XBox Acquiring Activision being ‘Good for Gamers’ is a Logical Fallacy – as XBox has not been ‘Good for Gamers’ Since 2005

A couple of weeks ago, I made an alternative argument for Microsoft to fight the FTC on. One that showed a bit more humility than Brad Smith’s “We tried peace” (which, having spent several decades working with government agencies, runs the risk of catalyzing this issue along bipartisan lines and backfiring on MSFT). Out of due dilligence, it is necessary to entertain another notion, one that looks at the realistic argument that Microsoft has not been ‘good for gamers’ since the start of console generation 7, and therefore the acquisition by said entity cannot possibly be ‘good for gamers’ as an outcome.

Let me first say, if you are fighting this fight on idealogical lines, as 99% of Gamer Twitter is, get out now. This post isn’t for you. If you are someone who has discounted Microsoft’s financial strength as an anti-competitive risk, because “money can’t buy you loyalty”, that’s what the definition of following loss-leader strategies is; using money and the ability to absorb a loss as a means to grow market share and thereby increase customer loyalty by offering cheap products. That’s how Game Pass got a foot-hold. If you then skate by the argument that Game Pass is not a value for everyone at $180 per year, deflecting that with “but Game Pass is $1”, obviously XBox has not gotten to nearly $3bn dollars of Game Pass revenue through customers buying Game Pass for $1. And as recent history has proven out, the economic scenario that once a company following loss-leader strategies gains market share, especially around lifestyle products that consumers deem “essential”, they can raise prices unobstructed. As has been the case with Amazon. Hulu. NetFlix. Gillete. and BMC. Let’s be honest; you are not interested in hearing an alternative line of reasoning if you have already entrenched. That being said, let’s proceed.

Generation 7: the Red Ring of Death. Microsoft started getting reports about XBox 360 failures as early as just after its launch in late 2005. Public admission, the extent of the problem, and the extension of the warranty was not done until mid-2007. And even then, XBox 360s that were already seeded in the user-base were all at risk. It was not until 2010 that the manufacturing problem was actually fully removed with the launch of the XBox 360 S or slim. Microsoft was able to proceed down this path because it could absorb taking the $1.15bn loss from extending the warranty. As well as the additional costs of re-design / re-engineering. We all make this out to be Microsoft did the right thing, and was a good guy. But in truth, they were under duress from class-action lawsuits, individual lawsuits, as well as a disc-scratching lawsuit that lingered through 2016/2017, and went all the way to the Supreme Court. These are additional legal costs that, again, would be difficult for a smaller outfit to shoulder, nor would it have the expert legal team required to fight some of these off. No one can argue that the RROD was ‘good for gamers’. More problematic, buy selling at a lower price than the PlayStation 3, the XBox was able to gain market share. So much so that it indoctrinated its customer base to accepting the shoddy worksmanship of the XBox 360 for several years until it solved the problem. A delaying tactic. Anecdotally, I had my own repaired multiple times and even then bought an XBox 360 Elite. Which also got a RRoD.

Generation 8: Prior to launch, Microsoft established a voicetrack of next generation evolutions for the console industry and some for XBox that all benefitted the manufacturer and platform holder, but were all bad for consumers. Persistent internet connection. Prevention of playing used games. Forced purchase of the Kinect. $100 more than the PlayStation 4. TV / Living Room-first design features. In ten months, XBox leadership changed hands 3 times.

And indie developers, who had soured on developing for the XBox in the late 360-era due to strict guidelines that increased developer cost and the friction of administrivia, were baited by ID@Xbox, and then given the switch of the XBox Indie Parity Clause.

Microsoft has an equality clause for indie developers that makes it impossible for an indie dev to bring its game to Xbox One if it has already launched on Playstation 4. The only way Microsoft allows an indie game to hit both consoles is if [it] launches within the same window on Xbox One

Windows Central

In the year after launch, as many as 66 indie games were under development for gen 8 consoles, with only 19 of those including the XBox One in their platform targets. And by the time we turned the corner into 2018, XBox’s announced exclusives were State of Decay 2, Crackdown 3, and Sea of Thieves. All disappointing launches.

The XBox One was outsold 2:1 by PlayStation 4, and by this point in the timeline, Microsoft’s focus for XBox was Game Pass and acquisitions, not games as a first-order. Again, tell me how a DRM-scheme that bit gamers in the ass even this year, a higher price, muddled leadership, and antagonizing indies, yielding fewer indie games on their platform for their gamers, while concurrently investing less in the development of exclusives was ‘good for gamers’?

Generation 9: Microsoft is one of the foremost companies in building and selling collaboration tools for development teams. They make Micrososft Teams. They own GitHub. They build tools that link development communications to office applications; office applications that they are the market leader in and own the vast majority of market-share in, so much so that it constitutes a natural monopoly. If any company should have been able to weather the impacts of COVID, move its teams remote, and transition to non-realtime collaboration, it should have been Microsoft, with only Google nearing any level of parity. And even Spencer is (finally) quoted as saying this year that using COVID as a reason for the low productivity of their development pipeline is an excuse. And yet the current output of their nextgen games is lower than PlayStation 5’s. To that, many will argue that PlayStation put out a lot of remasters and remakes in 2022. But it should be considered that Sony does not have the financial strength and warchest to engage in loss-leader strategies and take the routes Microsoft does. Sony could not take the potential loss of customer erosion by putting out no exclusives in a year. It only has $11bn cash on hand. Microsoft has $107bn. Let’s stop acting like Microsoft is the David to Sony’s Goliath. It is quite the opposite. Microsoft has delivered a nextgen console that ‘eats monsters for breakfast’, and it has pulled greater market share this gneration than last on the Game Pass offering, XBox All-Access, and only three or four exclusives of critical and commercial noteworthiness. All while impinging the industry’s legacy model by creating a low-cost alternative that grabs market share that other competitors cannot meet head-on, encouraging mass consolidation as evidenced by the moves from Tencent, Embracer, NetEase, and Sony. So how is mass industry consolidation, which actually leads to less choice for gamers in the long-term, not more, providing debt-coupled means of consumption in XBox All-Access, & following a business-model that is less-incentivized to produce AAA, critically acclaimed content due to the crutch of a subscription model ‘good for gamers’?

All of this is to say that only a company like MSFT could weather these three cataclysms, all created by its own doing, & still remain the number an operating platform holder and in the top ten of the industry players that make 65% of the gaming industry revenue. The arguments that I made before for them, their case, also work in reverse. 3DO, CD-i, Neo Geo, Turbo GrafX, Atari; none of them had the firm footholds in market adjacencies & capitalization base that would allow them a third do-over, additionally consuming smaller players along the way. Not even Sega, who made similar mis-steps across two generations, was able to hold on long enough to make a third go before it folded and went game-publisher only.

In making these arguments, my goal is only to say, there are two sides to this coin. It is not anywhere near an open-and-shut case, and it requires a lengthy period of due diligence and legal opinion. It is hilarious to me that the “anointed” of Gamer Twitter claim that any who make arguments opposing Microsoft’s case are not being open to other perspectives, when they themselves cannot hear their own intolerance in levying that accusation. That they would dismiss the concerns that many, many other gamers have on what the impact of this acquisition will be on the industry.

Should the acquisition go through, Activision will also have a different set of incentives that may not be beneficial to consumers. In the failure of Call of Duty: Vanguard, ATVI had a lot of pressure on Infinity Ward and the support studios to pull off a reversal. Activision is not as insulated against enduring multiple years of commercial slippage in its crown jewel. But under Microsoft, there will not be incentive to make good when a CoD is not as well received. CoD will be more places. It will be available to people at a reduced cost. Cloud-spend will no longer be a factor as part of Cost of Goods Sold to Activision. The pressure will be less. And with a wider-spread market share, and cheaper consumption models compared to Battlefield, competition will be inherently less. With greater resources to throw at CoD, the likelihood of a threat from an independent such as 1047 Games and Splitgate is unlikely. Who will want to play Escape from Tarkov when there are greater player numbers on CoD and it is available for cheap? Could a PUBG ever happen under that scenario? Almost absolutely not.

Let me also kick the legs out from underneath the table of the “regulators need to protect consumers, not competitors”. That’s bullshit. It is much easier to defend a “protect consumers” line of argument because in the argumentive distance from supplier to consumer, anti-competition lines of questioning become diluted. But even in that obfuscation (a great legal tactic, and great for consle warriors too), it does not upend the economic truth in a capitalist, competitve market: that the presence of more competitors eventually makes a better overall situation for consumers. Microsoft acquiring Activision is not expanding consumer choice. It is a reduction and consolidation of the total number of competitors in the upper echelon of revenue generating gaming industry players. It makes fewer gaming companies, not more. That simple math should be readily apparent even to the most STEM-challenged of the Twitter populace.

Making things cheap for consumers is the short-term view that the XBox brand-aligned brandish. But most of these citizen militia have an inability to extrapolate what things look like farther in the future. None of them have articulated how it is good for the industry. How it leads to more competitors.

How it does not raise competitive barriers for other industry players now and any new competitors that seek to enter later. We already have a state where we have not seen another console competitor enter the market for 21 years. How does MSFT acquiring Activision increase the possibility that we will? The fact that we have not seen one yet does not invalidate anti-competitive concerns. In fact, the history of the last two decades shows that barriers to entry have already had impact that has not been good for consumers. And it is not the regulatory agency’s job to just shrug their shoulders and allow that vector to continue unmitigated just because it’s already bad now.

Should the merger/acquisition go through, other 3rd party publishers will have additional financial and competitve incentive to do the same; seek other competitors to merge with or seek sale to one of the other Big Tech 5, or another Entertainment congolomerate that can leverage adjacencies in similar ways to Microsoft. We’ve seen similar behavior in the video entertainment industry. NetFlix disrupted the legacy cable television model such that a flurry of M&A’s was kicked off to move to the new model. Disney moved to buy key properties. Warner Bros merged with Discovery. NBCUniversal bought Sky. All of these moves have yielded more and more content being moved behind paywalls. There is ZERO argument that that has been good for consumers. The problem when similar behavior starts gaining momentum in the gaming industry, which it will by letting this merger go through, is that there is no Fubo, TiVo, Roku, and Vizio to create a disruptive middle tier. In fact, everything that industry is showing us is that mass consolidation around the strongest financial players could result in NetFlix itself being acquired by…you guessed it…one of the Big Tech 5. These are valid concerns that consumers and agencies have that are easy to see. That is, if green lenses and console warring do not make you dismiss them outright and refuse to even take five minutes to say that they need to be weighed carefully.

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