How the Microsoft-Activision merger could change the Xbox business

The future of Xbox and antitrust

Microsoft’s planned acquisition of Activision Blizzard is the largest-ever deal in the video game market by a mile. The eye-popping price, combined with the scale and scope of Microsoft’s ambitions for its gaming business, has invited a rare level of scrutiny and attention for an industry that’s largely flown under the regulatory radar.

The FTC is now in charge of reviewing the deal. With a newly empowered chair in antitrust expert and Big Tech critic Lina Khan and a Democratic majority, one big question stands out: Could the U.S. government block the deal, and on what grounds?

The chances of the FTC blocking the merger are low. Antitrust experts who I spoke with believe the deal is more than likely to succeed, but not without some strings attached.

• “It is very unlikely” the agency will block the deal outright, antitrust expert Aurelien Portuese, who leads a competition policy group at the Information Technology and Innovation Foundation think tank, told me.
• The combined businesses of Xbox and Activision Blizzard would only give Microsoft the No. 3 position in the gaming industry by global revenue, after Sony and market leader Tencent. “A blocked merger would be the best gift you can give to Sony or Tencent,” Portuese added.
• “The combination of Microsoft’s experience in software with Activision's creativity would seem to be a good fit in order to challenge bigger players,” Portuese said. “I think it’s going to be very hard for the FTC to argue that there’s a fundamental dominant position that will not be challenged in the near future.”

The compromises could change the Xbox business. Microsoft has already pledged to abide by a set of app store principles it released in February, in a good faith effort designed to appease regulators. But the FTC review could ask for a wide range of remedies, starting with platform exclusivity.

• “The one potential path to go forward is to go forward with some commitments like, ‘We won’t make XYZ content exclusive.’ They’ve said that publicly, but it’s different to get that in writing,” said Sumit Sharma, a Consumer Reports senior researcher who specializes in antitrust.
• For instance, Microsoft has already pledged to honor Activision’s existing contractual agreements with Sony’s PlayStation platform. But statements from the company give it wiggle room to change the arrangement as it sees fit in the future. The FTC, however, could demand the company keep Call of Duty multiplatform in perpetuity.
• “There’s always the ability for the FTC to potentially prosecute Microsoft for violation of the consent decree or even to unwind the merger,” Portuese said. He added that the FTC could do regular checks to ensure the company is abiding by the terms.

The labor question looms large. Although not strictly an antitrust concern, Activision Blizzard’s ongoing labor crisis could become entangled with the FTC review, and it’s not clear right now to what extent Khan and her Democratic majority will take workers’ rights issues into account.

• The deal was instigated in part because of damning media reports about Activision Blizzard CEO Bobby Kotick’s knowledge of the company’s harassment and discrimination problem.
• A group of four U.S. senators called the deal a “cynical and ‘opportunistic’ attempt to capitalize off the systemic issues coming to light at Activision Blizzard,” in a letter urging the FTC to investigate.
• Workers themselves are speaking out, too. “We believe that the impacts on workers need to be taken into account, and if a deal is bad for workers, it should either be blocked or made to include enforceable commitments to respect workers' rights,” said Activision Blizzard design researcher Brice Arnold during an FTC and DOJ listening forum earlier this month.
• The FTC is said to be taking into account “the combined companies’ access to consumer data, the game developer labour market and the deal’s impact on those workers who have accused Activision of discrimination and a hostile workplace,” The Information reported in April.
• “How should we consider data in these big mergers?” Sharma asked. ”If there’s a big merger where there’s lots of data to be pooled, how should we consider whether this would give them market power, and can that be exploited? These are definitely questions that are being asked.”

Although experts think the deal will make it through, these questions and many more could define the future shape and power of the Xbox platform. For now, Microsoft is preparing for a lengthy back-and-forth that could last well into next year, with a deal-closing target deadline of June 2023.

“It’s moving fast, at least fast enough for an acquisition of this size,” Microsoft President Brad Smith said of the deal’s timeline in an interview last week with Belgian business publication L’Echo. “One of our attorneys summed it up nicely by saying, ‘We’re coming to the end of the beginning, and now we’re entering the beginning of the middle,’” Smith said, adding that the company will “respect the process.”

“I think it’s going to be a detailed review, it will take a fair amount of time,” Sharma said. “Microsoft has learned from its past and has become much better at dealing with regulators and competition authorities both in Europe and the U.S.”

— Nick Statt

A version of this story appeared on Protocol.com.

Making moves

“The announcement got an overwhelming and positive response. We see a great potential, not only in sequels, but also remakes, remasters, spinoffs as well as transmedia projects across the Group.” — Embracer Group, the Swedish holding company that acquired Square Enix’s portfolio of Western games franchises and studios, said in its fiscal year report that it has high hopes for the future of Tomb Raider, Deus Ex and others.

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In other news

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Take-Two and Zynga deal closes. The Grand Theft Auto publisher has completed its acquisition of mobile juggernaut Zynga, giving the company a sizable portfolio of mobile, casual and free-to-play games.

Activision Blizzard broke the law with anti-union activity. The National Labor Relations Board said the game publisher illegally threatened its employees and imposed a social media policy that violated their rights. The agency will issue a complaint unless the company settles.

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Electronic Arts eyes an exit. The game publisher just split with FIFA and last week laid off about 100 employees at its Austin office. Now, according to news site Puck, the company has been engaging in talks with potential buyers, most recently with Comcast CEO Brian Roberts.

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Raven Software’s historic union vote

It’s been more than four months since quality assurance testers at Activision-owned Raven Software said they had formed a union following a five-week walkout to protest layoffs. On Monday, a group of more than 20 employees cast ballots in a NLRB-sanctioned election to determine whether Raven management would be forced to recognize the group. The union won, 19-3, making the Game Workers Alliance the first of its kind at a major American game studio.

Since January, Activision Blizzard has waged a lengthy anti-union campaign at Raven. Management split up the team and distributed members across various divisions at Raven, a tactic GWA members felt was designed to stifle organizing efforts. Activision Blizzard said in April it would convert thousands of contract workers to full time and hand out pay raises, but it excluded Raven’s union members from the bump.

Later that same month, the company tried to include all of Raven’s roughly 350 employees on the union vote; the NLRB struck the measure down, as well as future appeals trying to stall the vote. “Activision did everything it could, including breaking the law, to try to prevent the Raven QA workers from forming their union. It didn’t work, and we are thrilled to welcome them as CWA members,” said Sara Steffens, secretary-treasurer of the Communications Workers of America, in a statement.

"Now that we’ve won our election, it is our duty to protect these foundational values on which our union stands,” the GWA said. “Our biggest hope is that our union serves as inspiration for the growing movement of workers organizing at video game studios to create better games and build workplaces that reflect our values and empower all of us.”

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