Published: December 19, 2022

As industries across the globe continue to see rapid expansion in the face of ongoing innovation and increased market participation, many sectors are being scrutinized over monopolistic entities dominating industry conversations. We have watched this happen in many markets over time; while the 1900s saw the implementation of laws to prevent companies from taking over entire industries, it is still very much an issue in today’s economy. According to the Economist, three companies control about 80% of mobile telecoms; three have 95% of credit cards; and Google handles 60% of search. This type of market concentration has been identified across a myriad of industries, and gaming is the latest to catch headlines amid antitrust conflicts.

As one of the world’s biggest media industries, gaming has closed two of the largest acquisitions in the industry’s history since the start of this year after making over $38 billion dollars in gaming deals in 2021.

Three companies making the industry’s leading consoles—Microsoft, Sony, and Nintendo—and four publishers—Epic Games, Activision Blizzard, Take-Two, and Tencent—dominate the videogame market. Over time, they grew to create entire ecosystems within their platforms. But not everyone thinks that this growth has been positive; many people, including those at the Federal Trade Commission (FTC), feel as if these ongoing expansions are hindering competition in the industry. And this disagreement is causing an influx of gaming antitrust cases to enter the courts—a trend that is likely to continue through 2023 and beyond.

Lawyers representing companies in this space should consult with experienced experts who understand antitrust law and the challenges associated with market monopolies to evaluate potential issues and develop a well-informed litigation strategy. Additionally, industry insiders can provide real, practical insight into the gaming industry, and how the various players relate to each other when considering market share and the competitive landscape.

Let’s take a look at how current disputes could influence future antitrust litigation in the space and what a gaming industry pioneer thinks of the FTC’s latest move against Microsoft.

Epic Games v. Apple

Apple’s App Store, now dubbed a “walled garden”, has been a go-to destination for software developers looking to promote their products for over a decade. It began with a set of strict terms to ensure hackers and other internet trolls could not comprise its systems. These rules were widely accepted- until Epic Games came along.

Fast forward to 2020: the App Store hosted 1.8 million applications with 99.99 percent of them being created by third parties. And developers began growing weary of their rules, particularly one that prevented them from using their own payment platforms rather than Apple’s—which gave the tech giant a 30% cut of all payments, an estimated $20 billion each year. After Fortnite maker Epic Games attempted to bypass Apple’s payment system to maximize their revenue, the App Store blocked Fortnite from being downloaded, prompting Epic to sue Apple in federal court alleging that Apple had created an illegal monopoly for mobile gaming transactions. And in turn, Apple countersued claiming breach of contract, claiming that the App Store doesn’t keep out competitors; rather, they prevent inappropriate content and behavior from living on their platform.

Epic lost the initial antitrust suit and filed an appeal. The outcome of this case is likely to set the precedent in cases against app stores going forward, especially with other high-profile entities speaking out against Apple’s practices. If Apple continues to make its competitors feel disadvantaged, there is likely a slew of antitrust litigation in the future over other gaming software, social media apps, and more. And the appeals court’s decision, likely to come sometime next year, could ultimately decide how Apple is prosecuted in future antitrust cases.

Blocking the Microsoft-Activision Deal

The FTC officially filed a complaint against Microsoft on December 8 after they unsuccessfully attempted to mitigate the regulator’s initial concerns about the impending purchase. Regulatory bodies around the globe have been evaluating the deal since its conception, and the FTC finally moved to halt the acquisition citing that it was a direct violation of antitrust law and could unfairly boost Microsoft’s position in the market.

While Microsoft is pushing for the deal to help them compete in the mobile gaming space and enhance their Xbox Cloud Gaming service, which has doubled from 10 to 20 million users since last year, the FTC has reason to be dubious of Microsoft’s intention. Last year, Microsoft acquired ZeniMax Media, the parent company of Bethesda Softworks, in a massive merger that gave them access to titles like Starfield and Redfall. In completing the acquisition, Microsoft promised that the games would remain playable on all rival platforms and consoles. But directly following the deal, the company went back on its word, making several of the publisher’s titles Microsoft exclusives and alienating an entire sector of the market.

In the face of this current deal, the FTC feels that it could allow the company to suppress the competition and ignite explosive growth regarding its cloud gaming and subscription business. After all, Activision boasts some of the world’s most well-known video games in its catalog including Crash Bandicoot, Warcraft, Candy Crush, and the uber-successful Call of Duty. The newest iteration of Call of Duty exceeded $1 billion in sales after only 10 days on the market, and the franchise is set to continue with a new installment in 2023.

Evaluating the Claim

According to WIT Advisory Panel member and gaming expert Josh Grant, the FTC relies on three principal arguments for its claim:

  • Relevant Markets: The FTC defines the relevant markets here as High-Performance Consoles, Multi-Platform Library Content Services, and Cloud-Based Gaming Services in the US. However, the FTC ignores several current market realities in its relevancy definitions.  For one, mobile gaming is now 50% of the gaming market. With virtually 50% of US consumers playing games on their phones and on these platforms, there is a far greater distribution of product offerings from thousands of developers. And, importantly, these markets are controlled not by Microsoft and Sony but by Apple and Google in the US. Additionally, the FTC excludes Nintendo on the grounds that its tech capabilities are a generation behind Sony and Microsoft’s offerings.  This may be true, but if console gamers own a second console, it is most likely to be Nintendo- which has its own library of first-party restricted content like the Mario and Zelda franchises.  By bringing cloud-based gaming and subscription services and by excluding mobile and Nintendo, the FTC is certainly creating a tailored and narrow view of the overall gaming market’s breadth and depth.
  • AAA Franchises and Publishers: By narrowing the field in its Relevant Market definition, the FTC sets up a compelling argument linking consumer’s console choices to AAA franchises, and in that narrow version of the market, their claims are largely true. By vertically integrating arguably the largest and most successful of these AAA publishers, it is hard to argue with the FTC’s contention that Microsoft will have a greater advantage in a market with only two major participants.  This is particularly true if Microsoft starts adding Activision franchises like Call of Duty to its premium game pass subscriptions.
  • Restriction of First-Party Content to Microsoft Platforms: This is perhaps the FTC’s strongest argument. Microsoft acquired Zenimax/Bethesda and made some of their titles exclusives, and this pattern of exclusivity extends all the way back to Xbox’s early days with the launch of its anchor tenant franchise Halo. Despite Xbox’s head Phil Spencer’s statements to UK regulators in trying to sell the merger that Call of Duty makes too much money to pull from Sony, the FTC’s concerns here certainly have a very solid historical basis.

When asked if there are any potential consumer benefits to the merger, Grant highlighted one in particular: the expansion of titles/content to non-console-based markets like cloud gaming on smart TVs or AAA franchises like COD available in emerging technologies like the metaverse.  Emerging platforms and markets like cloud-based smart TV gaming or immersive experiences in VR/metaverse typically come with hefty price tags and generally take many years of development to bring to fruition.  Microsoft has the resources, capital, and technology to compete in these spaces and it needs showpiece AAA content to attract consumers.  The merger could pave the way for a better consumer experience in these emerging markets by integrating content and technology in an economic framework that could be financially viable.  However, if Microsoft continues its practice of restricting first-party titles from channels outside its own hardware footprint, these benefits may also further reduce competition and choice in these emerging markets.

In Grant’s final analysis, he finds that the FTC’s definition of Relevant Markets may be self-serving and questionable considering the broader dynamics in the video gaming market. However, its views on the role of AAA IP in driving hardware sales, scarcity of AAA publishers, and Microsoft’s own history of first-party restrictions align with his own experience in the industry and his personal concerns as a gaming consumer. 

The Legal Landscape

Given Microsoft’s track record, many entities including the FTC and competitor Sony feel that the gaming giant could once again go back on their promise and make “must-have” titles like CoD Xbox exclusives. Sony even called Microsoft a “Tech Titan buying up irreplaceable content at incontestable prices ($68.7 billion) to tip competition to itself.”

Some believe that the suit alleges likely harm to competition across the relevant markets mentioned above. The FTC complaint claims that the acquisition will create a monopoly, ultimately harming consumers and innovation in the industry moving forward. Alas, Microsoft and Activision are prepared to defend the deal and are confident it will go forward despite the current regulatory environment. In the meantime, other players in the space considering M&A as part of their business strategy should consult with former regulators and c-suite executives who can critique plaintiff practices while economic experts can discuss general market conditions and competitive landscapes.

At WIT, we have teams of gaming industry experts that are prepared to handle all aspects of antitrust litigation and include professionals who are esteemed economists, experienced industry insiders, and subject area specialists. If your company needs help preparing for these challenges, reach out for gaming experts who are uniquely qualified to inform your litigation strategy.  

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