The playing field
The gaming industry has been growing for decades, with advancements in technologies spurring a constant increase in avid gamers, now estimated to total around 3.1 billion worldwide, with industry revenues shifting from approximately $70.4 billion in 2012 to $180 billion in 2022, representing a growth rate of 156%.
This growth breeds increased antitrust scrutiny. This article discusses some key antitrust enforcement trends in the gaming sector, including in relation to the following: (i) increased consolidation, (ii) content accessibility, and (iii) alleged abusive practices by dominant firms.
A gaming M&A-thon
Acquisitions enable companies to rapidly expand their gaming portfolios and customer bases without having to invest in developing games internally with less certain return. Last year alone, the global gaming industry saw approximately 1,000 deals (announced and closed) totalling at least $123 billion in value, with Microsoft’s proposed $68.9 billion acquisition of Activision Blizzard (owner of Call of Duty (CoD)) taking centre stage. Other high-value deals include Take-Two Interactive’s acquisition of Zynga (owner of FarmVille) for $12.7 billion and Sony’s acquisition of Bungie (developer of Destiny 2) for $3.6 billion.
Game changers: Antitrust scrutiny in merger control
Since 2010, the European Commission (EC) has seen a 200% increase in notified transactions relating to the publishing of computer games, all cleared without commitments. However, it is uncertain whether Microsoft’s proposed acquisition of Activision Blizzard, currently being reviewed by the EC, the UK Competition and Markets Authority (CMA) and the U.S. Federal Trade Commission (FTC), will follow these precedents.
In its decisional practice in transactions between console makers and gaming content providers, the EC has considered and assessed whether the acquirer was likely to restrict its rivals from accessing the target’s games post-transaction (i.e., input foreclosure), but found that the acquirer either lacked market power upstream or that the target’s games were not an important input downstream. For example, in the EC’s review of Microsoft’s acquisition of ZeniMax, it found that “no ZeniMax games feature among the 15 bestselling console games in Europe” and that the upstream game publishing market was considered highly competitive. This view may now have changed.
In Microsoft/Activision Blizzard, the EC’s press release suggests that the primary focus of the assessment was the “distribution of console and PC video games”. In particular, the EC’s preliminary concerns relate to Microsoft’s ability and potential economic incentive to prevent its “rival distributors of console video games” (such as Sony and Nintendo) from accessing Activision Blizzard’s content, particularly CoD.
In its parallel review, the CMA provisionally found that Microsoft’s console rival, Sony’s PlayStation, would be significantly weakened by losing access to CoD (referred to as one of the most successful gaming franchises of all time and accounting for a significant proportion of “game time” on PlayStation). Without CoD, PlayStation users would either switch console or face less choice. The CMA cited Microsoft’s past practice of making ZeniMax’s games available exclusively on Xbox as a basis for this focus.
However, most recently, Microsoft was able to alleviate the CMA’s concern over foreclosure of Sony using economic evidence, specifically a revised financial model, to demonstrate that withholding CoD from PlayStation would not be financially beneficial and would actually result in losses for Microsoft. The CMA has subsequently streamlined its concern to the cloud gaming market as discussed below.
Both agencies nevertheless originally raised questions over whether Microsoft would, as opposed to restricting rivals’ access, degrade it, for example, by offering worse terms and conditions for game use or access, delaying game releases or increasing licensing prices, which would also negatively impact competition.
Tech-ing gaming to the next level: Microsoft/Activision Blizzard
The agencies acknowledge that input foreclosure strategies could reduce competition for multi-game subscription and cloud-game streaming services. The success of multi-game subscription services where customers pay a fixed fee for access to a catalogue of games, relies on having access to popular games.
The same applies to cloud-based services; technology which allows games to be accessed on remote servers and streamed directly to a device (which is not necessarily a console). The CMA considers cloud gaming to be a “relatively new market” with uncertain prospects of success for market players. It therefore provisionally found that it would be commercially beneficial for Microsoft to make Activision Blizzard’s content exclusive to its own cloud-gaming service.
The CMA also considered Microsoft’s ability to foreclose its multi-game subscription or cloud-gaming competitors, and the significant effect this would have on competition. In the CMA’s view, Microsoft’s strong gaming ecosystem includes its multi-game subscription service, Xbox Game Pass, a growing cloud-based offering and Windows PC Operating System (OS). For example, the CMA found that, as most games are designed and optimised for Windows PC OS (an OS is a necessary component for a cloud-based offering), Microsoft benefits from hosting games on its own server (as doing so avoids their paying licensing or game adaption fees to any third-party OS).
These are costs which other cloud-game competitors may incur. Thus, the CMA found that nascent competitors offering equivalent services may already struggle to compete, particularly with high barriers to entry such as costs of cloud infrastructure and game content, and the need for economies of scale to drive down costs. Any additional benefit accruing to Microsoft would therefore significantly reduce competition to the detriment of current and future cloud gaming users.
The CMA considers strong network effects an important feature of the console gaming market. Microsoft’s head start in providing these services reinforces such effects. In this context, “direct network effects” refer to value accruing (to a console or game) due to the increased network size; for example, CoD is more enjoyable if you can play against fellow gamers online, or “indirect network effects”, where value accrues due to the availability of more games on a platform. The CMA found that Microsoft benefits from this market feature.
However, there are also advocates in favour of the transaction. At the EC’s oral hearing on February 21, 2023, the European Games Developer Federation, comprising national game developer associations, urged the EC to consider how the deal could (i) create a strong competitor to China’s Tencent, the largest global gaming developer and publisher, and (ii) enable Microsoft to challenge competitors in the mobile gaming sphere.
The parties’ game plan
Microsoft has attempted to alleviate antitrust enforcers’ deal concerns by making offers to Sony, Nintendo, Nvidia and Steam, to supply games post-merger. It struck a deal with Nintendo to make CoD available on its console for ten years, should the deal be approved. It has also agreed to grant access to its entire gaming catalogue to Nvidia, which the CMA considers to be one of Microsoft’s “few merging rivals” in cloud gaming and made other licensing deals to cloud gaming providers Boosteroid and Ubitus. Sony has reportedly refused to entertain any of Microsoft’s offers to date.
In the United Kingdom, the CMA’s Notice of Possible Remedies (Notice) foreshadowed a preference for structural divestitures, for example, a sale of the business associated with CoD. Microsoft’s response to the Notice explains how a licensing remedy to Sony would be most proportionate and effective and that divestment would be inappropriate. Sony’s response advocates prohibition of the deal.
However, some reports suggest that Microsoft’s recent commitment to the EC to make Activision Blizzard’s catalogue of games available to cloud gaming rivals may quash the EC’s concerns, for which it has a deadline of May 22, 2023 to make a final decision.
It’s game on: Recent trends in behavioural conduct
Outside the remit of merger control, the EC has also scrutinized Article 101 and 102 of the Treaty on the Functioning of the European Union (TFEU) infringements within the gaming sector.
In January 2021, the EC imposed a EUR 7.8 million fine on Valve, the owner of online PC gaming platform Steam, and on five game publishers, including Bandai Namco, Capcom, Focus Home, Koch Media and ZeniMax (the Publishers) for geo-blocking. Steam allows users to directly download or stream PC video games upon authentication, and Valve provides Publishers with the technical means to activate the games through authentication keys (Steam Codes).
The Publishers requested that Valve set up geographical restrictions and provide them with “geo‑blocked” Steam Codes to meet unsolicited consumer requests (or “passive sales”). The Publishers provided those blocked Steam Codes within PC video games for distribution across certain Central and Eastern European countries. As such, consumers could not activate the games in those locations. The EC found that these bilateral agreements between Valve and the Publishers amounted to market partitioning under Article 101 of the TFEU.
The EC also found that four Publishers (excluding Capcom) had restricted cross-border trade through their licensing and distribution agreements with distributors in the EEA by including clauses which restricted cross-border sales. The restrictions were found to prevent consumers from buying products from lower-priced markets, depriving them of the benefit of the EU’s single market.
Valve has appealed the EC’s decision to the General Court, contesting, among other things, that giving Steam Codes to distributors is insufficient to constitute an agreement.
PayStation: Sony pushes consumer’s buttons
In the United Kingdom, Sony is being sued for damages of £5 billion by Alex Neill, a consumer rights advocate, on behalf of ~9 million consumers who allege to have overpaid for digital games or games content from PlayStation.
Sony allegedly abused its dominant position by (i) imposing exclusive dealing obligations on its customers (by requiring customers to only use Sony’s OS), (ii) tying Sony’s own electrical store for digital games to the sale of PlayStation consoles (by making its digital games and any add-on content exclusively available through Sony’s PlayStation store), and (iii) imposing excessive and unfair pricing on consumers through its commission. The case is ongoing.
Play by the rules
In addition, competition agencies, including the CMA, have launched market studies into the gaming sector. In 2019, the CMA investigated the supply of online gaming memberships and obtained commitments from Sony, Nintendo and Microsoft. The companies agreed to update their business practices relating to the auto-renewal of subscriptions. For example, Sony agreed to remind customers how to stop payments when they have not used their subscriptions for a long time.
Nintendo committed to removing its automatic subscription renewal from being the default option. Auto-renewal terms have generally been an enforcement focus for the CMA; for example, in 2021, the CMA similarly accepted undertakings from antivirus software companies to remove automatic renewals from being the default option, amongst other commitments.
Separately, the CMA’s market study into cloud gaming and mobile browsers found that the market for the distribution of native apps (and thus games) within mobile devices is concentrated between a small number of firms. In particular, the CMA expressed its concern that Apple has effectively blocked cloud gaming offerings from being native apps on the App Store of its iOS devices, as it considers apps to be the exclusive route of distribution for mobile cloud gaming services.
The CMA stated that Apple’s restrictions could act as a “brake on innovation”. App/game development becomes a futile objective when developers lack market entry through big platforms. The CMA also received support (from a range of individuals and companies familiar with or working within the gaming sphere) for its market investigation reference (MIR) and market investigation into mobile browsers and access to cloud gaming on mobile devices, which could enable the CMA to impose remedies on the market. Apple has appealed the CMA’s MIR Decision to the Competition Appeal Tribunal.
What’s next? It’s all to play for . . .
The growing gaming sphere has attracted regulators’ attention in recent years. In overview, we have identified the following themes which seem likely to persist:
- Agencies are likely to view the console market as highly concentrated, with the implication that standard models of theories of harm are likely to apply.
- In relation to acquisitions of game developer companies by console players, agencies have focused on assessing vertical theories of harm, in particular, on whether the vertical integration of a console company and a game developer would result in the foreclosure of other console companies and whether the consumer benefits resulting from such a transaction would outweigh any potential antitrust concerns. This is traditionally challenging to enforce and requires a blockbuster game (such as CoD) as a prerequisite.
- Agencies are considering the effect of such transactions more widely on the gaming market, in particular, in relation to nascent markets, such as cloud gaming and multi-game subscription services. They are considering, for example, whether the vertical integration of incumbents (for example, companies like Microsoft) with game developers enables a competitive advantage that would risk raising barriers to entry for new market entrants. The EC and CMA consider it important to keep such barriers to entry low, allowing nascent entrants to drive continued innovation and competition.
- As well as raising concerns over foreclosure by console leaders of game access to rivals, agencies also recognise the risk (and reality) of console and game leaders limiting access to their games through technical means; for example, by making games compatible exclusively with a vertically integrated firm’s console.
- Accordingly, sustaining the interoperability of games through multiple means of access will also remain an enforcement focus for agencies through merger control reviews and market studies, with continued consumer backing through, inter alia, class actions.
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