Two-Sided Markets and the Microsoft/Activision Merger

On January 18, 2022, Microsoft Corporation announced its intention to acquire Activision Blizzard Inc. for $68.7 billion, reflecting a price of $95.00 per share.1Microsoft to Acquire Activision Blizzard to Bring the Joy and Community of Gaming to Everyone, Across Every Device, Microsoft News Ctr. (Jan. 18, 2022),; see also Why Microsoft Is Splashing $69bn On Video Games, Economist (Jan. 22, 2022), At the close of the previous trading day, Activision Blizzard traded for just $65.39 per share.2Stock History, Activision Blizzard, (last visited Jan. 9, 2023).

The proposed merger would bring together two titans of console gaming. On one side of the transaction, Microsoft recently launched the new Xbox Series X and Series S consoles (collectively, “Xbox Series X|S”) in November 2020.3Complaint at ¶ 28, Microsoft Corp./Activision Blizzard, Inc., No. 9412 (FTC filed Dec. 8, 2022), [hereinafter FTC Complaint]. To date, Microsoft’s only meaningful competition in the market for high-performance, current-generation video game consoles is Sony’s PlayStation 5 (“PS5”).4Id. Microsoft is also a leader in subscription gaming services through its Xbox Game Pass service, which allows subscribers access to a large library of games for a fixed monthly fee.5Id. at ¶¶ 2, 35–36. As in the market for high-performance consoles, Microsoft’s only serious competitor for multi-game content library subscription services on consoles is Sony, through its similar PlayStation Plus subscription service.6Id. at ¶ 37. At least two large video game publishers also offer multi-game subscription services, but these services are restricted to games published by those companies, rather than offering a large library of games from many developers and publishers. See id. at ¶ 38. It is not obvious that such offerings are meaningful substitutes for subscription services that carry games from across different publishers, and therefore have much larger libraries.

On the other side of the transaction, Activision Blizzard is one of the “Big 4” independent video game publishers—an industry-recognized “top tier” of publishers that have a unique track record of “reliably produc[ing] AAA games for high-performance consoles and collectively own a significant portion of the most valuable IP in the gaming industry.”7Id. at ¶ 46. Most significantly, Activision Blizzard develops and publishes the cross-platform Call of Dutyfranchise, which accounts for ten of the top fifteen console games sold between 2010 and 2019.8Id. at ¶¶ 6–7.

The announced merger prompted quick scrutiny from antitrust authorities, including in the United States, the European Union, and the United Kingdom.9David McLaughlin, Microsoft Deal for Activision to Be Reviewed by FTC in U.S., Bloomberg News (Jan. 31, 2022, 10:53 PM EST),; Mikhail Klimentov & Shannon Liao, EU Opens Investigation Into Microsoft, Activision Blizzard Merger, Wash. Post (Nov. 8, 2022, 12:57 PM EST),; Ryan Browne, Microsoft’s $69 Billion Activision Takeover Faces Competition Probe in the UK, CNBC (July 6, 2022, 7:17 AM EDT), Antitrust authorities and commentators have expressed significant concern about whether Microsoft may withhold AAA games from its competitors in relevant product markets.10See, e.g., Foo Yun Chee, EU Regulators Quiz Rivals on Microsoft Tactics After Activision, Reuters (Dec. 20, 2022, 11:29 AM EST), In the past, Microsoft has withheld at least some AAA games from competitors after acquiring development studios with a history of producing cross-platform AAA games. Sean Hollister, Microsoft Says Three Future Bethesda Games Will Be Xbox-Exclusive, The Verge (Dec. 22, 2022, 9:11 PM EST), Microsoft attempted to allay such concerns by offering Sony a ten-year contract guaranteeing that Call of Duty games would continue to release on PS5 in tandem with their releases on Xbox Series X|S, but both regulators and competitors continued to express concern about the deal.11Arjun Kharpal, Microsoft Offers Sony 10-Year Deal for Call of Duty on PlayStation If Activision Deal Goes Through, CNBC (Dec. 6, 2022, 4:58 AM EST),

On December 8, 2022, the FTC filed a Complaint seeking to enjoin the proposed acquisition.12See generally FTC Complaint. In its Complaint, the FTC alleged potential anticompetitive effects in three product markets: (1) the market for high-performance consoles, (2) the market for multi-game content library subscription services (such as Xbox Game Pass), and (3) the market for cloud gaming subscription services.13Id. at ¶¶ 60–91. Microsoft is also active in the market for cloud gaming subscription services through a higher-tier version of Xbox Game Pass. I use the term “gaming subscription services” to refer collectively to the markets for multi-game content library subscription services and cloud gaming subscription services.

It is noteworthy, however, that the FTC did not characterize the market for high-performance consoles and the markets for various types of gaming subscription services as two-sided markets. A two-sided market is one that “offers different products or services to two different groups who both depend on the platform to intermediate between them.”14Ohio v. Am. Express Co., 138 S. Ct. 2274, 2279 (2018); see also David S. Evans & Michael Noel, Defining Antitrust Markets When Firms Operate Two-Sided Platforms, 2005 Colum. Bus. L. Rev. 667, 668 (2005). In other words, in a two-sided market, the producer’s products or services have value, in part, because they bring together two distinct groups of consumers who value the ability to interact with one another.

One obvious (and previously litigated) example of a two-sided market is the market for payment-processing services (namely, credit cards). On one side, consumers wish to use credit cards because they make it easier to buy things from merchants. On the other side, merchants wish to accept credit cards and use the underlying payment-processing services because credit cards increase consumer sales. Credit cards (and the associated payment-processing services) would carry no value to anyone if they were used only by consumers or only by merchants. They create value because they bring consumers and merchants together.

Both high-performance consoles and subscription gaming services are two-sided markets.15See Evans & Noel, supra note 15, at 679 (noting that video game platforms are two-sided markets). Consumers want access to games (including, in the case of subscription gaming services, access to games at a fixed monthly fee rather than on a per-game basis), while game developers need access to a gaming platform, such as the Xbox Series X|S or the PS5, to sell their products to consumers.16While game developers do not need access to a gaming subscription service to reach consumers, joining the library of games available in such a service often greatly increases a game’s playerbase by reducing (to zero) the consumer-subscriber’s marginal cost of buying the game. See, e.g., Tim Biggs, How Xbox’s ‘Netflix for Games’ Is Expanding Players’ Horizons, Sydney Morning Herald (Feb. 13, 2019, 8:20 AM), This has the potential to attract new fans who may not otherwise consider buying a game. See id. (noting that, for one puzzle game added to Xbox Game Pass, 40% of subscribers who played the game had “never played any puzzle game before”). These new players mean greater revenue, either through “sales of paid add-on content,” id., or through direct or indirect revenue sharing. See infra note 20. Microsoft’s actual product is the service of connecting consumers and game developers, who value gaming consoles because they provide a platform upon which transactions can take place, not unlike credit-card networks.

This gives rise to “indirect network effects.”17David S. Evans & Richard Schmalensee, Markets With Two-Sided Platforms, 1 Issues in Competition L. & Pol’y 667, 667–68 (2008). “Indirect network effects exist where the value of the two-sided platform to one group of participants depends on how many members of a different group participate.”18Am. Express Co., 138 S. Ct. at 2280. Consumers value a console (or gaming subscription service) with a library of 1,000 games more highly than an otherwise-identical console or service with a library of 10 games. Game developers would rather develop games for a console with 10 million players than a console with 100,000 players, and they would also rather join a gaming subscription service with more players, given that each additional player represents a potential increase in revenue.19There is little public information about how gaming subscription services pay game developers to incentivize them to join the service, but what little public information is available suggests that Microsoft has a variety of arrangements with developers, some of which do not involve straightforward revenue-sharing. For instance, the CEO of Microsoft Gaming, Phil Spencer, has stated that deals vary from revenue-sharing to covering the entire production costs of a game. Nilay Patel, Microsoft’s Phil Spencer on Launching the New Xbox and the Future of Games, The Verge (Nov. 24, 2020, 9:00 AM EST), Of course, even if the service pays developers in a lump-sum, rather than through revenue-sharing, the price offered will be at least indirectly influenced by the size of the service, given that a larger subscription service is likely to anticipate a greater marginal revenue from each additional game added to its library.

Given these indirect network effects, the Supreme Court has recognized that “two-sided platforms must be sensitive to the prices that they charge each side.”20Am. Express Co., 138 S. Ct. at 2281. “Raising the price on side A risks losing participation on that side, which decreases the value of the platform to side B. If participants on side B leave due to this loss in value, then the platform has even less value to side A—risking a feedback loop of declining demand.”21Id. (first citing Evans & Schmalensee, supra note 18, at 675; and then citing Evans & Noel, supra note 15, at 680–81). Even absent any anticompetitive activities, a competitive equilibrium in a two-sided market may include one side being charged far less than the other side, merely because one side is more sensitive to price changes.22See Evans & Schmalensee, supra note 18, at 667. In the market for video game consoles, for instance, manufacturers have historically sold consoles “at close to or below manufacturing cost” to consumers, while realizing “virtually all of their gross margin from licensing access to the software and hardware platforms to game developers.”23Id. at 673; see also Ben Gilbert, Xbox Consoles Have Never Been Profitable on Their Own, Microsoft Admits in Court, Bus. Insider (May 6, 2021, 10:38 AM),

Just as competitors in a two-sided market must carefully account for network effects when setting prices, so too must courts when evaluating the potential anticompetitive effects of restrictions or mergers in such a market. In Ohio v. American Express Co., the Supreme Court considered the antitrust implications of a contractual anti-steering provision imposed by a credit-card service provider (American Express, or “Amex”) on merchants, which prohibited merchants from “discouraging customers from using their Amex card after they have already entered the store and are about to buy something, thereby avoiding Amex’s fee.”24138 S. Ct. at 2279. While the plaintiffs offered some evidence that such provisions increased merchant fees, the Supreme Court held that this evidence was insufficient because such an analysis fails to consider effects on the other side of the two-sided market for credit cards.25Id. at 2287–90. As the Supreme Court reasoned, “[e]vidence of a price increase on one side of a two-sided transaction platform cannot by itself demonstrate an anticompetitive exercise of market power.”26Id. at 2287; see also Epic Games, Inc. v. Apple Inc., 559 F. Supp. 3d 898, 994 (N.D. Cal. 2021) (“In two-sided transaction markets, an anticompetitive price or restriction on one side may well reflect a competitive equilibrium on the other side.”). Instead, the two sides of the market must be analyzed together to determine whether the supposed anticompetitive activity raised the overall cost of the product, reduced output, or “otherwise stifled competition.”27Am. Express Co., 138 S. Ct. at 2287. Once a court determines that a market is properly characterized as a two-sided market, no antitrust violation can be established without analyzing the effects on both sides of the market.28Id. at 2287–90.

The FTC’s Complaint does not characterize the relevant product markets as two-sided markets, however. Instead, the FTC characterizes AAA gaming content—the product that Activision Blizzard appears to be uniquely positioned to reliably produce at a high level—as a “substantially important input” for both high-performance consoles and gaming subscription services, supposedly making the proposed acquisition a vertical merger.29FTC Complaint, at ¶¶ 1, 97. While AAA games are undoubtedly critical to a high-performance console’s success, it is unclear whether a court would accept their characterization as an “input,” such that this acquisition should be analyzed as a vertical merger. As the FTC’s now-rescinded Vertical Merger Guidelines stated, strictly vertical mergers are mergers “that combine firms or assets at different stages of the same supply chain.”30U.S. Dep’t of Justice & Fed. Trade Comm’n, Vertical Merger Guidelines § 1 (2020), [hereinafter Vertical Merger Guidelines]. The Vertical Merger Guidelines were withdrawn on September 15, 2021, Federal Trade Commission Withdraws Vertical Merger Guidelines and Commentary, Fed. Trade Comm’n (Sept. 15, 2021),, but the stated reasons of a majority of FTC Commissioners for withdrawing the Guidelines did not take issue with the discussed definitions. Statement of Chair Lina M. Khan, Commissioner Rohit Chopra, and Commissioner Rebecca Kelly Slaughter on the Withdrawal of the Vertical Merger Guidelines (Sept. 15, 2021), Meanwhile, “diagonal” mergers are mergers “that combine firms or assets at different stages of competing supply chains.”31Vertical Merger Guidelines § 1. Video games are not in the supply chains of either high-performance consoles or gaming subscription services, nor are they in a supply chain that competes with either of those two supply chains. They are distinct, separable products that are distributed using high-performance consoles and/or gaming subscription services as a platform upon which to meet consumers—the other side of the relevant two-sided markets, if one characterizes the relevant product markets as such. 

Microsoft may choose to argue that it is not acquiring the manufacturer of an input in any of the FTC’s alleged product markets; instead, it is acquiring its own customer in one side of a two-sided market. If a court were to accept such a characterization, the FTC would find itself in uncharted territory. Courts have just begun to consider how to analyze two-sided markets in the context of § 1 of the Sherman Act,32See, e.g.Am. Express Co., 138 S. Ct. at 2280–81 (recounting basic economic principles related to two-sided markets to drive the Supreme Court’s analysis, given the relative novelty of the issue); Epic Games, Inc., 559 F. Supp. 3d at 994 (noting that it remains “difficult to evaluate” potential procompetitive and anticompetitive effects of restrictions in a two-sided transaction market). and they have not yet been called upon to evaluate the anticompetitive effects of a merger in a two-sided market at all. There is reason to believe that some of the basic tools typically used to evaluate the potential anticompetitive effects of a merger will be ineffective in the context of a two-sided market.33See Epic Games, Inc., 559 F. Supp. 3d at 963–64 (noting that an expert conceded that the “small but significant and non-transitory increase in price” (SSNIP) test, which was developed by the Department of Justice “to analyze mergers,” would at least be “empirically . . . overwhelming in practice” if applied to a two-sided market). Indeed, the Supreme Court has so far made only one thing clear in this area of law: when both sides of a two-sided market value the other, courts must consider the effects on both sides of the market.34Am. Express Co., 138 S. Ct. at 2286–87 (noting that it may be permissible to analyze only one side of a two-sided market, but only in markets such as newspaper advertisements, where the indirect network effects only affect one side of the market (e.g., advertisers, in the case of newspapers)). This may well pose a challenge to the FTC. At the very least, if a court were to analyze the relevant markets as two-sided markets, it would complicate the FTC’s case.

Such a characterization could ultimately help the FTC, though. As noted previously, raising prices on one side of a two-sided market can result in a “feedback loop of declining demand” on both sides of the market due to indirect network effects.35Id. at 2281 (first citing Evans & Schmalensee, supra note 18, at 675; and then citing Evans & Noel, supra note 15, at 680–81). If Microsoft’s acquisition of Activision allows it to either lower costs to its own customers on the consumer side of the market (or to raise costs to Sony’s customers), then indirect network effects could result in a feedback loop that ends with Microsoft capturing a larger share of the relevant product markets than the size of the initial action might otherwise suggest. While Microsoft has argued that it would be irrational for it to remove cross-platform AAA games from competitor consoles,36See, e.g., Brad Smith, Microsoft’s Activision-Blizzard Acquisition Is Good for Gamers, Wall St. J. (Dec. 5, 2022, 1:24 PM ET) (“The main supposed potential anticompetitive risk Sony raises is that Microsoft would stop making Call of Duty available on the PlayStation. But that would be economically irrational. A vital part of Activision Blizzard’s “Call of Duty” revenue comes from PlayStation game sales.”). Brad Smith is the President of Microsoft. Id. this ignores the fact that, post-acquisition, any loss of revenue from a customer that no longer purchases a AAA game on the PS5 may be offset by increases in revenue stemming from driving consumers from the PS5 to the Xbox Series X|S.37This is a recognized potential anticompetitive effect of non-horizontal mergers. Vertical Merger Guidelines § 4(a). Given the two-sided nature of the relevant market, one might expect the latter effect to be unusually large compared to more traditional non-horizontal mergers. Quantifying such an argument would prove challenging, but if it can be done, the end result may even bolster the FTC’s case.

It remains to be seen whether Microsoft will raise the issue of two-sided markets38Microsoft’s Amended Answer to the FTC’s Complaint raises the defenses of “fail[ure] to allege a plausible relevant product market or markets,” “fail[ure] to allege any harm to competition,” and that the FTC’s claims are “too speculative to support any claim on which relief can be granted,” among many others. Amended Answer and Defenses of Respondent Microsoft Corp., at 32–33, Microsoft Corp./Activision Blizzard, Inc., No. 9412 (FTC filed Dec. 8, 2022), An analysis of two-sided markets could be relevant to any or all of those three defenses. and, if it does, whether the FTC will oppose such a characterization or accept it.39While the FTC’s Complaint does not affirmatively raise the issue of two-sided markets, it certainly does not preclude the FTC from ultimately embracing such a characterization of the relevant markets. If the FTC were to oppose the characterization and offer only a traditional merger analysis, it would face the significant risk that a court later finds that such an analysis is not fully responsive to the two-sided nature of the market. On the other hand, if the FTC were to accept such a characterization, it would have an opportunity to develop new tools for analyzing a “new” type of market—one with increasing relevance in the era of two-sided “Big Tech” platforms.

Robert Clark

Associate, Cozen O’Connor, Philadelphia, PA;
J.D. ‘22, The University of Chicago Law School; Founding Executive Articles Editor, The University of Chicago Business Law Review

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