Policy makers have become increasingly concerned about what the US Federal Trade Commission (FTC) describe as ‘negative option marketing’. These are marketing deals that contain the following feature:
a term or condition that allows a seller to interpret a customer’s silence, or failure to take affirmative action, as an acceptance of an offer.
For example, companies such as Amazon, Apple, Spotify and Netflix may offer students a 3-month free trial or 3-month introductory offer (at a special lower price) for movie and music streaming services. However, many of these subscription contracts contain an example of negative option marketing – auto renewal clauses.
Problems with auto-renewal contracts
The inclusion of an auto-renewal clause means that if a customer fails to cancel the subscription at the end of the three-month period, the subscription automatically reverts to its full price. The full-price contract then continues to roll-over indefinitely unless the customer takes a pre-specified action to terminate the deal. Inattentive consumers could end up paying subscription prices that far exceed their willingness to pay.
Auto-renewal contracts are not just an issue with free trials/introductory offers. Some people may purchase subscription contracts at the full price and then forget about them. These consumers could end up paying fees for months after they have effectively stopped using the service.
Another potential problem with the use of auto-renewal contracts, is businesses deliberately making the cancellation process more complex than it needs to be. In many cases it takes just one click to sign up for the subscription, but multiple clicks through a series of menus to cancel. Some businesses do not provide consumers with the option to cancel online and, instead, they are forced to phone a number that is often very busy.
Effects on consumer welfare
To what extent do these problems caused by auto-renewal reduce consumer welfare? What evidence do we have?
Research by Citizens Advice found that just over one in four people (26 per cent) had signed up to a subscription by accident. 58 per cent of this group forgot to cancel a free trial, while 21 per cent did not realise that the free trial would automatically roll-over to a full-price subscription. This seems to be a particular issue for those on low incomes with 46 per cent of people on Universal Credit signing up to a subscription by accident.
Analysis by the Department for Business and Trade (DBT) has tried to estimate the value of these unwanted subscriptions. The study found that consumers spent £602 million on unwanted subscriptions where a free or reduced-price trial had been rolled over to the full price. The same study also found that £573 million was spent on subscriptions that people had forgotten about.
One in five people in the Citizens Advice study who tried to cancel a subscription found the process difficult. The DBT estimates that cancellation difficulties led to £382 million being spent on unwanted subscriptions.
UK Government response
In response to these findings, the government introduced the Digital Markets, Competition and Consumers Bill into Parliament in April 2023.
Provisions in the Bill seek to standardise the information that businesses must provide consumers before they sign up for subscription contracts. For example, in the future, firms will have to display prominently (a) any auto-renewal provisions, (b) whether the price increases after a specified period, (c) details about how consumers can terminate the contract and (d) cooling-off periods.
The Bill also stipulates that businesses will have to provide consumers with reminders when a free/reduced-price trial period is about to end and/or a subscription is about to renew automatically. They must also make it easy to exit contracts and remove any unnecessary steps.
The government initially considered an additional measure that would force businesses to provide consumers with the option to take out any subscription without auto-renewal.
Citizens Advice strongly supported this policy. They argued that not only should consumers be given the choice, but that auto-renewal should not be the default i.e. people would have to opt-in to auto-renewal subscriptions.
However, after the consultation process for the Bill, the government decided against introducing this additional measure. Businesses have also argued that the other elements of the policy are too prescriptive.
Articles
Government documents
Questions
- Outline some theories from behavioural economics that might help to explain why people sometimes end up with unwanted subscriptions.
- Discuss some of the potential benefits of auto-renewal subscriptions for both consumers and firms.
- Using behavioural economic theory, explain some of the potential disadvantages for businesses of using auto-renewal subscriptions.
- When businesses deliberately make the cancellation process more complex than it needs to be, it is referred to as an example of ‘sludge’. Explain the meaning of ‘sludge’ in more detail, referring to some different examples in your answer.
- What difference do you think it would make to the number of people signing up for auto-renewal subscriptions if you had to opt-in as opposed to opting out? Explain your answer.
- Another policy would be to force firms to cancel subscription contracts if there is evidence that consumers have not used the service for a long period of time. Discuss some of the advantages and disadvantages of this measure.
- Explain what are meant by ‘dark patterns’. How may the choice architecture on some sites actually hinder consumer choice?
HS2 has been cancelled north of Birmingham. The prime minister, Rishi Sunak, announced this at the Conservative Party conference on 4 October, some 13 years after the plan was adopted by the Labour government to build a new high-speed railway from London to Birmingham, which then would branch into two legs – one to Manchester and one to Leeds. The initial budget for this was £15.8bn to £17.4bn. When it came to power, the Conservative-Liberal coalition government ordered a review of the plan. In light of this, the government gave the green light in January 2012 for the full Y-shaped project to go ahead. The London–Birmingham leg was planned to open in 2026 and the two northern legs from 2033.
The project was divided into two phases: Phase 1 to Birmingham and Phase 2 to Manchester and Leeds. The Phase 1 parliamentary bill became law in February 2017 and soon after that, various construction contracts were signed. After some delays, preparation for construction work began in June 2019. There was growing doubt, however, about the viability of the northern legs.
On becoming prime minister in 2019, Boris Johnson ordered an independent review of the project after estimates that the costs of the full project would be some £88bn. The review, chaired by Douglas Oakervee, was published in December 2019 (for a link, see list of reports below). It found that costs (in 2015 prices) were likely to be between £62bn and £69bn. Nevertheless, it concluded that the project should proceed: that the original rationale for HS2 still held; that there were:
no shovel-ready alternative investments in the existing network that were available: if HS2 were to be cancelled, many years of planning work would be required to identify, design and develop new proposals; that the upgrading of existing lines would also come at a high passenger cost with significant disruption; that there would be serious consequences for the supply chain, the fragile UK construction industry and confidence in UK infrastructure planning if HS2 were to be cancelled at this late stage.
In February 2020, the prime minister announced that HS2 would go ahead, including the legs to Manchester and Leeds. The Department for Transport published a document (see source line to the following table) giving the full business case for Phase 1 and the outline case for Phase 2. The document itemised the costs and benefits as estimated at the time.
Source: Full Business Case: High Speed Two, Table 2.9, Department for Transport (April 2020)
Box 12.6 in Economics (eleventh edition) and Case study 8.16 on the Essentials of Economics (ninth edition) student website looks at these costs and benefits. The above table is taken from the box/case study. Net transport benefits (present value at 2015 prices) were estimated to be £74.2bn. These include benefits to passengers from shorter journey times, greater reliability, greater connectivity and less crowding, and reduced congestion on roads. They also include other benefits, such as a reduction in carbon emissions and a reduction in road accidents. Net benefits also include the wider benefits from greater connectivity between firms (resulting in increased specialism, trade and investment), greater competition and greater labour mobility. These wider benefits were estimated to be £20.5bn, giving total net benefits of £94.7bn.
Total costs to the government were estimated to be £108.9bn and revenues from fares to be £45.4bn, giving total net costs of £63.5bn. This gave a benefit/cost ratio of 1.5 (£94.7bn/£63.5bn). In the light of these findings, the government announced in September 2020 that the main work on the London to Birmingham leg would begin, despite the Public Accounts Committee’s finding that the project was badly off course and lacking in transparency.
Concern was expressed over whether the Leeds leg would go ahead, but in May 2021, the transport secretary, Grant Shapps, confirmed that it would be completed. However, with the publication of the Integrated Rail Plan in November 2021 (for a link, see list of reports below), the government decided that the eastern leg of HS2 would no longer reach Leeds but instead end in the East Midlands. Then in June 2022, the link between the HS2 line near Manchester and the West Coast Main Line was scrapped. This would have allowed HS2 trains to reach Scotland.
In early 2023, it was announced that the building of the terminus at Euston was being put on hold. Many interpreted this as meaning that it was being scrapped, with trains terminating at Old Oak Common, some six miles from Central London.
Finally, as we have seen, HS2 north of Birmingham has now been scrapped and the government is seeking private-sector funding to build the terminus at Euston and complete the line from Old Oak Common.
Arguments for scrapping the northern legs
The main argument given by the government was that projected costs have risen substantially above original estimates and that by cancelling the Manchester and east Midlands legs, the money saved could be better used elsewhere. The argument is one of opportunity cost. The cost of going ahead would mean not going ahead with better-value alternatives.
The government claims that £36bn will be saved and that this will be diverted to rail, road and other transport projects, primarily (although not exclusively) in the north of England. The money would be spent between 2029 and 2040. Projects include spending additional money on the planned upgrading of the rail link between Manchester and Liverpool, Sheffield, Leeds and Hull; building a new station at Bradford; developing a mass transit system for Leeds and its surroundings; a £2.5bn fund for improved transport for smaller cities, towns and the countryside in the north of England; extra funding for transport in the east and west Midlands, including funding a Midlands Rail Hub. Out of the £36bn, £6.5bn would be for projects elsewhere, including road improvement.
In order to judge whether the diversion of funds represents a better use of money, a full analysis of costs and benefits of the various projects would need to be conducted and compared with an updated cost–benefit analysis of continuing with the legs to Manchester and the east Midlands and possibly reinstating the Leeds leg too.
One possible benefit for the government is a political one. It hopes that promising more local projects rather than HS2 will appeal to the electorate in large parts of the north of England who are suffering from poor and unreliable transport links. However, most of these projects will be started well beyond the next election and this political gain may turn out to be small. Indeed, cancelling HS2 may breed cynicism, with people wondering whether any promised new projects will actually be delivered.
Arguments against scrapping the northern leg(s)
The benefits originally identified from HS2 will now be lost. It is not just that the northern legs of HS2 would have provided faster travel to Manchester and Leeds, but the new lines would have reduced congestion for slower trains and freight on existing lines. This has been the experience in countries such as Japan and Spain, which have invested heavily in new, separate high-speed lines.
When the line is completed to Birmingham, the HS2 trains will be able to continue north of Birmingham on existing lines. But these lines are heavily congested, which will limit the number of HS2 trains that can use them. Also they will be restricted to 110 mph on these lines as they have no tilting mechanism. Also they will have a maximum capacity of only 550 seats (a single train set) as the platforms at Manchester Piccadilly cannot accommodate double-set trains. The existing Pendalino trains on the West Coast mainline can travel at 125 mph as they do have the tilting mechanism and they have a higher capacity of 607 seats.
Then there are the signals that cancellation sends to industry about whether governments can be trusted to follow through on public-sector projects. Many business had expanded or relocated to places near the HS2 routes. Many others will wonder whether the promised new projects will go ahead. Indeed, shortly after giving a list of the projects (some of which had already been built or were being built), the list was removed from the government website. There is already a mood of scepticism amongst the electorate. Polling following the initial announcement showed that a majority believed that it was unlikely that the Conservatives would deliver the other projects if they won the next election.
The opportunity cost argument that the money would be better spent on alternative transport projects is predicated on various assumptions. One is that the money will actually be spent, which, as we have seen, people consider doubtful. Another is that the only choice is either spending a fixed pot of money on the northern leg(s) of HS2 or spending it on the alternative projects announced by the prime minister. It could be argued that the government should proceed with both the full HS2 and these other projects, and fund it by extra taxation. Investment as a percentage of GDP is low in the UK compared with other countries. Over the past 10 years, it has averaged 17.8% in the UK. This compares with 21.0% in the USA, 21.5% in Germany, 23.7% in France and 25.4% in Japan. Also, public-sector investment is low in the UK compared with that in other countries.
Assessing the arguments
Many of the costs and benefits of long-term projects, such as HS2, occur many years hence. There is, therefore, a great deal of uncertainty over their magnitude. This makes it extremely difficult to reach a clear conclusion over the desirability of cancelling HS2 north of Birmingham or continuing with it. Under such circumstances, politics tends to dominate decision making.
Articles
- Rishi Sunak promises more rail, road and bus links
BBC News (4/10/23)
- The HS2 rail line: what has been cut and what will replace it?
Financial Times Gill Plimmer, Phillip Georgiadis, Jennifer Williams and Jim Pickard (4/10/24)
HS2 explained: What is the route now, what are the costs and why is the Manchester leg being axed?Sky News, Sarah Taaffe-Maguire (5/10/23)
- Rishi Sunak finally axes HS2 in the north – weeks after The Independent revealed plan
Independent, Jon Stone and Adam Forrest (4/10/23)
- HS2 | Timeline of a mistreated megaproject
New Civil Engineer, Rob Hakimian (4/10/23)
- HS2 scale-back creates ‘chilling effect’
Construction News, Catherine Moore (5/10/23)
- How HS2 caused the UK to lose focus on ‘levelling up’ during years of high-speed rail delays
The Conversation, Steven McCabe (28/9/23)
- What Rishi Sunak scrapping HS2 – and promising a new ‘Network North’– means for the north of England
The Conversation Tom Arnold (4/10/23)
- HS2: Why Rishi Sunak’s big gamble may not pay off
BBC News, Faisal Islam (5/10/23)
- ‘Managed decline’: the uncertain future for British rail after cuts to HS2
Financial Times, Philip Georgiadis, Gill Plimmer and Jim Pickard (6/10/23)
- Investment outside London could bring £100bn boost to economy, says Bank of England’s former chief economist
Channel 4 News, Helia Ebrahimi interviews Andy Haldane (27/9/23)
- HS2 surgery is the wrong choice say leading academics
RailTech, Simon Walton (3/10/23)
- Why has HS2 ended up being so expensive?
The Guardian, Gwyn Topham (25/9/23)
- Ten problems with Rishi Sunak’s Network North announcement
The Guardian, Helen Pidd (5/10/23)
- International investors are laughing at the HS2 shambles
The Guardian, Nils Pratley (4/10/23)
- Spain’s high-speed trains aren’t just efficient, they have transformed people’s lives
The Guardian, María Ramírez (11/10/23)
Government Press Release
Reports
Questions
- Why have the costs of HS2 (in real terms) risen substantially since the first estimates in 2012?
- Identify the types of environmental costs and benefits of the full Y-shaped HS2 project. Why might such costs and benefits be difficult to measure?
- Is the opportunity of cost of proceeding with the full Y-shaped HS2 a range of other transport projects? Explain.
- Find out the level of public-sector investment expenditure as a percentage of (a) total government expenditure and (b) GDP in some other developed countries and compare them with the UK. Comment on your findings.
- Should the decision whether or not to go ahead with the Manchester and east Midlands legs have been delayed until a new updated cost–benefit analysis had been conducted?
- If most of the benefits from the originally planned HS2 will be now be lost with the line ending at Birmingham, should this leg to Birmingham also be cancelled, even though many of the costs have already been incurred? Explain your reasoning.
The global average temperature for July 2023 was the highest ever recorded and July 3rd was the world’s hottest day on record. We’ve seen scenes of wildfires raging across much of southern Europe, people suffering searing temperatures in south-west USA, southern India and western China, flash floods in South Korea, Japan and eastern USA. These are all directly related to global warming, which is causing weather systems to become more extreme. And as the planet continues to warm, so these problems will intensify.
The Secretary General of the United Nations, Antonio Guterres, in a press conference on 27 July warned that:
Climate change is here. It is terrifying. And it is just the beginning. The era of global warming has ended; the era of global boiling has arrived. The air is unbreathable. The heat is unbearable. And the level of fossil-fuel profits and climate inaction is unacceptable. Leaders must lead. No more hesitancy. No more excuses. No more waiting for others to move first. There is simply no more time for that.
The environmental, human, social and economic impact of global warming is huge, but concentrated on just part of the world’s population. For many, a more variable climate is at worst an inconvenience – at least in the short term. But it is the short term that politicians are most concerned about when seeking to win the next election.
Tackling climate change requires action to reduce carbon emissions now, even though the effects take many years. But one person’s emissions make only a minuscule contribution to global warming. So why not be selfish and carry on driving, flying off on holiday, using a gas boiler and eating large amounts of red meat? This is what many people want to do and governments know it. Many people do not like green policies as they involve sacrifice. Examples include higher fuel prices and restrictions on what you can do. So, despite the visions of fires, floods and destruction, governments are wary about raising fuel taxes, airport duties and charges to use old high-emission cars in cities; wary about raising taxes generally to provide subsidies for sustainable power generation; wary about banning new oil and gas fields that would reduce reliance on imported fuel.
Because the external costs of carbon emissions are so high and global, government action is required to change behaviour. Education can help and scenes of devastation from around the world may change the hearts and minds or some people. Also, the prospect of profits from cleaner and more fuel-efficient technology can help to spur innovation and investment. But to meet net zero targets still requires policies that are unpopular with many people who might be inconvenienced or have to pay higher petrol, energy and food prices, especially at a time when budgets are being squeezed by inflation.
Part of the problem is a distributional one. The people most affected by the cost-of-living crisis and higher interest rates are those on lower incomes and with higher debts. Politicians know that it will be hard to win the votes of such people if they are faced with higher green taxes. As elections approach, politicians are likely to backtrack on many environmental commitments to appeal to such people.
This is beginning to happen in the UK, with the government declaring that it is on the side of the motorist. Indeed, Rishi Sunak has just announced that the government will authorise more than 100 new licenses for new oil and gas wells in the North Sea. This is despite the United Nations, various other international bodies, climate scientists and charities calling for a halt to all licensing and funding of new oil and gas development from new and existing fields. The government argues that increased North Sea production would reduce the reliance on imported oil.
Video
Articles
- July 2023 the Hottest Ever Month on Record, Likely Warmest in ‘Tens of Thousands of Years’
The Wire, Aathira Perinchery (28/7/23)
- Climate threat ‘existential’ says Biden, as world faces hottest July
BBC News, Heather Sharp and Emma Owen (27/7/23)
- UN chief says Earth in ‘era of global boiling’, calls for radical action
Aljazeera (27/7/23)
- Why it’s time to prepare for the worst on climate change
Financial Times, Robert Pindyck (6/7/23)
- The planet heats, the world economy cools – the real global recession is ecological
The Guardian, Larry Elliott (9/7/23)
- Climate change will reshape global supply chains — it can reduce welfare on Earth by 20%: Ivan Rudick
The Economic Times (India), Srijana Mitra Das (30/6/23)
- Rishi Sunak defends granting new North Sea oil and gas licences
BBC News (31/7/23)
- The oil industry has succumbed to a dangerous new climate denialism
The Conversation, Adi Imsirovic (31/7/23)
- Dismay as Rishi Sunak vows to ‘max out’ UK fossil fuel reserves
The Guardian, Severin Carrell, Peter Walker and Helena Horton (31/7/23)
- What are the Conservatives’ green policies – and what could be scrapped
Sky News, Jennifer Scott (31/7/23)
- Rishi Sunak signals he is ready to soften UK green policies
Financial Times, George Parker and Lucy Fisher (24/7/23)
- Green campaigners fear UK policy backlash after ULEZ keeps Uxbridge Tory
Politico, Charlie Cooper and Bethany Dawson (23/7/23)
- Climate policy and economic inequality
VoxEU, Diego Känzig (25/6/23)
- The untapped potential of education in the battle against climate change
VoxEU, Noam Angrist, Kevin Winseck, Harry Anthony Patrinos and Joshua Graff Zivin (14/7/23)
Questions
- In what sense is the environment a ‘public good’? How is the concept of externalities relevant in analysing the private decisions made about the use of a public good?
- How may game theory be used to help understand the difficulties in reaching international agreement about climate change policies?
- What is meant by ‘net zero’? Is carbon capture and storage an acceptable alternative to cutting carbon emissions?
- In what ways could policies to tackle climate change be designed to reduce income inequality rather than increase it?
- What are the arguments for and against banning (a) petrol and diesel cars; (b) gas boilers; (c) fossil-fuel power stations? How much notice should be given if such bans are to be introduced?
- What is meant by ‘nudge theory’? In what ways could people be nudged into making greener decisions?
- What are the arguments for and against granting new licences for North Sea oil and gas drilling? Explain where you feel the balance of the arguments lies.
Effects on competition in the console and cloud gaming markets
Many people in the games industry expected the Competition and Markets Authority (CMA) to approve Microsoft’s proposed takeover of the games business, Activision Blizzard. However, in its final report published on 26 April, the CMA stated that the takeover would result in a substantial lessening of competition (SLC) in the supply of cloud gaming services in the UK. It rejected a behavioural remedy proposed by Microsoft and concluded that the merger should be prohibited.
When analysing the potential impact of this merger, the CMA focused on the following three issues:
- How important is the availability of Activision Blizzard’s games for the competitiveness of Microsoft’s rivals in the console and cloud gaming market? If, following the merger, Microsoft used its control over Activision Blizzard to restrict the availability of the games, would this significantly harm the competitiveness of their rivals?
- If restricting the availability of the games did harm its rivals, would it be profitable for Microsoft to do so? Do the benefits outweigh the costs? The major benefit for Microsoft is the additional sales this generates as consumers switch to its products to gain access to Activision’s games. The major cost is the forgone sales of the games to their rivals in the console and cloud gaming market.
- If it is profitable for Microsoft to limit the availability of the games, would this policy lead to a substantial lessening of competition (SLC) in the console and cloud gaming market? To answer this question the CMA compared the level of competition that would be most likely to occur if the merger were to proceed with the level if the deal were prohibited? In other words, it needed to identify the counterfactual.
In response to the first issue, the CMA judged that restricting access to Activision Blizzard’s games post-merger would significantly harm the competitiveness of Microsoft’s rivals in both the console and cloud gaming markets. However, its judgment on the second issue differed between the two markets. Why was this? One key issue was the difference in the relative market power of Microsoft in cloud vs console gaming.
One common indicator used to analyse the market position of a business relative to its rivals is market share. Using data on revenues generated from the sales of hardware, associated games and subscription services, console gaming market shares in the UK for 2021 were as follows:
- Sony (PlayStation): 40% – 50%
- Microsoft (xBox): 30% – 40%
- Nintendo (Switch): 10% – 20%
Given the important market position of the PlayStation, limiting the ability of its users to purchase Activision games would result in Microsoft forgoing significant sales and revenue. Detailed analysis of the data by the CMA, indicated that the costs outweighed the benefits and so Microsoft did not have a commercial incentive to limit the availability of the games in this market. Therefore, the CMA concluded that the merger would not result in a SLC in the console gaming market. This finding was discussed in more detail in a blog on this website in March 2023.
The CMA judged that Microsoft had a much stronger position in the market for cloud gaming.
Cloud gaming services
Cloud gaming offers consumers a new way of playing graphically complex games. In this sector of the market, the games run on remote servers/data centres and then stream over the internet to the user’s device. The great advantage with this approach is that it enables consumers to play games on less powerful hardware devices such as smartphones, tablets, smart televisions, and standard PCs. Although the market is currently quite small it, has grown significantly over the past couple of years. Some people argue that it has the potential to make a dramatic change to the gaming market in the same way that businesses such as Netflix and Spotify have transformed the film, TV, and music industries.
It is more difficult to judge the relative market position of firms in a new and dynamic market, where things can change very quickly. The use of market share data is less informative but can still offer some insights. To estimate market shares in cloud gaming, the CMA used data on the number of monthly active users (MAUs). The figures for paid services in the UK for 2022 were as follows:
- xCloud (Microsoft): 70% – 80%
- PlayStation Cloud Gaming (Sony): 20% – 30%
- Boosteroid: 0 – 5%
- Nvidia GFN: 0 – 5%
Data suggest that Microsoft has a much stronger position in this market than in console gaming. There is also evidence that its market position is becoming more dominant. The same market shares for xCloud and PlayStation Gaming in 2021 were 40% – 50% and 50% – 60% respectively.
Given some of the limitations of using market-share data in a new and dynamic market, the CMA analysed other information about the sector to assess Microsoft’s market position. The investigation identified three key factors that could give Microsoft a significant cost advantage over its rivals: cloud infrastructure, the Windows operating system and access to a wide variety of games.
- Infrastructure: Microsoft’s ownership of Azure, a major cloud computing platform, could give it a significant cost advantage over its rivals in the future. A rival firm would need to develop it own cloud infrastructure or purchase these services from a third-party supplier.
- The Windows operating system: Given that far more games are developed for Windows as opposed to other operating systems, using Windows on a cloud infrastructure system gives a supplier access to large number of games. As it already owns Windows, Microsoft will be able to supply the operating system to its own cloud gaming service at little additional cost whereas its rivals will have to pay a license fee.
- Access to a wide range of games: Microsoft already owns twenty-four development studios that produce some very successful games such as Minecraft and Halo. It also has commercial relationships with other third-party developers who produce games for the Xbox console. This gives Microsoft another advantage over many of its rivals.
Given this evidence on Microsoft’s strong market position, the CMA concluded that the benefits to the company of restricting the availability of the games in the cloud gaming market outweighed the costs.
If Microsoft has commercial incentives to restrict the availability of Activision’s games, would this strategy lead to a SLC in the market for cloud gaming? To answer this question, the CMA had to identify the counterfactual: i.e. the most likely outcome in the market if the merger did not proceed. Following detailed analysis of the evidence, the competition authority concluded that Activision was likely to make its games available to different cloud gaming services if the deal did not take place.
Given Microsoft’s (a) strong market position and (b) limited number of relatively small competitors in cloud gaming, the CMA concluded that Microsoft’s commercial incentive to restrict the availability games would lead to a SLC compared to the counterfactual.
Martin Coleman, the chair of the independent panel of experts who conducted the CMA’s investigation, stated that:
Microsoft already enjoys a powerful position and head start over other competitors in cloud gaming and this deal would strengthen that advantage giving it the ability to undermine new and innovative competitors.
In response to these competition concerns, Microsoft offered to supply Activision games to certain cloud gaming services for a 10-year period. However, the CMA concluded that this behavioural remedy was not enough to address the competition issues raised by the merger and recommended that the deal be prohibited.
Microsoft’s immediate response was to appeal the decision to the Competition Appeal Tribunal.
The Federal Trade Commission is currently investigating the impact of the deal in the USA while the European Commission has just completed its investigation in the European Union. On 15 May, the EC announced that Microsoft’s behavioural remedy did fully address the competition concerns identified during its investigation. Therefore, the merger was approved on condition that Microsoft fully implemented the actions outlined in the remedy.
It will be interesting to read the recommendations of the FTC when the final results of its investigation are published later this year.
Articles
CMA and EC press releases
Questions
- Discuss the barriers to entry that exist in both the console and cloud gaming markets.
- Outline some of the issues when trying to calculate market shares in cloud gaming.
- What is meaning of the term ‘input foreclosure’? How is this relevant to the Microsoft/Activision case?
- What is the difference between a behavioural and a structural remedy? In what circumstances is a behavioural remedy most likely to be effective?
- Discuss some of the potential limitations with the behavioural remedy proposed by Microsoft.
- Explain why Microsoft’s position in the downstream market for cloud gaming is likely to influence incentives it faces to restrict the availability of Activision’s games post-merger.
Why did a competition authority change its mind on one aspect of this merger?
In January 2022, Microsoft announced its plan to acquire Activision Blizzard for $68.7 billion. Activision Blizzard is one of the largest games publishers in the world and famous for titles such as Call of Duty and World of Warcraft. Sales revenue from Call of Duty: Modern Warfare II was over $10 billion within ten days of its release in 2022. Given Microsoft’s ownership of the Xbox, one of the three devices that dominate the market for gaming consoles, the deal was always likely to raise competition concerns.
Potential competition issues
Following Phase 1 and 2 merger investigations by the Competition and Markets Authority (CMA) a number of competition issues were raised. One particular concern was in the market for gaming consoles and the potential impact of the merger on the future availability of Call of Duty (CoD). Some of the key findings of the initial research undertaken by the CMA were that:
- Sony’s PlayStation was a much closer rival for the Xbox than the Nintendo Switch, which tends to offer more family-orientated games.
- PlayStation users spend significant amounts of gametime playing CoD.
- Game availability is a key factor that influences console purchase decisions.
- Twenty-four percent of PlayStation users who play CoD stated that they would not purchase future versions of the console if CoD was unavailable on the platform.
These findings suggest that there are commercial incentives for Microsoft to limit the availability of CoD on the PlayStation. For example, the newly merged business could make future versions of the game exclusive to the Xbox – total exclusivity. Alternatively, it could adopt a policy of partial exclusivity. For example, it could only make versions of CoD available on the PlayStation that exclude some of its more popular features.
There are costs to Microsoft of implementing a policy of total or partial exclusivity. For example, 76% per cent of PlayStation users who play CoD stated that they would not switch consoles if future versions of the game were made unavailable. By making CoD exclusive to Xbox users, Microsoft would lose revenue from forgoing potential sales of the game to this group of users. The firm may also suffer reputational damage if there was a social media backlash against an exclusivity decision.
However, these costs of implementing a policy of exclusivity could be outweighed by the potential benefits. These include:
- The additional sales of consoles as some users switch from the PlayStation to the Xbox to gain access to CoD.
- the sale of CoD and other games to these additional Xbox users.
To quantify these costs and benefits, the CMA used a financial model that includes information on the amounts of money users typically spend on the Xbox platform and CoD over a five-year period. This ‘lifetime value of customers’ model found that it would be profitable for Microsoft to implement a policy of exclusivity post-merger.
The CMA also noted that in the majority of cases where Microsoft had previously acquired gaming studios, the subsequent release of games had been made exclusive to the Xbox.
CMA findings
Following its analysis of the case, the CMA published its provisional findings on the 8th February 2023. One key finding was that the merger would harm consumers, as it would lead to a substantial lessening of competition in the supply of console gaming services. The CMA argued that the acquisition should proceed only if Activision Blizzard sold off the parts of its business responsible for producing CoD. This is a structural remedy.
Microsoft rejected these findings and argued that the financial modelling used by the CMA was based on inaccurate data. In its formal written response to the competition authority the company argued that:
- The potential gains from a policy of exclusivity had been calculated over a five-year period whereas the costs (i.e. the forgone sales of CoD) had only been calculated over a one-year period. More accurate analysis should compare both the potential gains and losses over a five-year period.
- When more recent data are used to calculate the amounts of money users typically spend on the Xbox platform and CoD over a five-year period, the figure is lower than in the original work by the CMA.
Revised CMA findings
Having adjusted its analysis to take account of these criticisms, the CMA published an update to its Provisional Findings on 24th March 2023. In this update the competition authority stated that:
The analysis now shows that it would not be commercially beneficial to Microsoft to make CoD exclusive to Xbox following the deal, but that Microsoft will instead still have the incentive to continue to make the game available on PlayStation.
Therefore, just six weeks after publishing its Provisional Findings the CMA changed its conclusion and stated that the merger would not result in a substantial lessening of competition in the market for the supply of console gaming services in the UK.
In response to these changes an ex-CMA lawyer stated that:
This is extremely unusual. Restating your provisional findings is something ‘you would rather die than do’.
It is important to remember that the investigation by the CMA also raised concerns about the impact of the acquisition on competition in the cloud gaming market. These concerns remain unaffected by these updated findings and a final report will be published by the CMA at the end of April.
Competition authorities from 16 different countries/regions are also investigating the deal, including the Federal Trade Commission in the USA and the European Commission. It will be interesting to see if these authorities agree on the potential impact of the merger on competition.
Articles
CMA documentation
Questions
- Under what circumstances could a merger result in a substantial lessening of competition?
- Summarise the thresholds that have to be met by a potential merger before it is investigated by the Competition and Markets Authority.
- Explain the direct and indirect network effects that exist in the console gaming market. To what extent do they create barriers to entry?
- Outline some different ways that Microsoft could introduce a policy of partial exclusivity for the Call of Duty franchise of games.
- What would be the impact of a policy of exclusivity on the cross price elasticity of demand between Xbox and PlayStation consoles?
- Outline the difference between behavioural and structural remedies for merger.
- Discuss why the acquisition of Activision by Microsoft might reduce competition in the cloud gaming market.