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The Washington PostDemocracy Dies in Darkness

Microsoft and Sony are buying up the video game world. The FTC could stop them.

(Washington Post illustration; iStock)

Since kids in the 1990s clambered across monkey bars while declaring undying fealty to Nintendo and Sega, the world of video games has clung to an idea: console wars. Over the years, the players changed — Nintendo vs. Sega ultimately gave way to Sony vs. Microsoft — but discrete devices like the PlayStation and Xbox remained the centerpiece. Now, though, on the back of a slew of multibillion-dollar purchases, the industry appears to be entering a new phase that transcends physical hardware: the consolidation wars.

Last month, Take-Two made history by buying Zynga for $12.7 billion, only to be dwarfed immediately by Microsoft, which purchased Activision Blizzard for a record $68.7 billion in an all-cash deal that used up about half of the tech company’s cash on hand. An announcement from Sony followed soon after, with the Japanese electronics and entertainment company acquiring “Halo” creator and “Destiny” developer Bungie for $3.6 billion. Now, market analysts and industry veterans say nearly any gaming studio could be subject to a similar deal.

The Microsoft-Activision Blizzard deal comes at an interesting time for antitrust regulation. The Federal Trade Commission has been frequently criticized in recent years for not cracking down on competition and privacy abuses. But now, with the recent introduction of more aggressive leadership, the commission is operating under a more ambitious mandate to hold Big Tech responsible.

“The FTC and DOJ are both taking an aggressive posture on mergers,” said Matt Stoller, director of research at the American Economic Liberties Project, an anti-monopoly advocacy group, and a former policy adviser to the U.S. Senate Committee on the Budget. “They’re going to look at whether that particular industry will raise prices and if this is leading to the consolidation of the industry at large. I think they’re going to look at data and have a more expansive approach, [asking questions like], ‘Is this an attempt to capture an ecosystem?’ … ‘Does this deny opportunities for video game designers and producers?’ ”

All three major deals still await regulatory approval. Microsoft and Activision Blizzard estimated their deal would be completed by June 2023.

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Antitrust concerns arise over whether a company has monopolistic control over a given market, rather than the dollar amount of a deal. Still, of all the deals, antitrust lawyers say the record $68.7 billion Microsoft deal will draw the most federal scrutiny. Microsoft is one of the world’s largest companies, valued at $2.6 trillion, and Activision is one of the most prominent gaming firms in the world with a roughly $62 billion market capitalization. AT&T and Time Warner’s $85 billion merger faced immense legislative challenges and ultimately passed in 2018 after a protracted two-year battle with the Justice Department, which sought to block the deal.

On the same day the two gaming goliaths announced the deal, the FTC and DOJ launched a joint public inquiry with the goal of better detecting and preventing anti-competitive deals. Shortly after, Bloomberg reported the FTC had assumed responsibility for reviewing the Microsoft and Activision Blizzard deal. The FTC declined to comment or confirm an existing investigation. Stoller, though, pointed out that the stock market appears to be reacting to the looming specter of this investigation. “Activision is [trading at] $80, and the purchase price is at $95,” he said. “Investors think there’s a pretty good chance that the deal gets blocked. Otherwise the stock would be trading at $92 or something like that.”

Antitrust lawyers say if Facebook had tried to acquire a massive gaming company, that could have raised more eyebrows given that tech giant’s previous tussles with Congress.

“Microsoft, although they are one of the largest tech companies, has not been the focus of Congress and antitrust enforcers the way that Google, Facebook and Amazon have,” said Mitch Stoltz, senior staff attorney of the nonprofit digital rights group Electronic Frontier Foundation (EFF).

Last March, Microsoft completed its acquisition of ZeniMax Media, parent company of Fallout and Doom series publisher Bethesda Softworks, for $7.5 billion. It received regulatory approval from the European Union, which stated that the deal “would raise no competition concerns.”

While it seems unlikely that smaller video game acquisitions — Sony buying Bungie and Take-Two Interactive purchasing Zynga, for example — will draw the gargantuan, flaming eye of the FTC in the same way, Stoller does think those deals will be pertinent context for the FTC’s investigation.

“When you’re seeing not just one merger or acquisition but a whole slew of them at once, it’s pretty clear what’s going on: The industry is consolidating,” Stoller said. “I think you could look at this skepticism around Activision as the FTC basically saying, ‘We want to look at the industry structure as a whole.’ ”

This, Stoller believes, will include the industry’s — and especially Microsoft’s — newfound pivot toward Netflix-like subscription models. These services, much like the TV apps that inspired them, require content. For now, back catalogues make up the bulk of video game subscription service libraries. But as the arms race heats up, companies will need fresh content, thereby necessitating the purchase of studios.

That race to consolidate to boost the libraries of services like Xbox Game Pass could narrow the industry’s offerings, warned Johnnemann Nordhagen, an independent developer who worked on 2010s-era indie hit “Gone Home.”

“If Microsoft starts releasing stats that say, ‘These types of games do really well on Game Pass, and so that’s what we’re looking for in the future,’ what happens to other kinds of games?” Nordhagen said, adding that Steam, a ubiquitous PC gaming platform, has already done this to an extent by algorithmically sorting games in a way that encourages developers to chase trends for a slim chance at profitability.

Already, the industry appears to be moving in a direction that’s forcing even smaller fish to balloon in size. Publishers could have a harder time competing against juggernauts like Xbox and Sony while relying on fewer resources, noted Will McKeon-White, an analyst at research firm Forrester. “It’s scary for independent publishers who are trying to figure out what their existence is going to look like in the next five years,” he said.

Nordhagen outlined a scenario in which indie publishers, sensing fewer openings for their content as Triple-A publishers grow in market share, might opt to take fewer risks.

“You’re seeing indie publishers who previously would have thrown money at smaller projects now only interested in, like, million-dollar games,” Nordhagen said. “For the studios that make it, that’s not bad, right? You scale up as a studio and make larger things, and maybe your next project is bigger than your last. But for solo devs and people just starting to try to get into things, they don’t have the experience to be given a million dollars or multiple millions in funding, and there’s no middle ground there.”

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Both Microsoft and Activision Blizzard have hired former members of the U.S. government to executive roles. Microsoft’s corporate vice president and chief privacy officer, Julie Brill, worked for the FTC from 2010 to 2016. Activision Blizzard Chief Administrative Officer Brian Bulatao served as under secretary of state under former U.S. president Donald Trump, and Executive Vice President Frances Townsend was Homeland Security adviser to former president George W. Bush.

Former FTC commissioner Maureen Ohlhausen, who served as chairman under the Trump administration, said that Brill could offer Microsoft “sage advice on how the deal will be evaluated, especially any impacts on user data, but her previous role at the Commission will have no influence on how the agency evaluates the merger.” Ohlhausen said she could not comment on the chances of the deal being approved.

Stoller concurred, but said that stacking the deck with former government officials could make a potential journey through the winding halls of Congress less labyrinthine.

“[Brill] will have influence in Congress,” he said. “But I don’t think [Microsoft is] going to get a special hearing from the FTC. The days of sort of cozying up to the FTC and getting what you want out of them I think are gone.”

Microsoft disputed that characterization in a statement to The Washington Post. “Julie Brill and her team focus on privacy, responsible use of AI, digital safety, accessibility regulation, corporate standards and internal regulatory governance. Julie and her team have a large and important remit, but it does not include the regulatory process to close the Activision Blizzard acquisition,” wrote David Cuddy, general manager of public affairs at Microsoft.

All of this assumes the FTC commits to a rigorous investigation of Microsoft and Activision Blizzard, but that’s not a foregone conclusion. When the FTC’s current role in acquisitions and mergers was first envisioned as part of the Hart-Scott-Rodino Act in 1976, the assumption was that the FTC would have to investigate around 150 big mergers per year.

“Today, the agency receives about 150 filings of big mergers every two weeks,” Stoller said.

Manticore Games CEO Frederic Descamps, who used to be head of corporate development at Zynga fielding calls for mergers and acquisitions, said games companies are constantly thinking about making similar deals to the ones executed recently by Microsoft and Sony.

“This is happening all the time. You see only part of it. You remember when PopCap was acquired by Electronic Arts, PopCap was acquiring other companies. Like the fish are actually eating the little fish,” he said, pantomiming how a larger fish could consume smaller fish, which were in turn eating others.

McKeon-White, the Forrester analyst, predicted that larger companies with diversified businesses such as Nintendo, Valve and Epic are less likely to be acquired. By contrast, “I’d say Supergiant would be a perfect acquisition target. Relatively small, good. Company culture, demonstrating repeated significant success,” McKeon-White said. Supergiant, the studio behind popular indie games like “Hades” and “Bastion,” declined to comment.

Nordhagen — who left a job at “BioShock 2” creator 2K Games in 2012 to pursue his indie dreams — is now returning to the world of big-budget game development.

“It’s been almost four years now since [my previous indie game] ‘Where The Water Tastes Like Wine’ was released,” said Nordhagen, who recently accepted a job at Ubisoft Stockholm. “It’s been difficult for me to find the time and funding to make another game of that scale. I realized, what good is the freedom of the starving artist lifestyle if I don’t get to make my own stuff all the time? It’s kind of the worst of both worlds.”

But even though he believes consolidation will hurt the creativity of both indie developers and bigger studios, he’s optimistic about the further-flung future.

“You see these big trees come up and block out all the light and everything, but they eventually fall, and that means there’s room for a billion new saplings to sprout up,” Nordhagen said, pointing to the indie boom of the 2010s that arose from a then-calcified industry as an example. “I don’t know how long it will take, but I really think eventually the big giants will petrify themselves to a degree that they leave room for furry little mammals to come in and eat all their eggs or whatever.”

For now though, the industry is trending in favor of the giants. One Activision worker, who spoke on the condition of for fear of retaliation, hopes to leave the company, which is being bought by Microsoft, and soon. She’s in the middle of interviews with one developer and plans to leave if offered a position. Her would-be destination? Microsoft-owned gaming firm Bethesda Softworks.

“It worries me, it’s not very promising to be in an industry that seems to be slowly shrinking down to three companies,” she said. She’s also working with other Activision employees to unionize. “I just want a job where I’m treated well and compensated fairly.”