their private antitrust lawsuit against the deal. Their complaint largely just echoes the FTC's in-house administrative complaint. Both the federal litigation in the United States District Court for the Northern District of California and the adjudicative proceeding before the FTC's Chief (and only) Administrative Law Judge involve pretrial discovery. That goes both ways. It also means that Microsoft's counsel will have the right to conduct discovery of third parties, and my guess is that the top three priorities for third-party interrogatories and depositions will be Sony, Sony, and Sony.

The FTC's market definition, which I immediately described as "gerrymandered" (as did Activision Blizzard's counsel later on), comes down to PlayStation + Xbox, a two-horse race in which Sony clearly holds a dominant market share. I don't think Nintendo can be reasonably excluded from the console market, but what if that ended up being the result?

It would up the ante for Sony whenever it has to defend itself against allegations of having abused its market power.

It's not that Sony never has to defend against antitrust complaints. For instance, there's the PlayStation You Owe Us class action in the UK. That, too, is a key jurisdiction in connection with Microsoft-ActivisionBlizzard. If Sony succeeded in avoiding a single-brand market definition (PlayStation video game distribution being an aftermarket of the console market), the second-worst scenario would be a two-player market in which Sony is twice as big as its only competitor.

Let's assume, for the sake of the argument, that those merger reviews don't result in consent decrees despite Microsoft's publicly-declared and well-documented willingness to work it out--and also ignoring that there is no credible theory of harm under the law as it stands, and actually broadbased support for the transaction, such as from an organization representing thousands of small and medium-sized game development studios.

In that scenario, there will be discovery and there will be public trials. What will be on trial is effectively the business model that no one other than Sony has perfected: acquiring exclusive content (first-party titles, and contracts with third parties securing exclusive access to entire titles or to key features and "goodies").

While Sony is a third party, it will feel like its own business model and strategy are on trial.

If you think about it from a "careful what you wish for" angle, the question is whether Sony will end up cutting its nose to spite its face. Regulatory agencies are watching. Class-action lawyers like the ones who are suing Microsoft in the Northern District of California (and, with the greatest respect, there are some bigger and more powerful ones) will get a treasure trove of information enabling them subsequently to bring some PlayStation claims.

Merger opponents often have only one realistic objective: to cause as much delay as possible. It's been one year to the day since Microsoft and Activision Blizzard King announced the merger agreement, and there is no reason to assume the deal will close this month or next. Maybe it would be the smartest choice for Sony to celebrate the impact its regulatory complaints have made, and to work out a constructive solution before its own practices will be debated in court. Seriously, Sony should actually hope that the California class-action lawyers who will insist on immediate discovery at tomorrow's hearing will be told to wait.

The best outcome for Sony is not to see it through. It's to work things out before those class-action lawyers (and others) have millions of documents about Sony's exclusive content strategy in front of them and get to examine Sony's executives. And even with those competition authorities, Sony must be careful. Today, their focus is on the Activision Blizzard purchase. Tomorrow, their colleagues working on abuse-of-market-power cases may go after the PlayStation maker, which already finds itself on the receiving end of antitrust enforcement from time to time.