Friday, February 17, 2023

Rumor of Sony having visited Microsoft to negotiate Call of Duty license, potentially paving way for clearance of Activision Blizzard purchase

[Update] I have been provided with hard evidence of a visit by Sony executives to Seattle on February 6. There is some debate now on Twitter over the purpose of the trip, with some pointing to the fact that Sony owns multiple game development studios in the area. [/Update]

With only a few days to go until the European Commission's Microsoft-ActivisionBlizzard merger hearing, Joost van Dreunen--an academic and entrepreneur specializing in video games says a source told him that "Sony’s corporate jet made a visit to Seattle last week for the first time in 18 months," presumably to hammer out a license agreement that would provide the PlayStation maker with access to Call of Duty for a long time after the consummation of the transaction.

A Twitter follower asked me for comment on that rumor, and this is how I responded:

"It's speculation. What might be the case is that some major regulators have indicated to Sony that they will clear the transaction if they find Sony isn't being constructive about working out a Call of Duty license deal. In that case, Sony might have decided to sit down and talk."

The claim is neither corroborated nor necessarily contradicted by a recent Microsoft filing with the in-house court of the U.S. Federal Trade Commission (FTC) that was made public yesterday (PDF). In that filing, Microsoft's lawyers say that "since announcing the deal, Microsoft has repeatedly offered to enter into an agreement to license Call of Duty to [Sony Interactive Entertainment]—first for five years and then for ten, an unheard-of duration in the industry." But "[Sony] has refused."

I tweeted about that:

Sony once complained that Microsoft allegedly offered only a three-year deal. But we can rely on Microsoft's filing with the FTC, and we can reconcile the two numbers:

If Sony had another two years left under its existing Call of Duty license from Activision Blizzard, and Microsoft offered five years, then it would come down to an additional three years. However, from a commercial (and merger law) perspective, what matters is how much time a third party gets to adjust to the potential effects of a transaction.

Under the current deal with Activision Blizzard, there are some PlayStation-exclusive goodies. I would assume that if Sony wanted a new longer-term deal with Microsoft, that deal would replace the existing one with one that ensures total parity between the Call of Duty versions for Sony's market-leading PlayStation and Microsoft's Xbox. In other words, the present disparity in the PlayStation's favor would go away (which would be procompetitive), but Sony would get a longer-term contract.

Mr. van Dreunen's article that claims Sony and Microsoft may be close to a deal also speculates about a remedies package that would have two pillars: a long-term Call of Duty license as well as the divestiture of Blizzard Entertainment. But he is quick to note that this is inconsistent with the positions taken by the UK Competition & Markets Authority (CMA), which--apart from the fact that it does not categorically rule out a license-based solution--did not focus on a divestiture of Blizzard. The narrowest divestiture that the CMA has in mind would relate to Call of Duty; the next option would be all of Activision (which makes CoD, but also other games); and the furthest-reaching one would involve Activision and Blizzard, but not King (Candy Crush).

Let me put it this way: I find Mr. van Dreunen's claim about Sony having visited Microsoft far more interesting than his musings about that remedies package. As an app developer, I believe Blizzard's franchises would contribute very significantly to the appeal of the universal app store Microsoft plans to create.

Let me share a few observations on the FTC discovery process:

  • The Microsoft filing I mentioned further above (PDF) responds to Sony's motion to quash or limit Microsoft's subpoena. Sony accused Microsoft of "harassment", but Microsoft explains in its opposition brief why it believes its discovery requests are reasonable. One item that appears undoubtedly justified to me is that Microsoft wants to see documents from the person(s) who managed Sony's partnership with Activision Blizzard prior to the one currently in charge (Christian Svensson, who "has only been in this position since 2021"). I don't think Sony can reasonably argue that communications regarding the Activision Blizzard partnership in 2020 and before are irrelevant. Some narrowing of Microsoft's subpoena may happen. For example, Sony objects to Microsoft's request for access to performance reviews for the relevant Sony executives. While Microsoft is right that courts have decided that type of request in different ways, there is no guarantee that the FTC's Chief (and presently only) Administrative Law Judge (ALJ) D. Michael Chappell will require the production of such documents here.

    Microsoft's opposition to Sony's motion to quash or limit calls the FTC's "High-Performance Console" market definition "gerrymandered"--as did I in my commentary the FTC's decision to bring an in-house lawsuit and Activision Blizzard in its response to the FTC's complaint. It really is the term that comes to mind. By the way, the CMA does not exclude Nintendo from the relevant console market, but takes into account in its analysis of competitive dynamics that there are some differences between the Switch on the one hand and the PlayStation and Xbox on the other hand. The CMA's approach is intellectually honest so long as the net effect isn't the same as defining the market too narrowly.

  • Another filing that came to light yesterday is a Sony motion for an extension of time to bring a potential motion to quash or limit the FTC's subpoena (PDF). Sony previously agreed with the FTC's counsel on a two-week extension, and now agreed on another one of the same length (until March 1).

    What's a good sign is that Sony says in the motion it "has begun productions [of some but not all of the requested documents] to Complaint Counsel [i.e., the FTC] and to Respondent [i.e., Microsoft]."

    What I find a bit odd is that the FTC is being so generous with a second extension, given that the first one was already quite long. I wrote the following on Twitter:

What made some news this week is FTC commissioner Christine Wilson's announcement of her resignation, and the rather partisan reactions, with some Republicans blaming FTC chair Lina Khan and some Democrats (including what is indicated between the lines in the Democratic commissioners' reaction) accusing her of having been a pain in the neck. Mrs. Wilson keynoted a Concurrences webinar at which I spoke last year, and I agree with her dissent from the FTC's Microsoft-ActivisionBlizzard complaint. I regret the partisanship on both sides that I have seen this week. I'd like the FTC to vigorously enforce the antitrust laws against abusive Big Tech companies to a greater extent than Mrs. Wilson would presumably support, and in general that also includes merger reviews (where some mistakes were clearly made in the past, not only by the FTC but also other regulators). It's just that the FTC is currently ruining its reputation, such as with the absurd positions it's taking in the Microsoft-ActivisionBlizzard context. It also doesn't make the FTC look good that Meta has meanwhile closed its acquisition of VR fitness company Within. As I have previously said, the issues in that case, which the FTC lost (in the sense that its motion for a preliminary injunction was denied), are distinct from the ones in Microsoft-ActivisionBlizzard, but the FTC is losing credibility at a worrying pace.

In other Microsoft-ActivisionBlizzard news, the UK CMA published its "Summary of third party calls" (PDF). They spoke with six (unnamed) third parties, three of which raised some concerns. It's easy to figure, just based on what has been reported in the media before, that the three critics are Sony, Google, and to a lesser degree, Nvidia (which is just interested in some kind of license, but not opposing the deal as a whole). I tweeted about that, too:

There is nothing revelatory or otherwise surprising in the CMA's summary of those calls.

Finally, let me update my timeline chart once again. I've checked on the docket of that so-called gamers' (actually lawyers') lawsuit in the Northern District of California, and the briefing process concerning the protective order has been terminated after a stipulation by the parties; also, the deadlines for the briefing on Microsoft's motion to dismiss have been adjusted based on an agreement between the parties. The class-action lawyers have to file their opposition to the motion to dismiss today (Friday), and Microsoft will reply a week later. I've also added the deadline for Microsoft's opposition to the motion for a preliminary injunction, and done some general cleanup. Here's the updated chart (click on the image to enlarge):

Here's a table of the key acronyms:

N.D. Cal.United States District Court for the Northern District of California
PIpreliminary injunction
FTC(United States) Federal Trade Commission
CMA(UK) Competition & Markets Authority
DG COMP(European Commission's) Directorate General for Competition
NZ ComComCommerce Commission of New Zealand

Note that all of this is in flux and some of those events may not (have to) happen. For instance, if the motion to dismiss is granted in California, even if only in part, this may have implications for the preliminary injunction (possibly even obviating any PI hearing).