Competition in the $200 billion global video game industry is fierce and only getting fiercer. The video game market includes two submarkets, one which creates video game platforms and another which develops the games that run on these platforms. Two of the market’s biggest platform creators, Sony, owner of the PlayStation console, and Microsoft, owner of the Xbox console, have recently been ramping up their campaigns against each other. Microsoft announced last January its $69 billion agreement to purchase Activision Blizzard, a holding company that owns many prominent video game development studios and intellectual properties. The announcement did not please Sony, who moved to derail regulatory approval for the acquisition.
Historically, console manufacturers such as Microsoft and Sony have relied on independent game developers to ensure their platforms had an expansive catalog of playable games. To distinguish their console’s video game catalog, the console manufacturers have purchased smaller studios to develop exclusive titles. For instance, those wishing to play the Halo franchise cannot do so on PlayStation as it is a Microsoft exclusive, and those wishing to play The Last of Us franchise cannot do so on Xbox as it is a Sony exclusive.
But the video game industry is changing. Both Microsoft and Sony have recognized the profit potential of more aggressive vertical integration through the acquisition of major game developers. There is no need to share revenue from game sales when you own the developer. Moreover, controlling already acclaimed intellectual properties affords substantial competitive advantages in the video game industry. Activision Blizzard owns several renowned and lucrative video game franchises, including Call of Duty, Overwatch, and Diablo. If regulators approve the acquisition, Microsoft would not only reap the massive profits these video game franchises generate, but it would also have the capacity to make these franchises exclusives for its Xbox console, hurting the consumer appeal of Sony’s PlayStation.
In response to Sony’s protestations about its acquisition, Microsoft went on the offensive, claiming Sony is an anticompetitive actor. Microsoft contends that Sony, which is headquartered in Japan, has a monopoly over the Japanese video game market and uses anticompetitive tactics to preclude Microsoft from competing there. To reinforce this claim, Microsoft insists that Sony has a 98% market share in Japan.
To push its offensive, Microsoft managed to get a bipartisan group in Congress to repeat this claim. Given that Microsoft has the second-largest market capitalization in the world and knows its way around lobbying, it should not be too surprising Congress would sign on to this “98% market share” assertion. What is surprising, however, is how absurd this talking point is.
Microsoft is not actually alleging that Sony has a 98% share of the Japanese video game market. Why? Because that would be counterfactual. Microsoft specifically alleges that Sony has a 98% market share in the novel and mysterious “high-end game market.” The neat thing about the “high-end game market” is that it does not exist. What Microsoft has done is taken the actual market Sony competes in – the Japanese video game platform market – and stripped it of all of Sony’s competitors but Microsoft. The “98% market share” assertion excludes all PCs and Nintendo consoles sold in Japan. These platforms are excluded even though Nintendo represents the vast majority of video game consoles sold in Japan, and PC gaming is rapidly expanding amongst Japanese consumers. While it is appropriate to cast mobile gaming as a separate market due to its limited appeal as a substitute for other video game platforms, Sony’s PlayStation competes with Nintendo consoles and PCs. Simply put, Microsoft invented a consumer market to feign that their rival Sony has a monopoly in Japan.
Another assertion that Congress echoed for Microsoft was that Sony “signs deals designed to keep hit Japanese games from Microsoft’s Xbox.” As previously noted, Microsoft also signs exclusivity deals. Furthermore, making “hit” video game franchises exclusives for its Xbox console is one of the principal reasons Microsoft moved to acquire Activision Blizzard. If exclusivity deals are considered anticompetitive, Microsoft is throwing stones in a glass house.
Perhaps the Japanese government gives Sony special treatment in violation of the U.S.-Japan Digital Trade Agreement. That question is still up for debate. But this bizarre saga does make clear that U.S. politicians are giving Microsoft special treatment. And while I cannot blame Microsoft for advocating for its acquisition, it is still jarring to see Congress so casually parrot a corporation’s ridiculous talking points.