Microsoft is risking an antitrust fight over the future of gaming

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Wednesday, December 7, 2022

Microsoft could face its first antitrust fight in years over 'Call of Duty'

Microsoft fired its opening salvo in what could be a major confrontation with the Federal Trade Commission (FTC) over the tech giant’s $69 billion acquisition of Activision Blizzard. On Monday, Microsoft President Brad Smith penned an op-ed in The Wall Street Journal saying that the deal would benefit gamers and developers by making Microsoft more competitive with rival Sony.

The decision is a perilous one, however, as a fight with the FTC risks opening up Microsoft to the same negative attention and scrutiny Alphabet, Amazon, and Meta are facing as they stare down their own antitrust investigations.

So why take such a risk? Because Activision Blizzard, which owns the wildly popular “Call of Duty” franchise, will instantly turn Microsoft into the third largest gaming company in the world by revenue behind Tencent and Sony. What’s more, it will also give Microsoft the opportunity to jump further ahead of Sony in the still-nascent cloud gaming industry, which Newzoo says will jump from $2.4 billion in revenue in 2022 to $8.1 billion in 2025. On top of that, the deal would also make Microsoft a genuine competitor in the fast-growing mobile gaming industry.

'Warzone 2.0' brings a slew of big changes to one of the most exciting battle royale games around. (Image: Activision Blizzard)
Activision Blizzard's 'Call of Duty' is a hugely important game to both Microsoft and Sony. (Image: Activision Blizzard)

And Microsoft would have a truly massive gaming storefront if it combines its cloud gaming options and the mobile gaming titles it acquires through Activision Blizzard like “Candy Crush.”

“The whole reason they're buying this…is they truly intend to become the Netflix of games,” explained Wedbush managing director of equity research Michael Pachter. “The difference between Microsoft's approach and Netflix’s approach is Netflix did it largely based upon content it licensed from others, and Microsoft is doing it largely based upon content that they own and control.”

For Microsoft, the goal isn’t to dominate the console wars, but to get ahead of the competition in the future fight for cloud gaming supremacy. And if that means taking on the government, Microsoft seems more than happy to do so.

Gaming from anywhere, everywhere

The FTC’s antitrust suit would not only be a blackeye for Microsoft, it could also prove to be a major distraction. If Microsoft wasn’t contending with the Department of Justice’s antitrust suit that nearly split the company in half in the 1990s and 2000s, it might not have missed out on the smartphone revolution.

But the gaming industry, which Newzoo estimates will see global revenue of $196.8 billion in 2022, is seemingly too big of an opportunity for Microsoft to pass up.

“There's a lot of scrutiny on [the deal], because it is an absolutely huge acquisition,” explained Lewis Ward, IDC research director of gaming, esports, and VR/AR. “That would shake up the competitive dynamics of the entire gaming industry.”

It’s not just game consoles and downloadable games, though. Microsoft is angling to finally get ahead of Sony by becoming the go-to company for cloud gaming.

Cloud gaming basically allows gamers to stream and play the likes of “Assassin’s Creed Origins,” “Deathloop,” and “Halo Infinite” on traditionally underpowered devices like smartphones, tablets, or even smart TVs without the need for pricey consoles or PCs.

During Microsoft’s Q1 earnings call in October, CEO Satya Nadella announced that 20 million people have used Microsoft’s Xbox Cloud Gaming service so far. That’s up from 10 million people in April.

A man poses for a photo in front of a Microsoft Xbox sign opposite a Sony PlayStation sign at the Electronic Entertainment Expo, or E3, in Los Angeles, California, United States, June 16, 2015. REUTERS/Lucy Nicholson
A man poses for a photo in front of a Microsoft Xbox sign opposite a Sony PlayStation sign at the Electronic Entertainment Expo, or E3, in Los Angeles, California, United States, June 16, 2015. REUTERS/Lucy Nicholson

Still, that’s less than the 25 million PlayStation 5 consoles Sony has sold since it launched the console in 2020. Despite its best attempts, Microsoft consistently underperforms Sony in the gaming space and regularly sells fewer consoles and games than the PlayStation maker.

Cloud gaming, however, represents a new opportunity for Microsoft, and one that the company is keen on exploiting. It already has the necessary technology backbone in place thanks to its massive servers across the world. It just needs to attract more players.

“Game Pass [Microsoft’s gaming service that includes its cloud gaming platform] has really become central to the growth of Microsoft's game business. It reaches beyond the highly-competitive console market; it leans on Microsoft's strengths in cloud and software as a service, and it allows access to new audiences... among many other things,” Louise Shorthouse, research manager at Ampere Games told Yahoo Finance.

“It would allow Microsoft to be more competitive with Sony, of course, but also with China-based tech giants like Tencent who are very focused on international expansion at the moment.”

‘Call of Duty’ is key

At the center of the very public dispute between Microsoft and Sony is whether Sony will continue to have access to Activision Blizzard’s “Call of Duty” if Microsoft is able to buy Activision Blizzard.

According to Smith’s op-ed, Microsoft is willing to sign a 10-year agreement ensuring “Call of Duty” is available the same day on PlayStation and Xbox. It makes sense for Microsoft to keep “Call of Duty” on PlayStation too. The latest title in the franchise “Call of Duty Modern Warfare 2” topped out at $1 billion in sales over its first 10 days on the market. Cutting out Sony would mean eating into “Call of Duty’s” sales.

FILE - The Activision Blizzard Booth is shown on June 13, 2013 the during the Electronic Entertainment Expo in Los Angeles. Microsoft is buying Activision Blizzard, Tuesday, Jan. 18, 2022,  for $68.7 billion to gain access to blockbuster games including Call of Duty and Candy Crush. The all-cash deal will let Microsoft accelerate mobile gaming and provide it building blocks for the metaverse, or a virtual environment.  (AP Photo/Jae C. Hong, File)
Microsoft's Activision Blizzard deal would help it bolster its cloud gaming service. (AP Photo/Jae C. Hong, File)

What’s not clear, however, is if Sony would be able to offer the game via its PlayStation Plus service, which features a cloud gaming option.

Both Microsoft and Sony have a history of buying up third-party gaming companies and making their titles exclusive to either Xbox or PlayStation. But “Call of Duty” is such a huge franchise that if Sony doesn’t have access to it, say after that proposed 10-year agreement expires, gamers might find themselves opting for an Xbox instead of a PlayStation.

Mobile is massive, but part of the cloud story

While growing Game Pass is an enormous goal of the Activision Blizzard acquisition, Microsoft also stands to benefit by finally having its own competitive mobile games. Activision Blizzard’s King is home to titles like “Candy Crush” and then there’s the mobile version of “Call of Duty.”

The mobile games industry is expected to reach $225 billion in revenue by 2026, according to IDC. And since more people around the world have access to smartphones than high-end PCs and game consoles, investing in the mobile games industry just makes sense for Microsoft.

But, as Ward explained, if Microsoft can ensure that users can both stream console-quality games via Xbox Game Cloud and access downloadable versions of traditional mobile games, it could create a one-stop shop for gamers around the world.

Microsoft still has a long way to go to get its deal done. And there’s no way to guarantee that the tie up will benefit gamers rather than hurt them through decreased competition, as Sony argues. For Microsoft, however, the risk appears to be worth the reward. Even if it means being the bad guy.

By Daniel Howley, tech editor at Yahoo Finance. Follow him @DanielHowley

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