Saturday, January 28, 2023

Sony caught lying, possibly to EU antitrust chief Margrethe Vestager: Microsoft makes clearest public statement yet on 'parity' aspects of ten-year Call of Duty offer

Under merger laws as they stand, Microsoft's purchase of Activision Blizzard King (NASDAQ:ATVI) falls far short of what a regulatory agency could block: there is no theory of harm to competition itself. Sony is capitalizing on some antitrust enforcers' purely political concern over one of the world's largest tech companies buying one of the world's leading game makers. And in doing so, Sony appears to be lying to regulators and/or the media. That's a serious accusation, but Microsoft made it in public a few hours ago: Microsoft's communications lead Frank X. Shaw wrote on Twitter that he "hear[d] Sony is briefing people in Brussels claiming Microsoft is unwilling to offer them parity for Call of Duty if [it] acquire[s] Activision." According to the Microsoft spokesman, "[n]othing could be further from the truth":

That's really a clear-cut definition of parity that would be justiciable if ever necessary:

  • timing,

  • content,

  • features,

  • quality,

  • playability, and

  • any other aspect of the game.

I'm not totally surprised. In November I noticed an untruthful representation made by Sony in a UK filing: they said Microsoft was being investigated over its cloud software licensing practices, but no regulator has launched formal investigations (even if Sony had known something at the time that I didn't, by now it would certainly be public). There may or may not be investigations further down the road, but Sony claimed so just on the basis of someone having brought a complaint.

Mr. Shaw or his Brussels-based colleagues must have heard, directly or indirectly, from persons who were told by Sony that Call of Duty on the PlayStation might somehow be degraded--relative to CoD on the Xbox--when Microsoft is in charge. The word "people" indicates a plurality of persons, and that also makes sense because I believe Microsoft would not bring a public accusation of lying based on a single person's claim without having obtained corroborating information.

But what kind of "people" is Sony lying to?

It must be one or both of the following options:

The latter is more plausible than the former, but neither can be ruled out given that this revelation comes on the heels of that EC-Sony high-level meeting.

Journalists are more likely to confront Microsoft with what Sony said. There could have been conversations in which Microsoft told reporters that the deal was going to ensure total parity between the PlayStation and Xbox versions of Call of Duty, and then some journalists said "but Sony told us the opposite."

It isn't inconceivable, however, that what Sony said in the meeting with the EU's antitrust chief somehow leaked. More than ten years ago I had a meeting with one of Mrs. Vestager's predecessors at the Berlaymont (the EC's main building in Brussels) about another tech merger. The commissioner had one member of her cabinet and one of the two co-leads of the case team on her side of the table; we were also three. After the meeting, we talked to outside counsel for two other parties opposing the deal. Nothing leaked, but it was a small meeting and the fact that it took place wasn't reported in the media.

What weighs against the hypothesis of Sony having lied to Mrs. Vestager is that the Commission's Directorate General for Competition (DG COMP) presumably has a copy of the ten-year license offer in its case file. Anything Mr. Ryan said could be verified by just reading the proposed contract. However, Mrs. Vestager herself will probably not read an entire license agreement: she's in charge of competition enforcement and digital industry policy, and can't read each and every document from a merger case. So it's possible that Sony lied to her, hoping that even if the case team told her that the deal was clear on parity, some sliver of doubt would remain.

There can be no doubt that the ten-year license agreement came up during the Wednesday meeting. At this stage, where the European Commission was reported by MLex and others to be preparing a Statement of Objections (SO), Mr. Ryan was not going to give Mrs. Vestager a tutorial on what a video game console is. This is the stage where remedies matter (even if there is actually nothing to be remedied in the first place).

Here's the comment with which I shared the news of that meeting:

It's interesting that the original prediction of the SO being handed down this week did not pan out. I have no doubt that when MLex reported it, it was indeed the Commission's internal schedule, though anything can always change before a formal decision is adopted.

Wednesday would have been the day for the vote: that is the day the College of Commissioners meets every week except during the European Parliament's Strasbourg plenary weeks (which this week wasn't). Instead of a vote on the SO, what happened was Mrs. Vestager's meeting with Sony. It might have been Sony's last chance to convince her that the commitments offered by Microsoft do not satisfactorily address the issue.

Another thing happened on Wednesday. Politico's Samuel Stolton reported, based on information from four unnamed sources, that DG COMP is "planning to open an antitrust probe into Microsoft over its video and messaging service Teams."

There is obviously no factual link between the merger and that unilateral-conduct topic. It's a coincidence that both topics are on the agenda at around the same time. But it could be that the Commission will simply make a rational and pragmatic decision about the Activision Blizzard deal while deciding to investigate Salesforce subsidiary Slack's Office-Teams tying allegations. Again, it would be a coincidence, but it would show that the Commission is not giving Microsoft any preferential treatment, just that the Activision Blizzard deal simply doesn't raise issues, especially not when a hard and fast ten-year license agreement can serve as a de facto structural remedy.

On Thursday, Bloomberg reported that, according to a former U.S. antitrust official, the FTC rushed to its in-house court in December with its Activision Blizzard complaint in order to discourage the EC from striking an agreement with Microsoft. I don't know whether this is true (the Capitol Forum disagrees), but it could be. There definitely are interdependencies between regulatory processes, as evidenced by what Microsoft's counsel said at the first hearing in the FTC case and indicated by the postponement announced by the Commerce Commission of New Zealand. But Washington doesn't remote-control Brussels.

Bloomberg reporter Nick Turner jokingly called this an "America first" policy: first in a chronological sense (first to file), but obviously not in a policy sense. Prior to Lina Khan becoming FTC chair, it would have been unthinkable for a U.S. government agency to pursue the objective of derailing a merger U.S.-U.S. merger that raises no legal issues, and to try to use foreign competition authorities for that purpose.

I doubt that Mrs. Vestager, her aides and her services (i.e., DG COMP) were amused when they heard of that Bloomberg article. The FTC-DG COMP phone call that the article references undoubtedly took place; even the Capitol Forum does not dispute that fact. But the notion of an FTC in-house lawsuit serving to influence the Commission's independent decision on whether certain merger commitments are more than good enough to facilitate clearance is a bit of an insult. I'm sure the Commission won't be influenced either way: neither will it engage in a race to the bottom in terms of who is prepared to ignore the applicable legal framework to a greater extent than their peers, nor do I think the Commission will grant clearance just to prove its independence after the Bloomberg article.

In my observation, some of the reports on the EC-Sony meeting implied that it was a win for Sony to get that audience. But the opposite is possible: it could be that the meeting was held to give Sony one last chance to show why a justiciable PlayStation-Xbox parity commitment for what is an eternity in this industry should not be accepted. Sony may have failed to make that showing, and then there might not even be an SO. We will find out soon.

In other Microsoft-ActivisionBlizzard news, Sony filed a new agreed (with Microsoft) motion for an extension of time (PDF) to bring a potential motion to quash or limit Microsoft's subpoena. Further to the first extension, the deadline would have been on Friday (January 27). It has now been pushed back further to Wednesday (February 1). All that we can conclude from this is that the parties are still talking, but that they apparently find it hard to reach an agreement. Sony may have more problems with the truth than most people would have thought. They must have something to hide.

Microsoft's Twitter thread about the nature of the ten-year offer and Sony lying about it creates an interesting situation. Sony either has to contradict--which could lead to further public discussion, possibly even the publication of the entire agreement (with or without some of the commercially relevant numbers redacted)--or, by remaining silent, Sony fails to dispute that it lied. What makes all of this even more serious is that potentially Mr. Ryan himself was lyin'. But who--other than a liar--would not refute that kind of allegation?