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Open Letter to CMA

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Disclaimer: The perspective expressed below is solely the author’s and does not represent an official position of lordsofgaming.net.

This week, the UK’s Competition and Markets Authority invited the public to voice their views on Microsoft’s acquisition of Activision-Blizzard-King. I took the opportunity to do this. Below is the full letter I sent them.

To the Competition and Market Authority:

I would like to start by thanking your organization and its members for your diligent efforts to improve the betterment of consumers in the UK and indeed around the world. I would also like to thank you for allowing the public to share their thoughts on purchasing the Activision-Blizzard-King that Microsoft recommended.

Before I share my views on this proposed purchase, I wanted to briefly share my background with the gaming industry to provide context for my views and expose any biases I may have. I have been a consumer in the gaming industry for over 20 years. During this time, I have owned multiple consoles made by each of today’s leading console manufacturers (Microsoft, Nintendo, and Sony). Last year, I also served as a writer for the journalism outlet lordsofgaming.net.

At the start of this console generation, I decided to buy the Xbox Series X instead of the PlayStation 5, deciding that I prefer the value proposition offered by the Microsoft brand as the entry point to this generation of games. I’m also thinking of buying a Playstation 5 before the current generation ends.

Having said that, I believe the tentative findings from the CMA’s Phase 1 review of the merger exaggerate the likelihood of losses from this acquisition and understate both the probability and magnitude of the potential benefits. In my view, the most likely consequences of this acquisition will lead to stronger competition in the gaming industry for the betterment of consumers.

Impact on Console Platforms

In its issue statement, the CMA states that one of the focuses of Phase 2 research will be the potential harms to Xbox console competitors (especially Playstation) if Xbox decides to use ownership of Activision’s properties to gain market share. through exclusivity, pricing or degradation of quality. I agree with the CMA’s assertion that Microsoft may have commercial incentives to do this to provide proximity to their platform.

However, given the public commitments, Call of Duty With PlayStation features and content parity, Activision is likely to add its catalog and future games to Game Pass, increasing proximity and bringing the product to consumers at a lower price point. In my reading, this approach would be useful for two reasons.

  1. In the absence of merging, every consumer who wants to play Call of Duty or approaching Diablo IV they have to buy them at full price. After the merger is complete, this option will continue to be available to every consumer, but consumers with an Xbox, a capable PC or the ability to access cloud gaming will also have the option to play the game via a cheaper subscription.
  2. Over time, this approach could lead to wider adoption of the Xbox console platform, narrowing the existing wide gap between Microsoft and Sony’s market share and, more importantly, market power. If the competition between these two console manufacturers was closer in the future, it would be in the interests of consumers. I’ll just give an example of why below, as I’m sure other answerers will provide others.

One of the ways that the enormity of Sony’s current market leadership is hurting consumers is that it can get full-time or time-exclusive content from third-party developers and publishers. Thanks to its market leadership over the last nine years, Sony is capable of securing favorable terms in these deals in a way Microsoft cannot.

The reason is simply arithmetic. To persuade a third-party partner to enter into an exclusivity agreement, Sony must offer the partner more money than they would lose by not publishing on Xbox (or by publishing on Xbox for a year or more). Microsoft, of course, would have to do the same.

However, this usually only applies to Sony due to the huge difference in install bases across their platforms. With a total install base of over 150 million compared to Xbox’s 60-70 million, the conditions under which such a deal is commercially viable are much broader for Sony than it is for Microsoft.

While this is a legitimate business practice and part of Sony’s strategy to create familiarity for its console, it hurts any consumer without the PlayStation platform. Without such deals, I could play games like the one below. Final Fantasy 7 Remake, Bloodborne, and Marvel’s Spider-Man on my Xbox. Instead, I had to buy a Playstation 4. Others with lower cost could not play them.

If the competition between the two consoles were closer, such malicious applications of market power would be rarer and more costly. This is just one of many examples where closer competition between two producers will increase welfare.

Impact on Multi-Game Subscription Services

CMA Logo

The CMA is making the prudent decision to explore whether Game Pass, the multi-game subscription service with the strongest reputation in the gaming industry today, can be boosted to prevent the present and future with the addition of Activision-Blizzard-King’s catalog. competitors. However, I believe that a thorough review will lead to the conclusion that this addition to Game Pass, albeit notable, will not lead to a significant reduction in competition in the games market. This is for two reasons.

First, for the foreseeable future, the success of subscription services will be limited by their competition with free-to-play games. For example, if Microsoft raises the price of Game Pass to $30 per month after purchase, consumers like me are likely to unsubscribe and buy games we want to play “a la carte” instead. These distribution models are alternatives offered to consumers. However, even in a hypothetical scenario where a firm’s subscription service becomes dominant over its competitors’ services, it does not follow that the firm will have excessive market power. This firm would still have to compete on price, quality and other fronts.

Second, even with the addition of Activision-Blizzard-King, Microsoft won’t be the only company able to offer an attractive subscription service to the market. Both of the major current console competitors have a substantial wealth of intellectual property and franchises that can provide a strong foundation for a competitor for Game Pass. Indeed, Sony has taken meaningful steps to compete directly with Game Pass in restructuring the PlayStation Plus service.

In a hypothetical future where subscriptions have become the dominant way consumers choose to access games, competitors like Sony and Nintendo can leverage their properties, partnerships with third-party developers and publishers, and their own purchases to compete directly with Microsoft’s Game Pass offering. . This direct competition will benefit consumers on every platform.

Cloud Impact on Gaming

Finally, the CMA reports in its application that it is also investigating “whether the merger will adversely affect the future of cloud gaming.” In addition, the Authority noted that there is particular concern about whether Microsoft’s “multi-product ecosystem” could give Microsoft an insurmountable advantage over current and future competitors. This is another well thought-out line of inquiry; but in my view the dangers of editing on these grounds outweigh the potential benefits in terms of probability and scope.

In my view, cloud gaming is so new and unproven as a consumer product that regulators must be very careful about using their power in ways that can artificially prevent it from growing. While cloud gaming is currently only used by a small percentage of gamers as a technology, it has the potential to bring significant benefits to consumers, developers and publishers. Even now, it could reduce existing friction points that prevent consumers from accessing high-end games, such as the need to purchase expensive consoles, PCs, or (in some cases) controllers. Microsoft is currently using the cloud ecosystem to reduce pain points for developers through efforts like the ID@Azure program. If the CMA prevents this acquisition from being completed, it could significantly hinder consumer adoption of this technology and therefore delay or prevent the benefits it can bring to the industry.

Additionally, while the CMA rightly notes that Microsoft has a potential advantage in any future cloud gaming market due to its multi-product ecosystem, I think its concerns about this advantage are unfounded. To begin with, I don’t think we can reasonably argue that his advantage is large enough to potentially prevent other players from being able to compete in any meaningful way.

Second, and more importantly, the same factors that give Microsoft an edge over the cloud competition can be described as efficiency. As CMA members will know, market efficiency (including digital markets) tends to benefit consumers, as eliminating costs in a supply chain often leads to lower prices for consumers.

However, the CMA may not be aware that there is something like it in the recent history of the gaming industry. Over the past console generation, there has been a dramatic change in consumer trends: that is, a significant majority of consumers now buy games digitally rather than physically. In my view, the main reasons for this are market efficiency and reduced friction. Developers and publishers reduce costs by physically producing and shipping fewer discs and disc boxes. Also, delivering content directly to consumers’ homes eliminates the need for a third-party retailer. These reduced costs are often passed on to consumers in the form of more frequent and dramatic sales than you might find at a physical retailer. These discounted prices, combined with the convenience of being able to download a game from your couch, have caused consumers to prefer digital over physical as a means of product delivery.

Having a multi-product ecosystem that Microsoft can use to power its cloud gaming offering means it has efficiencies that other companies can’t. If this leads to Microsoft being the market leader in the future of cloud gaming, it may simply be because Microsoft is using this efficiency to deliver value to its consumers.

Solution

As a consumer who will directly and immediately benefit from the completion of this transaction, I ask the CMA to carefully consider the various efficiencies and consumer welfare-enhancing implications of this merger as we continue the Phase 2 investigation. I am sure that in your investigation you will reach many of the conclusions I have had.

Thank you for your time.

with gratitude,

Steve Perry

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