Microsoft’s Call of Duty pledge in Activision review raises points of contention on pricing, enforceability - analysis

Legal Analysis 20 February

Microsoft’s Call of Duty pledge in Activision review raises points of contention on pricing, enforceability - analysis

Microsoft’s [NASDAQ:MSFT] pledge to keep Activision Blizzard’s [NASDAQ:ATVI] blockbuster video game Call of Duty on PlayStation would face a high bar for approval should it be formally proposed as a behavioural remedy in EU and UK reviews of the deal, sources and an industry expert told this news service.

As the European Commission’s (EC) in-depth market investigation into the deal enters its core stage, Microsoft will face a deadline in the coming weeks to submit remedies in order to secure clearance of the transaction. In the UK, third parties have until Wednesday (22 February) to submit their comments on the agency’s remedies notice.

The software giant’s 10-year pledge to retain access to Call of Duty to Microsoft’s platform competitors, most notably Sony’s PlayStation, will likely form the basis of the remedy proposal that Microsoft intends to make to the EC, said one of the sources.

Microsoft has been engaged in remedy discussions with the EC, parallel to the agency’s market investigation, over the past several months, the first source said. The EC allows parties to formally submit remedies up until day 65 of its Phase II probe.

Microsoft will have until 2 March to submit remedies, although it still has the option to add 10 working days to the calendar, which would push the EC’s deadline to 16 March, according to a second source familiar with the transaction.

In December, Microsoft President Brad Smith said that it would offer equal access to Call of Duty to Sony, Nintendo [TYO: 7974] and Valve’s Steam for a period of 10 years. The ten-year pledge would mean parity on content, features, quality, playability as well as on pricing, said Microsoft Deputy General Counsel Rima Alaily in a statement.

The EC generally market tests remedies with third parties after submission.

Sony, which has been a vocal third party in this review, is likely to voice multiple concerns around the abovementioned remedy, said a third source familiar with the matter. These range from the enforceability of such a complex behavioural remedy to issues around pricing, should Call of Duty be included in Microsoft’s GamePass subscription service, this source said.

Microsoft’s parity commitment could be very difficult to encode in a contract and enforce, said the third source. As it currently stands, Sony works with Activision from an early date to ensure that its controller is not just responsive, but offers one of the best console player experiences, the source noted.

Another source of concern could stem from the fact that Sony’s current contracts with Activision are on terms that are better than parity, noted Joost Rietveld, Associate Professor at University College London's School of Management and a gaming industry specialist. Microsoft disclosed in its CMA filings that under Sony’s current exclusivity contract with Activision, Call of Duty would be exclusive to PlayStation for a period of 30 days, while one version of the game was exclusive for a period of one year.

Finally, a key area of dispute may also be around pricing. Sony takes the view that it needs to be enabled to price Call of Duty competitively to what Microsoft could offer, said the third source familiar.

A factor here is the shifts in the industry from console gaming offers, where games can be priced at around EUR 70 for and where the revenue split is typically 30% to the platform and 70% to the publisher, to a subscription service model, said the source.

Under the subscription service model, publishers are typically either paid upfront for the rights to their game, which can be good for smaller gaming studios but less beneficial for blockbuster games like Call of Duty, which would likely see limit to their upside, said Rietveld. Another model for subscriptions is the Spotify-style model where it would be paid for share of time spent on a game, he noted.

A third option would see a licensee, such as Sony, paying the wholesale price for Call of Duty multiplied by the number of users who play the game for more than a set amount of time, he noted.

Sony is likely to take the view that the contract on offer by Microsoft result in diminished revenues for PlayStation, leaving it unable to put investments into its own games, said the third source. It would be forced to offer its PS Plus subscription service at a higher price than GamePass, they noted.

As for Microsoft, it takes the view that the 10-year remedy covers access to Call of Duty on its subscription service PS Play and will offer a ‘much better’ revenue split that Sony’s existing contract with Activision, said the first and a fourth source familiar. It would likely result in hundreds of millions of windfall revenues for SIE, the first source said.

UK remedies

Last week in its remedy notice, the CMA said that Activision/Microsoft did appear to be a suitable case for behavioural remedies, noting that it had been informed of Microsoft’s proposed contractual arrangements. The CMA rather suggested several structural options, from a carve-out of Call of Duty to a divestment of the entire Activision unit. The CMA said however that it would consider a behavioural access remedy as a possible remedy, contingent on Microsoft’s ability to demonstrate that a divestment would jeopardise relevant customer benefits.

A structural remedy would also be very complicated, noted Rietveld. There are three studios that are working on Call of Duty within Activision, and any carve-out would likely require the development capabilities and not solely the IP for the game, he said. The fourth source familiar with the transaction said that a structural remedy would call into question the deal and would likely prove to be exceptionally complex.

Sony declined to comment.

A Microsoft spokesperson said that the company is committed to offering an effective and easily enforceable solution to address regualtors' concerns. "Our commitment to grant long term 100% equal access to Call of Duty to Sony, Nintendo, Steam, and others preserves the deal’s benefits to gamers and developers and increases competition in the market," they said.

The EC does not comment on ongoing reviews.

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