On 8 December 2022, the Federal Trade Commission sued to block Microsoft(MSFT)'s proposed acquisition of Activision Blizzard (ATVI). The main reasons listed is that the takeover may disadvantage consumers, by withholding Activision's games from rivals (Sony), degrading the experience of these games on rival platforms, and reducing consumer choice/industry innovation and so on.
Microsoft’s gaming division produces Xbox hardware and Xbox content and services. Its total gaming revenues in FY2022 were over USD16 billion.
You can find the document on the FTC website.
I am not a legal scholar so I can't comment on the merits of this case. However, the complaint is useful if you are looking for a primer on the current state of the console market. The document has redactions but large parts of it are not redacted.
I am not a legal scholar so I can't comment on the merits of this case. However, the complaint is useful if you are looking for a primer on the current state of the console market. The document has redactions but large parts of it are not redacted.
I'll list out a few points that I find interesting here.
1) The FTC is not blocking the acquisition, but rather, asking for restrictions to be placed on it. I quote:
NOTICE OF CONTEMPLATED RELIEF
Should the Commission conclude from the record developed in any adjudicative proceedings in this matter that the Acquisition challenged in this proceeding violates Section 5 of the Federal Trade Commission Act, as amended, and/or Section 7 of the Clayton Act, as amended, the Commission may order such relief against Respondents as is supported by the record and is necessary and appropriate, including, but not limited to:
1. A prohibition against any transaction between Microsoft and Activision that combines their businesses, except as may be approved by the Commission.
2. If the Acquisition is consummated, divestiture or reconstitution of all associated and necessary assets, in a manner that restores two or more distinct and separate, businesses, with the ability to offer such products and services as Microsoft and Activision were offering and planning to offer prior to the Acquisition.
3. A requirement that, for a period of time, Microsoft and Activision shall not, without giving provide prior notice to and obtaining the prior approval of the Commission, acquire, merge with, consolidate, or combine their businesses with any other company engaged in business activity in the relevant markets and, if necessary, in related business activity and markets.
4. A requirement to file periodic compliance reports with the Commission.
5. Requiring that Respondents’ compliance with the order may be monitored at Respondents’ expense by an independent monitor, for a term to be determined by the Commission.
6. Any other relief appropriate to correct or remedy the anticompetitive effects of the Acquisition or to restore Arm as an independent business.
2) Gaming is a huge category in entertainment markets.
Today, gaming is the largest category in the entertainment industry, with revenues that far exceed those of both the film and music industries. This year, the gaming industry is expected to be worth more than $170 billion in global revenues, five times greater than global movie box office revenues.
In 2021, Call of Duty: Vanguard topped the revenue charts as the best-selling game in the United States, with Call of Duty: Black Ops Cold War coming in second. And in 2022, Call of Duty: Modern Warfare II took in $1 billion globally in the first ten days following its launch. By comparison, the highest grossing film of the year so far, Top Gun: Maverick, took one month to reach the $1 billion threshold.
3) Gaming IPs are very valuable and hard to come by.
NOTICE OF CONTEMPLATED RELIEF
Should the Commission conclude from the record developed in any adjudicative proceedings in this matter that the Acquisition challenged in this proceeding violates Section 5 of the Federal Trade Commission Act, as amended, and/or Section 7 of the Clayton Act, as amended, the Commission may order such relief against Respondents as is supported by the record and is necessary and appropriate, including, but not limited to:
1. A prohibition against any transaction between Microsoft and Activision that combines their businesses, except as may be approved by the Commission.
2. If the Acquisition is consummated, divestiture or reconstitution of all associated and necessary assets, in a manner that restores two or more distinct and separate, businesses, with the ability to offer such products and services as Microsoft and Activision were offering and planning to offer prior to the Acquisition.
3. A requirement that, for a period of time, Microsoft and Activision shall not, without giving provide prior notice to and obtaining the prior approval of the Commission, acquire, merge with, consolidate, or combine their businesses with any other company engaged in business activity in the relevant markets and, if necessary, in related business activity and markets.
4. A requirement to file periodic compliance reports with the Commission.
5. Requiring that Respondents’ compliance with the order may be monitored at Respondents’ expense by an independent monitor, for a term to be determined by the Commission.
6. Any other relief appropriate to correct or remedy the anticompetitive effects of the Acquisition or to restore Arm as an independent business.
2) Gaming is a huge category in entertainment markets.
Today, gaming is the largest category in the entertainment industry, with revenues that far exceed those of both the film and music industries. This year, the gaming industry is expected to be worth more than $170 billion in global revenues, five times greater than global movie box office revenues.
In 2021, Call of Duty: Vanguard topped the revenue charts as the best-selling game in the United States, with Call of Duty: Black Ops Cold War coming in second. And in 2022, Call of Duty: Modern Warfare II took in $1 billion globally in the first ten days following its launch. By comparison, the highest grossing film of the year so far, Top Gun: Maverick, took one month to reach the $1 billion threshold.
3) Gaming IPs are very valuable and hard to come by.
Developing AAA games are very difficult, and this answers the question why Microsoft is buying IP, rather than developing in house. I touched on this in an earlier post about the show Playing Hard.
Production budgets for AAA games frequently exceed (REDACTED) million, if not (REDACTED) million, and development teams can include thousands of developers working over several years. The high cost of AAA game development is driven by many factors such as long development cycles and the scarcity of AAA-capable studios and talent.
The gaming industry recognizes a limited top tier of independent game publishers, sometimes referred to as the “Big 4” or simply the AAA publishers: Activision, Electronic Arts, Take-Two, and Ubisoft. These publishers reliably produce AAA games for high-performance consoles and collectively own a significant portion of the most valuable IP in the gaming industry. These high-profile franchises include, for example, Call of Duty (Activision), FIFA (EA), Grand Theft Auto (Take-Two), and Assassin’s Creed (Ubisoft).
4) Nintendo is the awkward child, or rather, chooses to play it's own game. This is, in my view, a clever strategy and a business moat.
Production budgets for AAA games frequently exceed (REDACTED) million, if not (REDACTED) million, and development teams can include thousands of developers working over several years. The high cost of AAA game development is driven by many factors such as long development cycles and the scarcity of AAA-capable studios and talent.
The gaming industry recognizes a limited top tier of independent game publishers, sometimes referred to as the “Big 4” or simply the AAA publishers: Activision, Electronic Arts, Take-Two, and Ubisoft. These publishers reliably produce AAA games for high-performance consoles and collectively own a significant portion of the most valuable IP in the gaming industry. These high-profile franchises include, for example, Call of Duty (Activision), FIFA (EA), Grand Theft Auto (Take-Two), and Assassin’s Creed (Ubisoft).
4) Nintendo is the awkward child, or rather, chooses to play it's own game. This is, in my view, a clever strategy and a business moat.
Conversely, Nintendo pursues a different strategy of integrating its lower performance, portable hardware with its own distinctive first-party games to appeal to player nostalgia for Nintendo’s unique gaming experience over high resolution, life-like graphics, and performance speed. While Microsoft’s Xbox Series X|S and Sony’s PS5 consoles incorporate semi-custom systems-on-a-chip (“SoC”) designed by AMD, Nintendo’s Switch runs on a non-AMD SoC that is more closely related to a mobile device processor found in higher-end mobile phones and tablets.
The PlayStation 5 and the Xbox Series X, the companies’ latest flagship consoles, retail for $499.99. By contrast, the Nintendo Switch retails for $200 less at $299.99.
Due to their distinct offerings, Microsoft and Sony consoles appeal to different gaming audiences than the Nintendo Switch. While Xbox Series X|S and PS5 consoles offer more mature content for more serious gaming, Nintendo’s hardware and content tends to be used more for casual and family gaming.
High-Performance Consoles are a relevant antitrust market. However, although the Nintendo Switch is highly differentiated from the Xbox Series X|S and PS5 consoles, it shares many of the same characteristics that make High-Performance Consoles distinct from PCs, and mobile devices.
The PlayStation 5 and the Xbox Series X, the companies’ latest flagship consoles, retail for $499.99. By contrast, the Nintendo Switch retails for $200 less at $299.99.
Due to their distinct offerings, Microsoft and Sony consoles appeal to different gaming audiences than the Nintendo Switch. While Xbox Series X|S and PS5 consoles offer more mature content for more serious gaming, Nintendo’s hardware and content tends to be used more for casual and family gaming.
High-Performance Consoles are a relevant antitrust market. However, although the Nintendo Switch is highly differentiated from the Xbox Series X|S and PS5 consoles, it shares many of the same characteristics that make High-Performance Consoles distinct from PCs, and mobile devices.
5) The sheer scale of Microsoft's gaming division
Microsoft’s gaming division produces Xbox hardware and Xbox content and services. Its total gaming revenues in FY2022 were over USD16 billion.
In contrast, here are the topline revenues of some of Singapore's blue chip companies:
Singtel (as of 31 March 2022): SGD 15.3 billion
DBS (as of 31 March 2022): SGD 14.3 billion
SIA (in 2019 pre-Covid): SGD 16.3 billion
Just as a reminder, the points above are not a summary of the entire complaint, so you should review it if you are interested in either of the 2 companies.
(vested in Microsoft, Activision and Nintendo)
None of the above should be construed as investment advice. Do your own due diligence as I will not be responsible for any loss/risk.
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