Quick Read: Walled Garden America

The consolidation of Hollywood has been a disaster. The FTC is making the case that the similar consolidation of video gaming is illegal.

Today’s quick read is about the FTC’s appeal of the Microsoft-Activision decision, and whether America is going to become a land of walled gardens or open markets.

One of the biggest business stories in America is the shutdown of Hollywood by the writers and actors strike, but the subtext of the fight is not just money. It’s that by combining distribution and production through mergers, the studios destroyed the open markets that were key to the industry’s success. Basically, streaming is a horrible business model, because it prevents new creative talent from connecting with audiences. So audiences are staying away. (Meanwhile, as Richard Rushfield notes, the executives are watching over the destruction of their industry, harming shareholders and workers, and extracting large payments for themselves.)

The Federal Trade Commission’s challenge of the Microsoft-Activision merger is about preventing the same dynamic from happening in the video game industry. In ruling against the government, the district court judge, Jacqueline Corley, fundamentally misunderstood the law and the case. Corley believed that the FTC was simply helping Sony in a fight with Microsoft over a single video game, Call of Duty, and whether it would be available on Sony’s Playstation. She saw the argument as a simple case of who is nicer to consumers in terms of short-term prices.

Unfortunately, by side-stepping the FTC’s actual argument, the judge green lit the consolidation of the video game industry. So the FTC appealed, arguing Corley didn’t grapple with their fundamental legal claim. Here’s the key paragraph from their appeal of the district court decision.

This case is about more than a single video game and the console hardware to play it. It is about the future of the gaming industry. At stake is how future gamers will play and whether the emerging subscription and cloud markets will calcify into concentrated, walled gardens or evolve into open, competitive landscapes—where games are platform-agnostic, new platform offerings can emerge to challenge the established incumbents, and consumers are free to choose where and how to access their favorite games.

Rival walled gardens run by an oligopoly or monopoly, with the goal of excluding competitors, is an industry structure the Clayton Act was designed to prevent. The law is set up to address monopolization in its incipiency, which is to say, as the Supreme Court noted in 1963, “whether the consolidation was to take place in an industry that was fragmented, rather than concentrated, that had seen a recent trend toward domination by a few leaders.”

More broadly, “the purpose of the proposed bill, H. R. 2734, is to limit future increases in the level of economic concentration resulting from corporate mergers and acquisitions,” said the Senate Judiciary report in 1950 on amendments updating the law. Corley’s view is that the case is about whether Microsoft will let consumers play Call of Duty for cheaper than they would have if the merger doesn’t go through. That’s bad for Sony, she muses, but so what?

The FTC’s case is that consolidating power into the hands of a few is bad for America, and against the legal framework Congress set up. I have no idea what the Ninth Circuit will do with this appeal. Judges make random, and often stupid, decisions. But the Congressional intent and statute are clear, as is the illustrative example of striking actors and writers who are downstream from an industry that has destroyed itself.