Tuesday, February 21, 2023

After EU merger hearing, Microsoft announces 10-year deal with Nvidia for GeForce NOW that will also cover Activision's Call of Duty: it's getting lonely around Sony

As expected, Microsoft and Sony met at the European Commission's merger hearing today. Sony even got twice as much time as any other third party to make its case against Microsoft's acquisition of Activision Blizzard King. Shortly before the hearing, I posted a thread of 18 tweets.

The most significant news of the day was neither the hearing (what really matters is what will come out of subsequent remedy discussions) nor Microsoft's announcement (right before the hearing) of the signing of a 10-year Call of Duty license agreement with Nintendo, given that Microsoft and Nintendo had already announced a principal understanding in early December. The most important announcement was made at Microsoft's post-hearing press conference, simultaneously with which Nvidia put out a press release:

Microsoft and NVIDIA Announce Expansive New Gaming Deal

Partnership will bring blockbuster lineup of Xbox games, including 'Minecraft' and Activision titles like 'Call of Duty,' to NVIDIA GeForce NOW cloud gaming service

On Twitter a number of people were wondering how such agreements can be signed before Microsoft formally owns Activision Blizzard. The legally savvy part of this blog's readership obviously knows the answer: condition precedent (a condition that must be met for a contractual commitment to enter into force at all).

This means Sony is left with only one co-complainer: Google. Short of the fruity Evil Empire, that's about the worst ally to have in a context like this--especially in light of Google's $360M "Project Hug" deal with Activision Blizzard King.

Nvidia was not a "complainer-complainer" before: the message was that they were not against the deal per se, but wanted to ensure access to content, which I described as being "opportunistic". That strategy worked out: with the agreement announced today, Nvidia is happy, Microsoft builds momentum for its licensing-based approach, Sony feels lonely, and competition regulators face the choice between

  • clearing a transaction that has positive effects for Nintendo's and Nvidia's numerous customers


  • trying to block the deal because the undisputed market leader in video game consoles might see its market share "plummet" from, say, 66% to 64%--which is doubtful enough, and at any rate could be avoided by taking a license deal.

What makes the second choice even less appealing is that regulators like the EC and the UK CMA need to turn merger law on its head to write a blocking decision. It's easy to forget this simple fact: if Sony were to lose a little bit of market share, that would--under the law--actually be an argument for, not against the deal.

I understand that unnamed "sources" who may be more or less Sony-aligned tell competition-specialized reporters that licensing wouldn't work reliably. It would be too hard to contractualize the total parity commitment offered by Microsoft and to enforce it later. The problem for Sony and any regulators it seeks to co-opt is this: there would have to be what is called a market test. Market participants would be asked to comment on the effectiveness of a proposed remedy. Sony's answer is predictable. Short of Microsoft offering Sony a majority of the voting rights in Activision Blizzard King, Sony will be against anything. But with respect to Nintendo and Nvidia, there's no more need for a market test: there already is empirical evidence that such sophisticated organizations see their concerns (if they ever had any) satisfactorily addressed by clear-cut, long-term commercial agreements.

Then there's Valve, which publicly stated that Microsoft offered such a deal but they said they didn't take it because they knew they could rely on Microsoft anyway.

Who's more credible? Sony, which simply seeks to exploit its walled garden and to harm a challenger, or the combination of Nintendo, Nvidia, and Valve?

Sony has countless license deals with game makers in place, and without knowing their content we can be sure that there are all sorts of complicated provisions in them, compared to which a parity commitment is easily enforceable.

Here's the most important sentence from Nvidia's press release:

"NVIDIA therefore is offering its full support for regulatory approval of the acquisition."

In other Microsoft-ActivisionBlizzard news, someone must have subpoenaed Valve as counsel for that company entered an appearance in the FTC's in-house litigation. Microsoft and Google are negotiating the scope of the former's discovery request and have agreed on another extension of the filing deadline for a potential motion to quash (now Friday, February 24).