This post is an "email response" to a podcast episode.
I just had a listen to the latest episode of your excellent Dithering podcast (December 9th 2022) about FTC blocking the Activision acquisition. While I understand that there’s a limit to the nuances you can fit within 15 minutes, I felt that your discussion had some blind spots – specifically about scale and power. I’m not saying your conclusion is wrong or that the FTC’s fronted arguments are great. I’m also not saying you don’t know the things I’m about to write – I’m just saying it didn’t come through in the podcast, and I just felt the need to write down some thoughts after the episode. Hopefully, you’ll read it. It’d be great to hear your thoughts. Thanks!
1) The difference between building and buying
While you don’t seem to think this acquisition should be blocked, I assume you think it’s OK (in principle) for some acquisitions and mergers to be blocked. And while it’s very rare, sometimes businesses need to be broken up.
However, I think we can agree that the threshold for breaking up a business is higher than blocking an acquisition. For instance, I think it’s fair to not want to break up Apple. But if The App Store was a separate business (in a parallell universe), we’d might be sceptical about letting Apple buying them and consolidating their power on the platform.
However, in the podcast, you said it was weird for FTC to want to block Microsoft from buying Activision Blizzard (AB) because they might become too dominant in 2030. Then you’re almost saying «let them consolidate, and if they become too dominant, we’ll just break them up!». Now, I’m not saying this means the FTC should block every merger. My point is that I think it’s perfectly fair for them to speculate about future dominance when looking into mergers, to reduce break-ups – which are much more invasive. I’d rather hear your arguments for why you don’t think Microsoft will be too dominant, instead of bashing FTC for even speculating.
It might be unfair, but I think it’s ok to view dominance built and dominance bought a bit differently – although I think both should be regulated heavily. 😉
2) Power and vertical integration
This brings me to the next blind spot (again, not your blind spots, but the discussion’s). In the Vergecast episode dropped the same day, they made a point about FTC and Leena Khan shifting focus from not only looking and horisontal consolidation and integration, but also at vertical. I felt you looked too much on Microsofts ability to compete in the gaming industry, without taking their general power and influence into consideration.
You said that Microsoft would make deals with Sony (and Nintendo) to sell AB games there. And they’ll probably do that (at least the current franchises), but that they control those titles bring power. Slippery slope arguments can be very unfair – but is there a limit to whom you think it’s ok for Microsoft to buy? After AB, could they buy EA? Ubisoft? Unity? Roblox? Take 2? Square Enix? All of them?
So even though Microsoft might license some older franchises, like Call of Duty, to Sony – I’m nervous of a future where Microsoft owns the games, owns the servers, through Azure, and can market their gaming service on all Windows Machines. I think it’s very relevant to look beyond the gaming market when evaluating this acquisition.
3) Comparison with Sony’s acquisitions
You laughed about how it was ridiculous that Microsoft should be stopped from buying Activision Blizzard (AB), when Sony buys stuff left and right. Now, I don’t think it’s great that Sony keeps buying studios – but there’s a difference of scale. First, there’s the size of Microsoft and Sony:
I think it’s relevant to remember that, in terms of market cap, Microsoft is over 18 times the size of Sony. So, I think it’s wise to be a bit stricter with them.
Then there’s what they’re buying. Because while Sony has bought many companies recently, most of them has been pretty small and niche. Most of the larger studios today, has been with Sony for a long time, like Guerrilla Games (Horizon Zero Dawn), Media Molecule (LittleBigPlanet), Naughty Dog (The Last of Us), Santa Monica Studio (God of War), Polyphony Digital (Gran Turismo) and Sucker Punch Productions (Ghost of Tsushima). Here we’re back to the thing where I think it’s a bit more OK for Sony to own many great studios, since they’ve built them over many years.
However, Sony has had some large acquisitions. The three largest, are Insomniac ($229 million), Gaikai ($380 million) and Bungie ($3.6 billion). But if we compare this to Microsofts top 3 pre-AB, we get this:
But it’s when we swap out the tiny Rare-deal for AB, that we really get to see the scale:
I don’t love that Sony bought Bungie. However, not only was it a one-game-studio under half the price of Bethesda – Activision Blizzard is three times the size of Roblox, double the size of EA and larger than all of Nintendo! The deals are just not the same.
Here’s a funny little coincidence: As I said, Microsoft’s market cap is about 18 times that of Sony. And if they buy AB, their top 3 acquisitions will be about 18 the value of Sony’s! Now, I know that doesn’t tell the entire story, but it’s worth bearing in mind. And again: is your opinion that Microsoft can buy AB, but then have to stop? Or can they then go ahead and purchase Ubisoft and EA? And if no, why is the line where it is?
4) FTC doesn’t stop game streaming
Another point you made, was that FTC hindered the game streaming business model from developing, and tried to keep things «as they are». I don’t buy this.
Why must Microsoft own the studios to put their games on Xbox Cloud? FTC doesn’t say that Microsoft can’t license games from AB to put them on their service! If I remember correctly, you can get Call of Duty on Xbox today…
I believe in cloud gaming, and Microsoft are in a great position to make it happen, due to the trio of Azure, Windows, and Xbox. They absolutely do not need even more power and dominance to make it happen. I think it’s much healthier if Microsoft has to compete to get game licenses and customers, instead of using their capital and bundling power.
It’s perfectly reasonable to disagree with this, but it was jarring to hear a discussion about this without what, I think, are some important perspectives.