Tuesday, March 21, 2023

Focus of Activision Blizzard merger debate shifts from concerns to constructive solutions and procompetitive effects: Epic Games welcomes Microsoft's mobile app store plans

If not for my new editorial policy that respects the patent-focused part of my readership, I'd have had a handful of reasons to blog about the Microsoft-ActivisionBlizzard merger review processes since my post on Wednesday, Activision Blizzard acquisition won't close before May 22, Microsoft is prepared to stipulate in San Francisco court. I have, however, commented in real time via Twitter, where many of my recent tweets have received hundreds (often between 500 and 900) likes. This is now a roundup of recent developments.

Momentum for clearance is growing. There are unmistakable signs for that. The tone of the conversation has changed. This is now the solution-finding stage. It's the time for deal makers rather than detractors and obstructors. It is not a solution to urge competition regulators to try to block a deal when they could never defend such decisions in the courts of law--and when there are relevant customer benefits on the table. One of those "RCBs" is directly related to the primary competition concern that the European Commission and the Competition & Markets Authority are trying to address on the basis of new legislation: opening up mobile app markets.

The Financial Times reported yesterday on Microsoft's plans to create--enabled by the acquisition of Activision Blizzard King as well as legislation that demonopolizes the mobile app ecosystems--a mobile app store. That is not entirely new. Microsoft started talking about it shortly after the merger agreement was announced, and specifically described plans to "shift consumers away from the Google Play Store and [Apple] App Store" in a filing with the CMA. This blog was first to highlight that passage in October (followed by The Verge and others).

In the fall Epic Games' founder and CEO Tim Sweeney said he'd be happy to compete with a Microsoft Store on mobile platforms, and he's spoken out even more clearly now:

He added:

"Microsoft’s core market is way over a billion active users and they want many billions. I love this ambition."

As my readers know, I agree with Epic on a number of app store questions and I'm grateful for their efforts on all developers' behalf. We disagree only rarely, and just at the periphery of those issues.

I believe Epic would speak out even more strongly and clearly in favor of Microsoft's acquisition of ABK if Sony wasn't a shareholder (5% or so) and the PlayStation a key distribution channel. When it comes to opening up mobile app markets, Epic has actually much more in common with Microsoft than with that walled-garden dinosaur.

The FT article confirms what MLex and Reuters have also reported: the commitments (potential merger remedies) Microsoft offered to the EU last week are all about cloud gaming and don't mention any foreclosure concerns related to Sony's PlayStation or Google's Chrome OS, which shows that the European Commission has narrowed its case to gaming services. On Twitter I commented as follows:

Last week, Microsoft announced two 10-year agreements with cloud gaming companies. After the deal with Boosteroid, which I blogged about, Microsoft announced another agreement with Ubitus, a cloud gaming provider that powers other services:

Between Nvidia, Boosteroid, and Ubitus, there are now already three such deals in place. Arguably four, given that Valve (Steam) said they could trust Microsoft and saw no need to contractualize anything.

Those positive dynamics have made Sony lose control over the narrative. In the beginning, the name of the game for them was negativity. It was all about fear, uncertainty, and doubt. That's what got in-depth investigations started in some jurisdictions, though I still believe that the ones who cleared the deal on the fast track (especially Brazil and Chile) got things right by traditional merger review standards. By now, Sony is an entrenched, increasingly isolated, and almost sidelined complainant. It missed more than one opportunity to play a more constructive role. I don't understand that degree of inflexibility.

In order to have enough time for a proper market test of Microsoft's proposed commitments, the European Commission has extended its deadline to May 22--the date that Microsoft previously mentioned as the earliest possible closing date in a filing with the United States District Court for the Northern District of California.

For the class-action lawyers in San Francisco (who've lost a long list of merger cases), it's now back to the drawing board. Judge Jacqueline Scott Corley granted Microsoft's motion to dismiss because "[t]he Complaint does not plausibly allege the merger creates a reasonable probability of anticompetitive effects in any relevant market." Judge Corley rightly asked: "Why would Microsoft make Call of Duty exclusive to its platforms thus resulting in fewer games sold? What is it about the console market or PC games market and Microsoft’s position in those markets that makes it plausible there is a reasonable probability Microsoft would take such steps." Here's the order (my commentary continues below the document, where I'll also provide an updated timeline chart):

DeMartini et al. v. Microsoft Corp. (case no. 22-cv-8991-JSC, N.D. Cal.): Order Granting Motion to Dismiss

The class-action lawyers now have 20 days to file an amended complaint. I guess they'll try, and Judge Corley appears to expect the same, which is why she still has a case management conference on her calendar for April 12. But will their amended complaint fare better? Will they ever meet the "Twiqbal" plausibility requirement? I doubt it.

Given that the private lawsuit in California was largely just copied from the FTC's complaint, what does that decision mean for the FTC? I want to be fair. The FTC obviously knows a lot more about the case than those class-action lawyers do, and chances are that the FTC has better lawyers. While I disagree with the FTC on this merger topic, I know that sooner or later I'll find myself in a U.S. courtroom again watching them defend competition. It's fair to say that the dismissal of the "FTC copycat" lawsuit in San Francisco also indicates that the FTC won't easily persuade a federal judge of its theories, but it's equally correct to say that the FTC would probably have done a better job, so the outcome could have differed gradually.

What should give the FTC pause is the combination of Judge Corley's order and the more solution-oriented position taken by the EU Commission. And there's this backdrop of growing criticism of Lina Khan's leadership of the FTC.

All things considered, now might be a good time for the FTC to look at Microsoft's remedy proposals to the EC and think hard about whether that could be a starting point for discussions. At the first FTC v. Microsoft & Activision Blizzard hearing in early January, Microsoft's counsel said that they hoped to be able to work things out with the FTC after agreeing on solutions in the EU and/or UK. That is now the case, at least with a view to the EU, but arguably also in the UK, where Microsoft submitted a "self-executing" access remedies proposal.

Last week, the UK Competition & Markets Authority (CMA) published Microsoft's response to its provisional findings. Two parts of it were particularly noteworthy. A chart shows the extent to which most console game publishers are dependent on the PlayStation:

But Microsoft also detected a clear error in the CMA's PlayStation-related foreclosure theory:

The numbers presented by the CMA itself show that foreclosure would be vastly unprofitable as soon as an error (comparing a one-year term to a five-year term) is corrected. I wouldn't attribute this to malice, but the CMA can do better than that for sure.

Just like the EC stressed that it might reach different conclusions from regulators in other jurisdictions (probably alluding to the FTC more than to anyone else), the CMA has the same right. But if the numbers aren't there, why should the CMA not find a way to make it work? It would definitely be desirable to have a reasonable degree of consistency between the remedies agreed upon in the UK, U.S., and EU.

Sony is asking for too much if it wants the CMA to swim against the tide and take an unconstructive outlier position that it won't be able to defend in court. The EU won't block the deal. In the U.S., the FTC may or may not become constructive, but sooner or later it will lose in federal court.

Finally, here's my updated timeline chart, which reflects the postponement of the EU decision and the dismissal (without prejudice) of the private lawsuit in California (click on the image to enlarge):