Subscription services, such as Game Pass or Sony's PlayStation Plus, are not their own market, but rather an alternative way for consumers to pay for console, PC, or mobile games that are otherwise offered as standalone buy-to-play or free-to- play games. (Page 12)
REDACTED (5 sentences + a long footnote). The cannibalization risk is why many game publishers, Activision included, do not embrace the subscription model. (Page 13)
The FTC's proposed cloud-gaming subscription services market is similarly incoherent. As an initial matter, cloud gaming is not a separate product—it is a euphemism for a technology that allows for a game to be streamed from an external source, such as the cloud, rather than downloaded onto a device (like a PC or console) and played natively. In addition, the FTC's proposed market includes some multi-game subscription services, like Game Pass, that offer cloud streaming of console games as feature for subscribers, who typically use it to try games before downloading them. But it also includes other distinct services, like Nvidia's GeForce NOW, that allow consumers to stream games they already own on PC. The FTC provides no explanation for how these products are substitutable, particularly given its own argument that consoles and PCs are in distinct markets. (Page 13)
Beyond that, cloud-gaming is entirely unproven—while the technology has been around for some time, it has never seen significant demand—and predictions about its future development and Xbox's role are conjectural. Even assuming that perceived harm to a future market is relevant, the FTC itself has recognized that projecting harm in future markets "can be difficult," must be "strongly rooted in the evidence," and requires "considerable evidence" that the market will emerge and that the merger will result in a substantial lessening of competition. Nielsen Holdings, N.V. & Arbitron Inc., FTC File No. 131-0058, at 2-3; see also, e.g., FTC v. Facebook, Inc., 560 F. Supp. 3d 1,4 (D.D.C. 2021) (rejecting reliance on a future market as "too speculative and conclusory"). (Pages 13-14)
The FTC cannot make those showings. As noted, Sony Group's CEO recently acknowledged the financial and technical difficulties cloud gaming faces. And even if the FTC had evidence of what this segment would look like in the future, it is wholly speculative that Xbox would participate in it in a meaningful way, REDACTED. (Page 14)
The FTC alleges a single theory of harm: vertical foreclosure. Courts appropriately place a heavy burden on the government in vertical merger cases because "[v]ertical mergers often generate efficiencies and other procompetitive effects." ("Vertical integration is ubiquitous in our economy and virtually never poses a threat to competition when undertaken unilaterally and in competitive markets."). These considerations apply with particular force here as the merger will make Activision's games more accessible to consumers. (Page 14)
The FTC's central claim is that the combined firm would withhold certain Activision content—in particular, COD—from Sony, the longtime market leader. In citing such "foreclosure" as its basis for opposing this transaction, the FTC must prove, among other things, (1) that the combined company would have the incentive to withhold COD from rivals to whom an independent Activision would otherwise sell COD (i.e., that doing so would be profitable despite the forgone Activision sales), (2) that it has the ability to foreclose (i.e., that rivals cannot effectively compete without COD and could not offset any harm through a competitive response), and (3) that competition (as opposed to individual competitors) would likely be harmed. The FTC cannot make these showings. (Pages 14-15)
No incentive. This element is simple. Microsoft has committed not to withhold from anyone by signing binding contracts to bring COD on nondiscriminatory terms to Nintendo and multiple different cloud gaming providers. The FTC must account for these economic realities in trying to meet its burden, rather than relying on "assumptions and simplifications that are not supported by real-world" facts, and that ignore "economic reality". The government fails to do so. (Page 15)
As further proof of its lack of incentive, Microsoft has offered to provide Activision content to Sony for the next ten years. REDACTED (three sentences).
The only plausible reason why Sony has declined to sign is not because it fears "foreclosure" (which it could prevent with the stroke of a pen), but because it believes this transaction will make third-place Xbox a more effective competitor. Sony is presumably worried that putting Activision games in Game Pass "day and date" will increase consumer interest in subscription services—a business model Sony believes is less profitable than making consumers pay $70 for each new release. But that belief is a reason to approve this deal because the antitrust laws "were enacted for the protection of competition not competitors." The antitrust laws do not protect a dominant firm's profit margin. (Page 15)
Even setting aside the offer, withholding COD would harm Xbox economically (Xbox would be losing COD revenues on the /argest console provider, Sony.) Those revenues were critical to the price Microsoft paid for Activision, the Board's evaluation of the transaction, and the financial targets to which Xbox is held accountable. Withholding would cause even greater harm by degrading the game and infuriating gamers. (Pages 15-16)
Microsoft's acquisition of Mojang's Minecraft franchise in 2014 illustrates why all of these incentives cut against withholding. Like COD, Minecraft is a popular franchise with substantial cross-platform play. Under the reasoning advanced by the FTC, Xbox would have had incentives to make Minecraft exclusive to its Xbox. It did not, and has not since. On the contrary, Xbox has expanded access to the game, and continues to release new editions available on PlayStation. Indeed, Defendants are not aware of any situation where a publisher has chosen to take exclusive an existing game franchise that is multi-player and offers cross-platform play. There is no reason to believe this would be the first. (Page 16)
The government's two responses to this straightforward logic are unavailing. The FTC primarily relies on its expert, Dr. Lee, who claims withholding would be profitable. He arrives at that conclusion by purporting to simulate the likely increase in Xbox purchases as a result of withholding (the "demand model") and analyzing how profitable withholding would be for Xbox (the "foreclosure analysis"). The linchpin of his conclusion is that withholding COD would result in a 5% increase in Xbox's console share. Dr. Lee initially tried to justify this prediction with his demand model, but Defendants" expert Dr. Carlton demonstrated that it had serious conceptual flaws. Dr. Lee then pivoted to saying that his demand model is "distinct and separate" from his foreclosure model, and tried to justify the 5% figure based on cherry-picked documents. Even assuming that is a proper role for an expert (which it is not), the sources do not support his conclusion. And Dr. Carlton further shows that Dr. Lee's foreclosure analysis relies on multiple false assumptions and that correcting for them shows that any foreclosure strategy would in fact be unprofitable. Ultimately, Lee's analysis provides no basis to disregard the real world, where Sony has a favorable offer for COD, Xbox has made plain that it wants to provide COD to Sony (and in fact needs to continue to sell to Sony), and regulators around the world all agree that withholding COD from Sony would be unprofitable and is thus not a serious concern. (Pages 16-17)
The FTC's strained analogy to Microsoft's acquisition of ZeniMax, a fundamentally different game developer, likewise fails to establish that COD would become exclusive. The first two ZeniMax games Xbox released post-acquisition (Deathloop and Ghostwire) were exclusives for Sony, REDACTED.The ZeniMax story thus says nothing about what Xbox would do with an existing, multi-player, cross-platform franchise like COD—the relevant analogy there is Minecraft. (Page 17)
Related footnote: In drawing its analogy to Zenimax, the FTC wrongly implies that Xbox misled the European Commission about its intent regarding future Zenimax titles. The European Commission took the extraordinary step of responding directly when the FTC made this claim in its administrative complaint, by stating publicly that Microsoft did not make any "commitments" to the European Commission, nor did the European Commission "rely on any statements made by Microsoft about the future distribution strategy concerning ZeniMax's games." Instead, the European Commission cleared the transaction "unconditionally as it concluded that the transaction would not raise competition concerns." (Page 17)
No ability. There is likewise no reason to think Xbox could foreclose PlayStation by withholding COD. If every PlayStation device that accounted for as little as two hours of COD per month were to somehow transform into an Xbox device overnight, PlayStations would still comfortably outnumber Xboxes. If any such shift occurred between Xbox and PlayStation, that would serve only to make the console market less concentrated and more competitive. But the existence of such an extreme shift is implausible: Nintendo outcompetes Xbox even though it does not currently have access to COD. Likewise, Steam, the leading PC gamestore, has also risen in popularity without COD. That is no doubt why the FTC tries to exclude Nintendo and PC from the console market—they are proof that COD is not essential to competition. (Pages 17-18)
Moreover, any claim that Xbox could foreclose PlayStation would need to take account of Sony's ability to respond competitively. The myriad options available to Sony are fatal to the FTC's case. Sony could lower prices or improve the quality ofits console. It could invest in other first-party or third-party games, as it recently did with Bungie in a deal the FTC quickly cleared. Or, as Sony's CEO told investors in the wake of news of Microsoft's acquisition of Activision, it could "grow [Sony's] own studios organically" to increase Sony's own value proposition to consumers. These likely competitive responses are integral to antitrust analysis, but the FTC simply ignores them. See Barry Wright Corp. v. 1TT Grinnell Corp., 724 F.2d 227,232 (1st Cir. 1983) (Breyer, J.) (the "long term effects" of any proposed merger will "depend in large measure on competitors" responses."); Paddock Publ'ns, Inc. v. Chi. Trib. Co., 103 F.3d 42, 44 (7th Cir. 1996) (rejecting challenge to exclusivity agreement between incumbent newspaper and content creators because any rival newspaper "deprived of access" even to the "best known" content can compete on the basis of alternative content). (Page 18)
No harm to competition. In any event, even if Microsoft could be expected to make COD exclusive, the FTC has not shown harm to competition. The entirety of the FTC's analysis is Dr. Lee's assertion that any exclusivity that would result from the merger must necessarily be anticompetitive because it reduces the availability of a single company's games on a single company's platform (complaining making COD exclusive would result in diminished "consumer choice"). That is not the law. Exclusivity arrangements (whether from contract or vertical integration) are ubiquitous throughout the economy and are usually procompetitive. Indeed, both Sony and Nintendo have entered into a wide range of exclusivity arrangements of their own with various game publishers, and each has far more exclusive gaming content than Xbox does. Dr.Lee himself has recognized in his prior academic work about gaming that such arrangements can be procompetitive. (Page 19)
This transaction also does not exhibit, and the FTC's motion does not address, any of the special features that have led courts in unusual cases to conclude that vertical integration will give rise to anticompetitive outcomes. In particular, COD is not a "necessary input" for Xbox rivals, and any "foreclosure" percentages would be far too small to warrant any presumption of competitive harm. Tellingly, Dr. Lee never seeks to show that competition would be harmed such that Xbox would be able to raise console (or game) prices. (Page 19)
Related footnote: Even if, counterfactually, Xbox had the incentive to withhold all of Activision's content, that would be a modest share of the console game publishing by any measure. Such a "foreclosure percentage" would be far smaller than the level (30-50%) needed to raise any presumption of anticompetitive effect even if Xbox were a platform monopolist. (Page 19)
Finally, the FTC ignores critical variables in the economic analysis by disregarding the new options the merger will create for playing Activision content "ncrease[ed] output" is a clear "indicator of a merger's competitive impact." In re AMR Corp., 625 B.R. 215, 255 (Bankr. S.D.N.Y. 2021), aff'd, 2023 WL 2563897 (2d Cir. 2023); see also Ohio v. Am. Express Co., 138 S. Ct. 2274, 2289 (2018) (practices that "expand output and improv[e] quality" are procompetitive). (Page 20)
Here, the acquisition would benefit consumers by making COD available on Microsoft's Game Pass on the day it is released on console (with no price increase for the service based on the acquisition), on Nintendo, and on other services that allow cloud streaming. Activision has historically refused to provide this type of access to COD, REDACTED (sentence and footnote). These clear consumer benefits likewise eviscerate the FTC's case. (Page 20)
With respect to the console market, the FTC at least purports to offer a quantitative analysis—however flawed—of likely foreclosure effects. But it makes no such pretense when it turns to the putative markets for "content library" and "cloud gaming" subscription services. Even if these gaming features were (wrongly) considered separate "markets," the FTC"s claims regarding "content-library" and "cloud gaming" services would fail. Indeed, the FTC does not even allege, let alone substantiate, any allegation that the merger will likely cause the withholding of content that Activision would otherwise provide to third-party content-library or cloud-gaming providers. (Page 20)
As a threshold matter, the FTC misconceives the law. Even accepting the government's framing of the standard, the question is whether this "merger will likely lead to a substantial lessening of competition," whether the world with this merger is "likely" to be substantially less competitive than the but-for world without it. The FTC does not even purport to make that showing as to content-library subscription services and cloud gaming subscription services. Instead, Dr. Lee contends that he need only show that "an independent Activision" is somewhat "more likely" than the combined company would be "to support particular content library and [cloud] gaming services." But that is not enough under the law — Dr. Lee instead (at minimum) must be willing to show that an independent Activision would likely support such services and that the combined firm likely would not. Dr. Lee is not willing to make that representation, which dooms the government's case here, just as it did in AT&T. (Page 21)
Related footnote: A plain-meaning interpretation of Section 7 precludes liability for the simple reason that Activision does not make COD available to content-library or cloud-gaming providers today; thus, continued withholding could not constitute a "substantial lessening" of competition. U.S. v. Falstaff' Brewing Corp., 410 U.S. 526, 537 (1973) ("[w]e leave for another day the question of the applicability of $ 7 to a merger that will leave competition in the marketplace exactly as it was" but will nonetheless result in "less competition than there would have been" in the but-for world); U.S. v. Marine Bancorp., Inc., 418 U.S. 602, 639 (1974) (continuing to "express no view on the appropriate resolution of the question reserved in Falstajf"). As discussed in the text, the FTC's alternative-market theories of harm fail even if the relevant Section 7 comparison is between future but-for and with-merger worlds. (Page 21)
Last edited by Ryuu96 - on 17 June 2023
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