Wednesday, March 8, 2023

UK Competition & Markets Authority publishes Microsoft filing that makes case for 'self-executing' access remedies to preserve relevant customer benefits while Sony's naysaying borders on libel

This is my rapid response to two documents published today by the Competition & Markets Authority (CMA) of the United Kingdom: Microsoft's and Sony's responses to the notice of possible remedies relating to Microsoft's acquisition of Activision Blizzard King (ABK).

Those documents were originally submitted on February 22. Today the CMA released the public redacted versions.

When I commented on the CMA's remedies notice, I viewed it as more open-minded than many other commentators did. Since then, the CMA's CEO, Sarah Cardell, has given speeches that I interpreted as the CMA being principled and pragmatic at the same time. Mrs. Cardell clarified that the CMA "is not anti-mergers" (last week's Keystone conference in Brussels) and that behavioral remedies are considered, provided that any concerns are properly addressed.

Meanwhile it has also become known that the European Commission (EC) is apparently inclined to clear the transaction on the basis of access remedies, and won't insist on any divestiture.

I'll start with a couple of quotes from Sony's submission to the CMA (which I instantly shared on Twitter):

  • In para. 28, Sony acknowledges that "Microsoft’s conduct in relation to the ZeniMax acquisition" was "not a violation of a behavioural commitment." The only alleged violations of such commitments that Sony alleges in its filing are not merger-related, and go back a long time when Microsoft was like a different company.

  • Sony goes off the deep end where it outlines a scenario in which Microsoft would intentionally produce "bugs and errors":

    "For example, Microsoft might release a PlayStation version of Call of Duty where bugs and errors emerge only on the game’s final level or after later updates."

    Let that sink in. It's a theory according to which some decision makers at Microsoft, all the way down some command chain, would have to instruct programmers to purposely create (or at least not to fix) bugs and errors. Activision's testers would obviously detect and report those errors, but people would be ordered not to do anything about them because of an anticompetitive agenda. The notion that the world's largest software maker would do this, regardless of the impact on its credibility across all business segments should someone blow the whistle or find out through U.S. pretrial discovery, is an insult not only to Microsoft--as it borders on libel--but also to human intelligence.

So, what does Microsoft propose and what are its arguments?

To some extent, Microsoft's submission on remedies pokes holes into the CMA's theories of harm. That is not the focus of the submission, but it does matter in the remedies context whether a theory of harm is rock-solid or highly debatable. In this context, it's worth taking note of what Axios reported this week: "A YouGov survey commissioned by Microsoft in January found that just 3% of all PlayStation users would switch to buying an Xbox if Microsoft pulled Call of Duty from PlayStation."

The question of whether access or divestiture remedies are warranted in this specific case has three key determinants:

  • the loss of relevant customer benefits (RCBs) that would result from a divestiture (or prohibition),

  • the efficacy of the proposed access remedies (and the extent to which any of the typical concerns over that type of remedy are eliminated in the current context), and

  • the disproportionality of any of the potential divestiture remedies outlined by the CMA.

Other factors that inform the proportionality analysis here are international comity (meaning respect for foreign jurisdictions) as the merging parties are based outside the UK and generate the vast majority of their revenues elsewhere, and the fact that Sony is the market leader. But for the most part it's about finding the sweet spot in light of the three key determinants I mentioned:

Relevant customer benefits: As an app developer who has filed formal complaints over Apple's and Google's mobile app distribution terms, I've been very much interested for more than a year in Microsoft's cross-platform mobile app store plans. The UK is contemplating new legislation that would empower the CMA's Digital Markets Unit (DMU) to tackle the mobile duopoly problem. I'm happy to see that Microsoft's submission discusses plans for an Xbox Mobile Platform. The document explains that Microsoft needs not only King's games (like Candy Crush) but also very much Activision Blizzard's mobile games (CoD: Mobile, Warzone Mobile, Diablo Immortal, Hearthstone, and Warcraft Arclight Rumble) to make it happen.

Microsoft's filing discusses not only those mobile plans but also the fact that the deal has the potential to bring Call of Duty to 150 million more gamers. The submission explains why CoD will benefit Nintendo and its customers, and that currently CoD is not available on any cloud gaming service, but even without the access remedy Microsoft proposes (and Sony rejects because it just doesn't want to be constructive as long as it believes it can delay and potentially derail the deal), it would already be ensured to become available on two such services (Microsoft's own service and Nvidia's GeForce Now as a result of a recently signed agreement).

Efficacy of access remedies: Microsoft notes that parity commitments (regardless of Sony's naysaying) are common contractual provisions in the console industry. What is particularly key here from a practical (enforcement) point of view is that Microsoft's proposal is designed to be "self-executing" by virtue of Microsoft paying for a monitoring trustee, an objective third party assessor, and a fast-track dispute resolution mechanism (arbitration that will lead to swift results).

Disproportionality of divestiture (or prohibition): Microsoft says that even if the deal as a whole was not prohibited, but a divestment of Call of Duty or Activision was required, it would "still effectively involve the largest divestment ever required by the CMA." And it would, which takes us full circle back to the relevant benefits, "have severe adverse effects on the development of competition because it would prevent Microsoft from achieving its key strategic objective, namely building a mobile gaming business with sufficient scale in order to challenge Google and Apple."

There's a lot more to say about the filings that became available today. For now I just wanted to provide a high-level overview. It appears that the CMA's criteria for access remedies can be met, and there isn't a case for prohibition or divestiture, which would be preferred by Sony but not benefit consumers.