INTRODUCTION
Well, here we go again :p
Microsoft is acquiring Activision Blizzard and the transaction is under review from multiple competition regulators around the world. One of them is the Administrative Council for Economic Defense or CADE in Brazil.
Back in July, CADE asked 11 third parties about the acquisition, to understand what they thought about it.
I summarised all the answers here:
One of those answers was from Sony, ant they weren't happy about the acquition.
Well, 10 days later Microsoft has responded to all those answers, specially the one from Sony. It's a long but very interesting response (market strategies, the economics of exclusivity, Sony blocking content coming to Gamepass, etc), that's why I thought that it deserved a new thread.
WHAT SONY SAID
Sony said that from a development/publication perspective, game development typically involves an early stage that is neutral in relation to the platform, before the game is adapted for one or more specific platforms.
They believed that all games compete for engagement of the player. Players choose their gaming platform based on pricing, technical features, and available game types. The available content is the main factor for the player to choose a platform.
They said that there are few barriers to entry in game development and publishing for PC. That only one developer can create an "indie" game and distribute it online, but creating a high-end AAA game (like Activision's Call of Duty) requires a budget of hundreds of millions of dollars and thousands of employees.
They said that apart from Activision there are few developers/publishers capable of producing AAA games, such as EA (FIFA), Take-Two/Rockstar (Grand Theft Auto) and Epic Games (Fortnite). These games tend to be long-running franchises with big budgets, multi-year development cycles and very supportive followers.
Despite all of that, Sony believed that none of these developers could create a franchise to rival Activision's Call of Duty, which stands out as a gaming category on its own. That's why they believed that Call of Duty was so popular that it influences users' choice of console. In fact, their network of loyal users is so ingrained that even if a competitor had the budget to develop a similar product, it would not be able to create a rival.
They talked about the time, money, number of employees, millions of followers, sales and other data points related to Call of Duty to show how it's a very unique franchise that cannot be replaced.
They agreed that subscription services compete with games purchased for a one-time fee. But they thought that the lowest upfront costs of subscription services could be anti competitive in relation to publishers who recoup the significant investments in games by selling them for an upfront fee. They also thought that this could harm consumers by reducing the quality of the games.
They said that over the past five years, Game Pass has grown to capture approximately 60-70% of the global subscription services market (that marketshare is even greater in Brazil, where Game Pass represents approximately 70-80% of the PC subscription services market).
They believed that it would take several years for a competitor – even with substantial investments – to create a rival effective for Game Pass.
They also said that Call of Duty represents an important revenue stream for the PlayStation (they provided data but it's redacted), and it is one of SIE's biggest sources of revenue from third parties.
WHAT MICROSOFT RESPONDS
IN GENERAL
For starters, MS understands that the relevant markets defined during the Bethesda acquisition are still relevant. That means no segmentation by genre and that the market for digital distribution of games includes buy-to-play and other subscription services (obviously they don't want Gamepass perceived as their own market because they have a huge marketshare there).
They say that MS and ABK will face competition from a number of game developers and publishers. In addition, all of their games have close competitors. In fact, the third parties named several rival third-party publishers who own popular game franchises, demonstrating the intense rivalry in the market.
In fact, MS highlights arguments from Ubisoft, Riot, Amazon or Google that confirm some of their arguments: post transaction there will be multiples developers and publishers and players use multiple devices to play.
MS says that in all the relevant markets the'll have a marketshare of less than 20% (that usually means that there is no risk of anticompetitive effects). There is only one market where they have more than that, the digital distribution of games, where MS has more than 30%. However, they believe that Activision Blizzard's position in console game publishing is well below any levels that could result in market concerns. So, even in that market everything should be OK, according to them.
ABOUT SONY
MS literally says that: "Not surprisingly, Sony was the only third party to convey public opinion materially different from MS/ABK and the third parties regarding the competitive analysis of the transaction".
According to MS, Sony said that: 1) Activision Blizzard's Call of Duty franchise would be unrivaled and essential for the PlayStation console; 2) the inclusion of Activision Blizzard content in the Xbox Game Pass catalog would represent a "tipping point" in the market.
MS believes that Sony's isolated position can likely be explained by the fact that Microsoft's subscription game offering, Game Pass, was launched as Microsoft's competitive response to Xbox's failure in the "console wars" and the need to offer players additional value compared to the "buy-to-play" traditional model. In this way, Game Pass threatens to compete more effectively with the buy-to-play model, which Sony has successfully adopted.
Almost literal, MS says that: "In short, Sony is not resigned to having to compete with Microsoft's subscription service. Sony's public outcry on subscription games and the company's response are clear: Sony doesn't want attractive subscription services to threaten its dominance in the market for digital distribution of console games. In other words, Sony rails against the introduction of new monetization models capable of challenging its business model".
About Call of Duty being its own category of games, MS says that Sony's argument seems to assume that the publishing and development market should be segmented based on genre/type, but that Call of Duty would be a genre/market of its own.
MS believes that Sony does not present any element to substantiate the claim that Call of Duty would be a separate market from all other categories of games: "Sony is limited to commenting on Call of Duty's brand strength and loyalty and engagement. However, claiming that Call of Duty has a loyal following is a premise from which the conclusion that the game is a "category of games in itself" does not follow. The PlayStation itself has a foundation established by players loyal to the brand. This finding, however, does not lead to the conclusion that the PlayStation – or any branded product with loyal consumers – is a separate market from all other consoles. Extrapolating from such a finding, the extreme conclusion that Call of Duty is a "game category in itself" is simply unjustifiable under any quantitative or qualitative analysis."
Besides, MS believes that Call of Duty has several rivals, as corroborated by the companies consulted by CADE and the confidential data shared.
Therefore, according to MS, not only is Call of Duty not a "category of games per se", it also faces strong competition from games of multiple genres and types.
Sony also suggested that Call of Duty is essential for game publishers. To answer that, MS shares lots of redacted data: consumer spending on PlayStation or the % of Sony digital sales worldwide. MS also says that in 2021only two Activision Blizzard titles ranked among the 20 best-selling console games of the year, a list that spans a range of of titles from other popular franchises owned by rival publishers such as FIFA (Electronic Arts), Grand Theft Auto (Take-Two Interactive), Assassin's Creed and Far Cry (Ubisoft), Resident Evil Village (Capcom), Minecraft (Xbox) (they remember that is also available on PlayStation and Nintendo consoles). In addition to the exclusives from Nintendo and Sony.
Therefore, MS believes that Call of Duty is just one game among a wide range of best-selling games, many of which are not even available on Xbox due to exclusivity strategies adopted by Microsoft's competitors.
About how essential Call of Duty could be, they say that Sony contradicts itself because they talked about the success of Gamepass since 2017. The thing is that until now none of the Activision Blizzard titles have been included in Game Pass, but the service has managed to attract and engage millions of players. So, if Game Pass proved successful without making this type of game available, logically such content cannot be considered essential for a game distribution channel to be competitive. According to MS, the same can be said of Nintendo's console platform and Epic Games' PC store, which stood out despite not having games from the Call of Duty franchise available.
For MS, the reasons above indicate that Sony is apprehensive about the increased competition on the merits that the transaction entails, rather than worried about any anti-competitive effect.
Finally, MS says that Sony's hypothetical concern appears to be that with Activision Blizzard content, Microsoft would gain an unattainable lead in subscription services. They say that this is unfounded for five reasons:
1.- It is not part of Microsoft's strategy to remove content from players: "On the contrary, Microsoft has publicly stated "its desire to keep Call of Duty on [Sony's] PlayStation", as well as the intention to "continue to make Call of Duty and other popular Activision Blizzard titles on [Sony's] PlayStation" with the commitment to do so "in addition to existing contractual arrangements" [RESTRICTED ACCESS]. In this regard, players will continue to have access to Activision Blizzard content, including Call of Duty, through traditional buy-to-play channels such as the PlayStation console. This fact reduces players' incentives to migrate to Game Pass, as they will be able to continue subscribers to their preferred service (e.g., Sony's PlayStation Plus) and, in addition, easily buy a copy of Call of Duty".
2.- Data shows that players see subscription services as one of the many ways in which one can pay for games. According to MS, this was confirmed by Sony itself: "SIE believes that subscription services compete with games purchased for a one-time fee ("buy-to-play"). [...] The games are substantially the same, regardless of whether the consumer made a one-time payment or accessed the titles through a subscription service." MS says that Sony's statement reveals the illogic of the claim that the addition of "Activision games to this content would represent a tipping point." According to MS: "If (i) subscription services compete with the buy-to-play model, as recognized by Sony itself, and (ii) Activision content will continue to be distributed through the buy-to-play channel, then players can simply continue to choose which payment model they prefer to access Activision content."
3.- MS says that Sony's insinuation that Game Pass could achieve unattainable leadership in the subscription services space is not only inconsistent with the market definition that Sony itself defended, it also ignores: "(i) the dynamic nature of these services and (ii) the relevant presence of Sony itself in this space. In fact, subscription services represent a recent monetization strategy. As much as Game Pass has been a pioneer, it is a dynamic space with new services and content emerging, and there are already a number of incumbents and services. Sony already offers a subscription service, PlayStation Plus, which the company has been able to scale from its existing user base, the size of the PlayStation platform and its exclusive content. In fact, Sony has surpassed Microsoft in terms of console sales and installed base, having sold more than twice as many Xbox in the last generation."
MS believes that what Sony fails to mention when it insinuates that Game Pass could achieve unattainable leadership in subscription services, is its own leadership position in digital distribution of console games: "Sony is, in fact, the largest digital distributor of console games. Therefore, Sony's concern with the potential competition of Game Pass simply reflects the usual resistance of traditional incumbents to competition on merit represented by disruptive players."
MS also says that this complaint to services such as Game Pass also reveals Sony's real concern: "The fear that an innovative business model that gives consumers access to high-quality content and lower up-front costs threatens its position as leadership in the gaming industry, with Microsoft moving away from a "device-centric" business strategy (in the sense that gamers must buy expensive PCs or consoles to have access to the best quality games) towards a more consumer-centric ("gamer-centric")."
MS quotes the interview from Sony CEO Jim Ryan where he revealed the company's strategy of not including new titles on PlayStation Plus on game launch day, which according to MS clearly exposes resistance to a business model that threatens the device-centric strategy adopted by Sony until then.
4.- Reason number four is totally redacted :p
5.- MS says that there is strong upstream competition, rival game distribution channels, including console stores and subscription services, that have access to a wide range of titles in addition to Activision Blizzard games, including exclusive content NOT available to Microsoft consumers.
They talk about how the "New PlayStation Plus" is perceived as a rival to Gamepass by the industry.
They also point out that the use of exclusive arrangements has been at the heart of Sony's strategy to strengthen its presence in the gaming industry. MS says that in addition to owning exclusive first-party content, Sony has also entered into agreements with third-party publishers to secure other forms of exclusivity with respect to certain games, such as marketing exclusivity or exclusivity rights with respect to downloadable content.
Seeing how Sony is a leader in the distribution of digital games, MS sees Sony's concern about the eventual exclusivity of Activision's content as incoherent and that it only reveals "the fear regarding an innovative business model that offers high quality content at low costs to players, threatening a leadership that was forged from a device-centric strategy and focused on exclusivity throughout of years."
In fact, MS says that Microsoft's ability to continue expanding Game Pass has been hampered by Sony's desire to inhibit such growth. Sony pays for "blocking rights" to prevent developers from adding content to Game Pass and other competing subscription services (then there is a bunch of redacted content).
Finally, MS says that regardless of how unusual Sony's criticisms of content are, the reality is that the strategy of retaining Activision Blizzard games, not distributing them in rival console stores, would simply not be profitable for Microsoft because such a strategy would only be profitable if Activision Blizzard's games were able to attract a sufficiently large number of gamers to the Xbox console ecosystem, and if Microsoft could earn enough revenue from the sale of games to offset the losses arising from non-distribution of such games on rival consoles.
MS says that the specific costs of exclusivity strategies and estimated lost sales mean that Microsoft would not be able to make up for the losses of implementing such exclusivity. In summary, the hypothetical adoption of any content discontinuation strategy would not be profitable for Microsoft and, even if implemented, such strategies would not have any competitive impact, MS says.
In the end, Microsoft understands that all the relevant information has been provided, that they can provide more info if needed, but they already request the approbation of the acquisition to CADE.
Well, here we go again :p
Microsoft is acquiring Activision Blizzard and the transaction is under review from multiple competition regulators around the world. One of them is the Administrative Council for Economic Defense or CADE in Brazil.
Back in July, CADE asked 11 third parties about the acquisition, to understand what they thought about it.
I summarised all the answers here:
The official opinions from Sony, Ubisoft, WB, BN, Apple, Riot, Google and more about the Activision Blizzard acquisition Activision/Blizzard
INTRODUCTION As you may have heard, Microsoft is acquiring Activision Blizzard. :p To do that, they need the legal OK from competition regulators all around the world. The FTC or the European Commission are the big ones, but for the deal to go through it has to be approved by almost 20...www.resetera.com
One of those answers was from Sony, ant they weren't happy about the acquition.
Well, 10 days later Microsoft has responded to all those answers, specially the one from Sony. It's a long but very interesting response (market strategies, the economics of exclusivity, Sony blocking content coming to Gamepass, etc), that's why I thought that it deserved a new thread.
WHAT SONY SAID
Sony said that from a development/publication perspective, game development typically involves an early stage that is neutral in relation to the platform, before the game is adapted for one or more specific platforms.
They believed that all games compete for engagement of the player. Players choose their gaming platform based on pricing, technical features, and available game types. The available content is the main factor for the player to choose a platform.
They said that there are few barriers to entry in game development and publishing for PC. That only one developer can create an "indie" game and distribute it online, but creating a high-end AAA game (like Activision's Call of Duty) requires a budget of hundreds of millions of dollars and thousands of employees.
They said that apart from Activision there are few developers/publishers capable of producing AAA games, such as EA (FIFA), Take-Two/Rockstar (Grand Theft Auto) and Epic Games (Fortnite). These games tend to be long-running franchises with big budgets, multi-year development cycles and very supportive followers.
Despite all of that, Sony believed that none of these developers could create a franchise to rival Activision's Call of Duty, which stands out as a gaming category on its own. That's why they believed that Call of Duty was so popular that it influences users' choice of console. In fact, their network of loyal users is so ingrained that even if a competitor had the budget to develop a similar product, it would not be able to create a rival.
They talked about the time, money, number of employees, millions of followers, sales and other data points related to Call of Duty to show how it's a very unique franchise that cannot be replaced.
They agreed that subscription services compete with games purchased for a one-time fee. But they thought that the lowest upfront costs of subscription services could be anti competitive in relation to publishers who recoup the significant investments in games by selling them for an upfront fee. They also thought that this could harm consumers by reducing the quality of the games.
They said that over the past five years, Game Pass has grown to capture approximately 60-70% of the global subscription services market (that marketshare is even greater in Brazil, where Game Pass represents approximately 70-80% of the PC subscription services market).
They believed that it would take several years for a competitor – even with substantial investments – to create a rival effective for Game Pass.
They also said that Call of Duty represents an important revenue stream for the PlayStation (they provided data but it's redacted), and it is one of SIE's biggest sources of revenue from third parties.
WHAT MICROSOFT RESPONDS
IN GENERAL
For starters, MS understands that the relevant markets defined during the Bethesda acquisition are still relevant. That means no segmentation by genre and that the market for digital distribution of games includes buy-to-play and other subscription services (obviously they don't want Gamepass perceived as their own market because they have a huge marketshare there).
They say that MS and ABK will face competition from a number of game developers and publishers. In addition, all of their games have close competitors. In fact, the third parties named several rival third-party publishers who own popular game franchises, demonstrating the intense rivalry in the market.
In fact, MS highlights arguments from Ubisoft, Riot, Amazon or Google that confirm some of their arguments: post transaction there will be multiples developers and publishers and players use multiple devices to play.
MS says that in all the relevant markets the'll have a marketshare of less than 20% (that usually means that there is no risk of anticompetitive effects). There is only one market where they have more than that, the digital distribution of games, where MS has more than 30%. However, they believe that Activision Blizzard's position in console game publishing is well below any levels that could result in market concerns. So, even in that market everything should be OK, according to them.
ABOUT SONY
MS literally says that: "Not surprisingly, Sony was the only third party to convey public opinion materially different from MS/ABK and the third parties regarding the competitive analysis of the transaction".
According to MS, Sony said that: 1) Activision Blizzard's Call of Duty franchise would be unrivaled and essential for the PlayStation console; 2) the inclusion of Activision Blizzard content in the Xbox Game Pass catalog would represent a "tipping point" in the market.
MS believes that Sony's isolated position can likely be explained by the fact that Microsoft's subscription game offering, Game Pass, was launched as Microsoft's competitive response to Xbox's failure in the "console wars" and the need to offer players additional value compared to the "buy-to-play" traditional model. In this way, Game Pass threatens to compete more effectively with the buy-to-play model, which Sony has successfully adopted.
Almost literal, MS says that: "In short, Sony is not resigned to having to compete with Microsoft's subscription service. Sony's public outcry on subscription games and the company's response are clear: Sony doesn't want attractive subscription services to threaten its dominance in the market for digital distribution of console games. In other words, Sony rails against the introduction of new monetization models capable of challenging its business model".
About Call of Duty being its own category of games, MS says that Sony's argument seems to assume that the publishing and development market should be segmented based on genre/type, but that Call of Duty would be a genre/market of its own.
MS believes that Sony does not present any element to substantiate the claim that Call of Duty would be a separate market from all other categories of games: "Sony is limited to commenting on Call of Duty's brand strength and loyalty and engagement. However, claiming that Call of Duty has a loyal following is a premise from which the conclusion that the game is a "category of games in itself" does not follow. The PlayStation itself has a foundation established by players loyal to the brand. This finding, however, does not lead to the conclusion that the PlayStation – or any branded product with loyal consumers – is a separate market from all other consoles. Extrapolating from such a finding, the extreme conclusion that Call of Duty is a "game category in itself" is simply unjustifiable under any quantitative or qualitative analysis."
Besides, MS believes that Call of Duty has several rivals, as corroborated by the companies consulted by CADE and the confidential data shared.
Therefore, according to MS, not only is Call of Duty not a "category of games per se", it also faces strong competition from games of multiple genres and types.
Sony also suggested that Call of Duty is essential for game publishers. To answer that, MS shares lots of redacted data: consumer spending on PlayStation or the % of Sony digital sales worldwide. MS also says that in 2021only two Activision Blizzard titles ranked among the 20 best-selling console games of the year, a list that spans a range of of titles from other popular franchises owned by rival publishers such as FIFA (Electronic Arts), Grand Theft Auto (Take-Two Interactive), Assassin's Creed and Far Cry (Ubisoft), Resident Evil Village (Capcom), Minecraft (Xbox) (they remember that is also available on PlayStation and Nintendo consoles). In addition to the exclusives from Nintendo and Sony.
Therefore, MS believes that Call of Duty is just one game among a wide range of best-selling games, many of which are not even available on Xbox due to exclusivity strategies adopted by Microsoft's competitors.
About how essential Call of Duty could be, they say that Sony contradicts itself because they talked about the success of Gamepass since 2017. The thing is that until now none of the Activision Blizzard titles have been included in Game Pass, but the service has managed to attract and engage millions of players. So, if Game Pass proved successful without making this type of game available, logically such content cannot be considered essential for a game distribution channel to be competitive. According to MS, the same can be said of Nintendo's console platform and Epic Games' PC store, which stood out despite not having games from the Call of Duty franchise available.
For MS, the reasons above indicate that Sony is apprehensive about the increased competition on the merits that the transaction entails, rather than worried about any anti-competitive effect.
Finally, MS says that Sony's hypothetical concern appears to be that with Activision Blizzard content, Microsoft would gain an unattainable lead in subscription services. They say that this is unfounded for five reasons:
1.- It is not part of Microsoft's strategy to remove content from players: "On the contrary, Microsoft has publicly stated "its desire to keep Call of Duty on [Sony's] PlayStation", as well as the intention to "continue to make Call of Duty and other popular Activision Blizzard titles on [Sony's] PlayStation" with the commitment to do so "in addition to existing contractual arrangements" [RESTRICTED ACCESS]. In this regard, players will continue to have access to Activision Blizzard content, including Call of Duty, through traditional buy-to-play channels such as the PlayStation console. This fact reduces players' incentives to migrate to Game Pass, as they will be able to continue subscribers to their preferred service (e.g., Sony's PlayStation Plus) and, in addition, easily buy a copy of Call of Duty".
2.- Data shows that players see subscription services as one of the many ways in which one can pay for games. According to MS, this was confirmed by Sony itself: "SIE believes that subscription services compete with games purchased for a one-time fee ("buy-to-play"). [...] The games are substantially the same, regardless of whether the consumer made a one-time payment or accessed the titles through a subscription service." MS says that Sony's statement reveals the illogic of the claim that the addition of "Activision games to this content would represent a tipping point." According to MS: "If (i) subscription services compete with the buy-to-play model, as recognized by Sony itself, and (ii) Activision content will continue to be distributed through the buy-to-play channel, then players can simply continue to choose which payment model they prefer to access Activision content."
3.- MS says that Sony's insinuation that Game Pass could achieve unattainable leadership in the subscription services space is not only inconsistent with the market definition that Sony itself defended, it also ignores: "(i) the dynamic nature of these services and (ii) the relevant presence of Sony itself in this space. In fact, subscription services represent a recent monetization strategy. As much as Game Pass has been a pioneer, it is a dynamic space with new services and content emerging, and there are already a number of incumbents and services. Sony already offers a subscription service, PlayStation Plus, which the company has been able to scale from its existing user base, the size of the PlayStation platform and its exclusive content. In fact, Sony has surpassed Microsoft in terms of console sales and installed base, having sold more than twice as many Xbox in the last generation."
MS believes that what Sony fails to mention when it insinuates that Game Pass could achieve unattainable leadership in subscription services, is its own leadership position in digital distribution of console games: "Sony is, in fact, the largest digital distributor of console games. Therefore, Sony's concern with the potential competition of Game Pass simply reflects the usual resistance of traditional incumbents to competition on merit represented by disruptive players."
MS also says that this complaint to services such as Game Pass also reveals Sony's real concern: "The fear that an innovative business model that gives consumers access to high-quality content and lower up-front costs threatens its position as leadership in the gaming industry, with Microsoft moving away from a "device-centric" business strategy (in the sense that gamers must buy expensive PCs or consoles to have access to the best quality games) towards a more consumer-centric ("gamer-centric")."
MS quotes the interview from Sony CEO Jim Ryan where he revealed the company's strategy of not including new titles on PlayStation Plus on game launch day, which according to MS clearly exposes resistance to a business model that threatens the device-centric strategy adopted by Sony until then.
4.- Reason number four is totally redacted :p
5.- MS says that there is strong upstream competition, rival game distribution channels, including console stores and subscription services, that have access to a wide range of titles in addition to Activision Blizzard games, including exclusive content NOT available to Microsoft consumers.
They talk about how the "New PlayStation Plus" is perceived as a rival to Gamepass by the industry.
They also point out that the use of exclusive arrangements has been at the heart of Sony's strategy to strengthen its presence in the gaming industry. MS says that in addition to owning exclusive first-party content, Sony has also entered into agreements with third-party publishers to secure other forms of exclusivity with respect to certain games, such as marketing exclusivity or exclusivity rights with respect to downloadable content.
Seeing how Sony is a leader in the distribution of digital games, MS sees Sony's concern about the eventual exclusivity of Activision's content as incoherent and that it only reveals "the fear regarding an innovative business model that offers high quality content at low costs to players, threatening a leadership that was forged from a device-centric strategy and focused on exclusivity throughout of years."
In fact, MS says that Microsoft's ability to continue expanding Game Pass has been hampered by Sony's desire to inhibit such growth. Sony pays for "blocking rights" to prevent developers from adding content to Game Pass and other competing subscription services (then there is a bunch of redacted content).
Finally, MS says that regardless of how unusual Sony's criticisms of content are, the reality is that the strategy of retaining Activision Blizzard games, not distributing them in rival console stores, would simply not be profitable for Microsoft because such a strategy would only be profitable if Activision Blizzard's games were able to attract a sufficiently large number of gamers to the Xbox console ecosystem, and if Microsoft could earn enough revenue from the sale of games to offset the losses arising from non-distribution of such games on rival consoles.
MS says that the specific costs of exclusivity strategies and estimated lost sales mean that Microsoft would not be able to make up for the losses of implementing such exclusivity. In summary, the hypothetical adoption of any content discontinuation strategy would not be profitable for Microsoft and, even if implemented, such strategies would not have any competitive impact, MS says.
In the end, Microsoft understands that all the relevant information has been provided, that they can provide more info if needed, but they already request the approbation of the acquisition to CADE.
