Manipulating market definitions is the only way to cast Microsoft as a threat

Editor’s note: This article was edited after publication to update information.

At the forefront of one of the largest cases since the 90s, Microsoft finds itself once again facing a major Federal Trade Commission (FTC) antitrust complaint. Instead of focusing on software or the personal computer — areas where Microsoft is a formidable competitor — the FTC’s current effort targets Microsoft’s role in the gaming industry. The complaint relies on an indefensibly narrow market definition to claim that Microsoft’s acquisition will drastically alter competition. 

The FTC issued a complaint against the proposed nearly $70 billion Microsoft acquisition of the gaming company Activision. The complaint alleges that the acquisition would violate Section 7 of the Clayton Act which bans mergers or acquisitions where the effect  “may be substantially to lessen competition, or to tend to create a monopoly.” 

A key part of measuring competition is properly defining the relevant market. The FTC’s definition is limiting in that it includes only high-performing gaming consoles, multi-game content library subscription services and cloud gaming subscription services, all of which are limited to the U.S. 

According to the FTC, high-performing gaming consoles include only PlayStation and Xbox. Limiting the market to two relevant consoles ignores the reality that many games are offered on multiple consoles, including PCs. Furthermore, many gamers already own more than one console, which adds a level of competition and choice. 

Even more problematic than the narrow definition for consoles is how the FTC defines AAA games. The category of AAA games doesn’t have a universal definition, but in the complaint, the FTC stated that they involve production budgets in the millions, development teams with thousands of workers and development lengths of several years. The agency also alleged that the top-tier of the AAA category only includes about four game developers: Activision, Electronic Arts, Take-Two and Ubisoft, and possibly a fifth with the addition of Epic. 

Given the time and money poured into AAA games, the FTC believes that these games drive innovation and improve the overall gaming experience. This idea is also largely accepted by the gaming industry. However, to make the point that the Activision acquisition will increase concentration, the agency severely limits the market. 

Typically, antitrust market concentration is measured through the Herfindahl-Hirschman Index (HHI). This index is calculated by squaring the market share of relevant companies. The highest possible score is 10,000, but traditionally anything over 2,500 is considered moderately concentrated. Mergers or acquisitions that increase the score by 200 points or more are traditionally considered to increase market power. 

While not limited to the Unites States — as is the case in the FTC complaint — 2021 revenue data from Macrotrends, Companies Market Cap, Statista and Zippia can provide a general estimation of the concentration of the AAA game marketplace. 

Focusing on the five companies listed provided an HHI score of roughly 2,344, which is below the threshold for moderate concentration. The FTC’s core complaint is that Microsoft could make Activision games exclusive to its own platforms, thus removing it from the competitive sphere. Microsoft has stated that it doesn’t intend to offer Activision content solely through its products. However, if Microsoft did, the removal of Activision would increase the narrowly defined market concentration to roughly 2,753. 

This worst-case scenario in the AAA game marketplace shows some moderate increases in concentration. However, the categorization is problematic at best. While the FTC alleges these five companies comprise the relevant AAA market, this isn’t the truth. Industry publications include companies that aren’t on the list such as Square Enix which makes Final Fantasy, as well as many other market players. 

If the FTC expanded the market to include additional AAA gaming studios, the HHI and Microsoft’s market share would further diminish. Specifically, adding Sony, Square Enix, Riot Games, and Capcom — major gaming companies for which public revenue data is available — would drop the HHI to roughly 1,666. Additionally, if Microsoft were to fully remove Activision content, it would only increase the score by roughly 79 points. 

By relying on unjustifiably narrow market definitions that include only two consoles and five gaming companies, the FTC attempts to show that Microsoft’s acquisition of Activision will reduce competition. However, the goal shouldn’t be to skew the measurement to manufacture a certain outcome. 

What the FTC should do is demonstrate empirically that consumers would be harmed by the merger, instead of manipulating the data. 

Tirzah Duren and Steve Pociask are with the American Consumer Institute, a nonprofit educational and research organization. You can follow them on Twitter @ConsumerPal.