Hello, and welcome to Protocol Entertainment, your guide to the business of the gaming and media industries. This Friday, we’re taking a look at Microsoft and Sony’s increasingly bitter feud over Call of Duty and whether U.K. regulators are leaning toward torpedoing the Activision Blizzard deal.
Call of Duty is starting to sink the Activision ship
For Microsoft’s Activision Blizzard acquisition, the fate of Call of Duty is starting to look less like a bargaining chip and more like a deal breaker. On Wednesday, the U.K.’s Competition and Markets Authority, one of three pivotal regulatory bodies arguably in a position to sink the acquisition, published a 76-page report detailing its review findings and justifying its decision last month to move its investigation into a more in-depth second phase.
Microsoft hit back — hard — and accused the CMA of parroting the talking points of its prime competitor, Sony. But the Xbox maker has exhausted the number of different ways it has already promised to play nice with PlayStation, especially with regards to the exclusivity of future Call of Duty titles. Unless Microsoft is able to satisfy Sony’s aggressive demands and appease the CMA, it now looks like the U.K. has the power to doom this deal like it did Meta’s acquisition of Giphy.
The CMA is focusing on three key areas: the console market, the game subscription market, and the cloud gaming market. The regulator’s report, which it delivered to Microsoft last month but only just made public, goes into detail about each one, and how games as large and influential as Call of Duty may give Microsoft an unfair advantage.
- “The CMA is concerned that having full control over this powerful catalogue, especially in light of Microsoft’s already strong position in gaming consoles, operating systems, and cloud infrastructure, could result in Microsoft harming consumers by impairing Sony’s — Microsoft’s closest gaming rival — ability to compete,” the report said.
- The CMA said it’s also concerned about “other existing rivals and potential new entrants who could otherwise bring healthy competition through innovative multi-game subscriptions and cloud gaming services.”
- “The CMA recognises that ABK’s newest games are not currently available on any subscription service on the day of release but considers that this may change as subscription services continue to grow,” according to the report. “After the Merger, Microsoft would gain control of this important input and could use it to harm the competitiveness of its rivals.”
- In other words, if Microsoft owned Call of Duty and other Activision franchises, the CMA argues the company could use those products to siphon away PlayStation owners to the Xbox ecosystem by making them available on Game Pass, which at $10 to $15 a month can be more attractive than paying $60 to $70 to own a game outright.
- The CMA argued that Microsoft could also encourage players to play Activision games on Xbox devices, even if they were available on both platforms, through perks and other giveaways, like early access to multiplayer betas or unique bundles of in-game items.
Microsoft responded with a stunning accusation. In a formal response, Microsoft accused the CMA of adopting “Sony’s complaints without considering the potential harm to consumers.”
- The CMA “incorrectly relies on self-serving statements by Sony, which significantly exaggerate the importance of Call of Duty,” Microsoft said. The company also accused the CMA of adopting positions laid out by Sony without the “appropriate level of critical review.”
- Microsoft reiterated many of the points it’s made since the deal was announced in January, including its commitment to release Call of Duty games on PlayStation for “several more years” beyond Activision’s existing agreements, a concession PlayStation chief Jim Ryan said last month was “inadequate.”
- In its statement, Microsoft said taking Call of Duty away from PlayStation players would “tarnish both the Call of Duty and Xbox brands,” and implied that Sony, as market leader, does not need the franchise to continue dominating the console space.
- “The suggestion that the incumbent market leader, with clear and enduring market power, could be foreclosed by the third largest provider as a result of losing access to one title is not credible,” Microsoft said. “While Sony may not welcome increased competition, it has the ability to adapt and compete.”
- Microsoft also went to great lengths to play down its position in the gaming market, a tactic that while strategically necessary does also feel dishonest.
- Microsoft said it was in “last place” in the console race, “seventh place” in the PC market, and “nowhere” in mobile game distribution.
- In August, Microsoft said pulling Call of Duty from PlayStation would be unprofitable, and in this recent filing it claimed that Sony would still have a larger install base than Xbox if every single Call of Duty player on PlayStation switched to Microsoft’s ecosystem.
- In a secondary issues statement released Friday, the CMA responded to some of Microsoft’s complaints and said the company was not fairly representing the incentives it might have to use the deal to “foreclose” Sony’s ability to compete.
Sony is playing a savvy, but disingenuous, game. The PlayStation maker has come out against the deal to the CMA and other regulators around the world, but in many ways the tactics it says it fears Microsoft may employ if it owns Activision Blizzard are the very same tactics Sony has relied on for many years.
- Sony’s leading market position is due in part to the company’s first-party studios, many of which it acquired, and the exclusive games they produce.
- Sony also has for years paid Activision Blizzard for exclusivity rights to certain elements of yearly Call of Duty games (like early access to betas); that’s the very same contractual agreement Microsoft said it will honor if the deal goes through.
- Yet at the same time, Sony is telling the CMA it fears Microsoft might entice players away from PlayStation using similar tactics. “According to SIE, gamers may expect that CoD on Xbox will include extra content and enhanced interoperability with the console hardware, in addition to any benefits from membership in [Xbox Game Pass],” the CMA report said. “SIE submitted that these factors are likely to influence gamers’ choice of console.”
- Sony, of course, has reason to be worried. Call of Duty is a major revenue-driver on PlayStation because of the console’s large install base of more than 150 million units.
- But beyond that, Microsoft’s strategy of acquiring studios, putting more games on its subscription platform, and supporting game streaming is undermining Sony’s business model. It may also be true that Microsoft is simply so big and its pockets so deep that it’s the only company that can afford this strategy.
- Sony has begun to respond to the changing market, but slowly and often half-heartedly. Many of the Xbox ecosystem’s most attractive features — like being able to buy a game on Xbox and play it on PC, or streaming Game Pass games to multiple screens — are nonexistent in the PlayStation ecosystem, and Sony has made clear it has no desire to change that.
- Sony’s position on some of these policies, and its feet-dragging response to subscription and cloud gaming and cross-platform play, suggests to me it would rather regulators stop Microsoft’s advances than have to defend its own platform through competition.
Picking sides in this increasingly bitter feud is no easy task. Microsoft does indeed offer platform perks Sony does not, and we can imagine those perks extending to players of Activision Blizzard games if the deal goes through.
But Microsoft is also one of the world’s largest corporations, and praising such colossal industry consolidation doesn’t feel quite like the long-term consumer benefit Microsoft is making it out to be. It’s also worth considering how much better off the industry might be if Microsoft is forced to make serious concessions to get the deal passed. On the other hand, Sony’s fixation on Call of Duty is starting to look more and more like a greedy, desperate death grip on a decaying business model, a status quo Sony feels entitled to clinging to.
“Should any consumers decide to switch from a gaming platform that does not give them a choice as to how to pay for new games (PlayStation) to one that does (Xbox),” Microsoft wrote. “Then that is the sort of consumer switching behavior that the CMA should consider welfare enhancing and indeed encourage.” The Activision Blizzard deal now depends on how convincing that argument is.
A MESSAGE FROM QUALCOMM
Every great tech product that you rely on each day, from the smartphone in your pocket to your music streaming service and navigational system in the car, shares one important thing: part of its innovative design is protected by intellectual property (IP) laws.
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This article originally appeared on https://www.protocol.com/newsletters/entertainment/call-of-duty-microsoft-sony