January was quite a month for the video gaming industry with three blockbuster deals. Many commentators have tried to predict potential antitrust issues and highlighted the anticipated interest of antitrust regulators in these cases worldwide. In this post, we provide an overview of recent developments and the relevant markets.
The new year started with a bang in the gaming industry. First, Take-Two, best-known for the record-breaking game series Grand Theft Auto, announced it would acquire social game developer Zynga for $ 12.7 billion. Commentators had just started highlighting the deal to be the biggest in the video game history when Microsoft stole the show with its envisaged $ 69 billion takeover of Activision Blizzard, a leading game developer and interactive entertainment content publisher (famous games you might know are Call of Duty, Diablo and World of Warcraft). Probably not as an immediate response but nevertheless shortly after, Sony revealed its plans to purchase Bungie in another billion-dollar deal ($ 3.6 billion for those of you interested in numbers, but more on that later).
Since the gaming market has grown considerably in recent years, these deal figures are hardly surprising. According to Satya Nadella, Microsoft’s CEO, gaming “is the most dynamic and exciting category in entertainment across all platforms today and will play a key role in the development of metaverse platforms.” In fact, consumers worldwide spent more than $ 180 billion on video games in 2021 alone (this is about half of the global footwear market, a slightly more
essential broadly known product, one could say), half of which went to mobile game suppliers (see this article on Newzoo, a paradise for number-crunchers). Let’s put an eye on the relevant markets from an antitrust perspective, their structural specifics and what can be drawn from the past regarding theories of harm in this area.
Gaming markets – anything special?
Finally Looking at the relevant markets in the broader sense, it is about far more than only selling games. A first distinction can be made between hardware and software. The console market for instance is dominated by the three console makers Nintendo, Microsoft and Sony with combined market shares of 90%. Regarding software, the EU Commission distinguished in Microsoft/Zenimax between game software development and publishing on the one hand and game distribution (in either physical or digital form) on the other. Further potential segmentations, e.g., a distinct market for video game publishing for PCs or mobile devices or for a certain genre (sport or action), were analysed but could ultimately be left open in the same and other decisions. On top of that, former niche products like live streaming of video games have become significantly more important and lucrative in recent years.
In fact, there are some particularities in the markets concerned that justify a special interest on the part of regulators. Many of the key players are simultaneously active on different levels of the supply chain, e.g., producing and selling consoles and distributing corresponding games via their integrated online shops. Then, there are mutual dependencies all over the place. Console developers need games for the attractiveness of their consoles. But it also works the other way around: Without access to a specific technical infrastructure or the consoles’ own online shop (console specific digital forefront, as I learnt), it does not seem to be economically reasonable to invest several years and considerable amounts in the development of new games. Considering all of this, input or customer foreclosure will remain high on the regulators’ agenda when it comes to vertical mergers in this area. It fits nicely into the picture that the EU Commission flagged digital mergers, in particular, as cases that are more and more about vertical or conglomerate effects.
Horizontal mergers in the gaming area are also closely scrutinized by regulators worldwide. Last year, the Chinese regulator blocked the merger between Huyan and DouYu, both active on the market for live streaming of video games. Both companies had already been backed by Tencent, but via the deal, Tencent would have acquired sole control over DouYu. It was the first prohibition of a merger between domestic companies in the technology sector in China (and only the third prohibition overall since the introduction of the merger control regime in China in 2008). Besides foreclosure concerns, the regulator highlighted high barriers to entry both on the streaming market and the upstream market for online game operation service providers.
Not always innovative, though
Behavioural matters have also created attention. Last year, the EU Commission fined Valve, a large video gaming platform, and five gaming publishers roughly €8 million for agreeing on certain geo blocking practices. As a result of those agreements, customers were not able to activate a game outside their respective Member State. In the press release, Commissioner Vestager inter alia stressed, coming back to numbers, that more than 50% of all Europeans played video games and that the video game industry was thriving in Europe. Reading between the lines, more activities or cases in the pipeline would not come as a surprise.
More to come?
The boom in the video games industry is far from over. Besides the blockbuster deals mentioned above, there have been a number of “smaller” transactions and investments which show that the market is looking for new opportunities to grow and is still on the move. By way of example, the Saudi Arabian Public Investment Fund (known from here) acquired ESL, one of the oldest and biggest eSports companies, for $1 billion. With eSports on the rise, it can be expected that some of the questions highlighted in our post on sports will also play a role in the gaming industry going forward. But also the overall political landscape regarding big tech and other current top topics like data protection and antitrust will not make the life of the players in the video gaming industry easier.