CELEX: 32021M10001
Language: en
Date: 2021-03-05 00:00:00
Title: Commission Decision of 05/03/2021 declaring a concentration to be compatible with the common market (Case No COMP/M.10001 - MICROSOFT / ZENIMAX) according to Council Regulation (EC) No 139/2004 (Only the English text is authentic)

EUROPEAN COMMISSION
                                                               Brussels, 05.03.2021
                                                               C(2021) 1607 final
                                                                                 PUBLIC VERSION
                                                                   In the published version of this decision,
                                                                   some information has been omitted
                                                                   pursuant to Article 17(2) of Council
                                                                   Regulation      (EC)      No     139/2004
                                                                   concerning non-disclosure of business
                                                                   secrets     and      other     confidential
                                                                   information. The omissions are shown
                                                                   thus    […].     Where possible         the
                                                                   information omitted has been replaced by
                                                                   ranges of figures or a general description.
                                                               Microsoft Corporation
                                                               One Microsoft Way 8/2284
                                                               Redmond WA 98052
                                                               United States of America
Subject:             Case M.10001 – Microsoft/Zenimax
                     Commission decision pursuant to Article 6(1)(b) of Council Regulation
                     No 139/20041, 2 and Article 57 of the Agreement on the European
                     Economic Area3
Dear Sir or Madam,
(1)       Following a referral pursuant to Article 4(5) of the Merger Regulation, the European
          Commission received on 29 January 2021 notification of a proposed concentration
          pursuant to Article 4 of the Merger Regulation by which Microsoft Corporation
1    OJ L 24, 29.1.2004, p. 1 (the ‘Merger Regulation’). With effect from 1 December 2009, the Treaty on the
     Functioning of the European Union (the ‘TFEU’) has introduced certain changes, such as the replacement
     of ‘Community’ by ‘Union’ and ‘common market’ by ‘internal market’. The terminology of the TFEU
     will be used throughout this decision.
2    For the purpose of this Decision, although the United Kingdom withdrew from the European Union as of
     1 February 2020, according to Article 92 of the Agreement on the withdrawal of the United Kingdom of
     Great Britain and Northern Ireland from the European Union and the European Atomic Energy
     Community (OJ L 29, 31.1.2020, p. 7), the Commission continues to be competent to apply Union law as
     regards the United Kingdom for administrative procedures which were initiated before the end of the
     transition period.
3    OJ L 1, 3.1.1994, p. 3 (the ‘EEA Agreement’).
Commission européenne, DG COMP MERGER REGISTRY, 1049 Bruxelles, BELGIQUE
Europese Commissie, DG COMP MERGER REGISTRY, 1049 Brussel, BELGIË
Tel: +32 229-91111. Fax: +32 229-64301. E-mail: COMP-MERGER-REGISTRY@ec.europa.eu.
 ---pagebreak---         (“Microsoft”, USA) intends to acquire sole control of ZeniMax Media Inc.
        (“ZeniMax”, USA) within the meaning of Article 3(1)(b) of the Merger Regulation
        (the “Transaction”).4 Microsoft and ZeniMax will together be referred to as the
        “Parties” and Microsoft will be referred to as the “Notifying Party”.
1.      THE PARTIES
(2)     Microsoft is a global technology company, which offers products and services to its
        customers through the following segments: (i) Productivity and Business Processes;
        (ii) Intelligent Cloud; and (iii) More Personal Computing (“MPC”). As part of the
        MPC operating segment, Microsoft develops, publishes and distributes games for
        personal computers (“PCs”), video game consoles and mobile devices. Microsoft
        also offers the Xbox gaming console and related services, such as the Xbox Live
        online gaming service and the Xbox Game Pass gaming subscription service.
(3)     ZeniMax is a privately held company that develops and publishes games for PCs,
        consoles and mobile devices. As part of its broad portfolio of games, ZeniMax
        develops and publishes video game franchises such as “The Elder Scrolls” and
        “Fallout”.
2.      THE OPERATION AND CONCENTRATION
(4)     The Transaction will be implemented by means of an Agreement and Plan of Merger
        (the “APM”) entered into on 19 September 2020 between Microsoft, Vault Merger
        Sub, Inc. (“Vault”) and ZeniMax. Under the APM, Vault, a newly created Microsoft
        subsidiary, will be merged with, and into, ZeniMax. Following this merger, Vault
        will cease to exist, and ZeniMax will be a wholly owned subsidiary of Microsoft.
(5)     Following the Transaction, Microsoft will exercise sole control over ZeniMax. The
        Transaction therefore constitutes a concentration within the meaning of Article
        3(1)(b) of the Merger Regulation.
3.      UNION DIMENSION
(6)     The Transaction does not have a Union dimension within the meaning of Articles
        1(2) or 1(3) of the Merger Regulation, because ZeniMax’s total Union turnover does
        not exceed EUR 250 million (ZeniMax: [100-150 million], Microsoft: [10.000-
        50.000 million]) and ZeniMax’s aggregate turnover is not more than EUR 25 million
        in each of at least three Member States.
(7)     Following the Notifying Party’s reasoned submission pursuant to Article 4(5) of the
        Merger Regulation that the concentration should be examined by the Commission,
        the Commission has transmitted this submission to all Member States. No Member
        State has expressed its disagreement within a period of 15 working days. The
        Transaction meets the legal requirements set out in Article 4(5) of the Merger
        Regulation: (i) it is a concentration within the meaning of Article 3 of the Merger
        Regulation; and (ii) it is capable of being reviewed under the national competition
4   Publication in the Official Journal of the European Union No C 40, 5.2.2021, p. 21.
                                                          2
 ---pagebreak---          laws of at least three Member States, which are (i) Austria, (ii) Cyprus, and (iii)
         Germany. The Commission informed the Notifying Party on 18 December 2020 that
         the case was deemed to have a Union dimension.
4.       RELEVANT MARKETS
(8)      The Transaction leads to competitively relevant links with regard to the
         development, publishing, and distribution of video games. Video games are
         electronic games played by manipulating images on a video display or television
         screen. Video games are developed for PCs, gaming consoles, and mobile devices
         (such as smartphones). In particular, the competitively relevant links between the
         Parties concern the following two levels within the video-gaming value chain:
         (a)      Game software development and publishing: the development (including
                  design, art, programming, and testing, usually taking place in a development
                  studio) and the making available to the public of a video game. Microsoft and
                  ZeniMax are active in the development and publishing of console games in
                  both physical (discs) and digital form; and
         (b)      Game distribution: the distribution of games to the public in either physical
                  or digital form, through (i) physical retail (online and “brick-and-mortar”
                  retailers) and (ii) online download/streaming, via digital storefronts5, app
                  stores and subscription services). Microsoft is active in the operation of
                  digital storefronts selling console games in digital form.6
4.1.     Game software development and publishing
(9)      Game software development and publishing refers to the development (including
         design, art, programming, and testing, usually in a development studio) and the
         making available to the public, for sale or free of charge, of a video game. In the
         present decision, video game software development and publishing will be analysed
         together (hereafter “video games publishing”).
         Relevant product market
4.1.1.1. The Commission’s previous practice
(10)     In Activision Blizzard/King, the Commission concluded that there were indications
         that the market for game software publishing could be segmented by hardware,
5   Video games, associated content and related services may be distributed through digital storefronts. These
    storefronts are usually accessible to players at any time and from anywhere as apps and/or websites that
    offer video games for PCs or console. For example, players using consoles can purchase games through
    the console-specific storefront (which enables automatic download onto consoles linked to storefront
    accounts). Microsoft operates the Microsoft Store, an app store on Windows PCs, and the Xbox Store
    (since late 2017 also rebranded as the Microsoft Store), an Xbox console user-facing storefront, which can
    be accessed via Xbox consoles or a web browser.
6   ZeniMax also owns and operates a digital storefront, Bethesda net, where it offers ZeniMax PC content
    for download. However, ZeniMax does not sell third-party games on its digital storefront. Similarly,
    ZeniMax provides game subscriptions for ZeniMax content, i.e., The Elder Scrolls Online (“ESO”) and
    Fallout 76, but not for third-party content. In this decision, reference to game distribution means
    distribution of first- and third-party content unless specified otherwise.
                                                             3
 ---pagebreak---          namely (i) PC games, (ii) console games, and (iii) mobile games. 7 The Commission
         found indications that mobile games in particular constitute a distinct market, given
         their nature, technical features, different pricing structure, different production costs,
         and different distribution channels (native mobile games being largely distributed
         through app stores).8 Overall, however, the Commission argued that the “lines
         between different platforms are blurring, because games are often released on
         several platforms, there is substantial substitutability between games”.9
(11)     The Commission further considered a segmentation by reference to the type of
         gamer (e.g., casual, midcore or hardcore10) or genre (e.g., action, adventure, role-
         playing games, sport strategy, resource management, etc.11). However, the
         Commission considered that from a supply-side perspective, the same company can
         create games of many different types. From a demand-side perspective, distinctions
         between game type or genre were not followed by players and could therefore not be
         made accurately.12 The Commission reached the same conclusion in
         Vivendi/Activision, where it noted that “from a demand-side perspective, most
         gamers appear to buy games across several game genres” and “from a supply-side
         perspective, publishers appear generally to publish games across multiple genres”.13
         Further, the Commission added that a distinction by genre was “subjective”, as there
         were “games with multi-types of gaming activity inside the same game”.14
(12)     The Commission ultimately left the product market definition open.15
4.1.1.2. The Notifying Party’s views
(13)     The Notifying Party submits that video games developed for PCs and consoles are
         increasingly substitutable, while native mobile games remain distinct.16 The
         Notifying Party argues that games developed for PCs and consoles require greater
         investment in money, time, and resources (i.e., marketing).17 Moreover, the
7   Commission decision of 12 February 2016 in case M.7866 - Activision Blizzard/King, paragraph 26.
8   Commission decision of 12 February 2016 in case M.7866 - Activision Blizzard/King, paragraph 20.
9   Commission decision of 12 February 2016 in case M.7866 - Activision Blizzard/King, paragraph 22. The
    Commission has also considered in its decisions concerning antitrust cases AT.40413 - Focus Home,
    AT.40414 - Koch Media, AT.40420 – ZeniMax, AT.40422 – Bandai Namco and AT.40424 – Capcom
    (decisions of 20 January 2021, paragraphs 62-66 and 77-79; a public version of the decision is not yet
    available) […].
10  Commission decision of 12 February 2016 in case M.7866 – Activision Blizzard/King, Table 1. Casual,
    midcore and hardcore games describe different types of gamers considered in this case, with increasing
    differences in terms of difficulty, strategic thinking and time commitment. Casual games include simple
    game mechanics (i.e., puzzle games), engaging the player in shorter yet more frequent periods of time,
    with no special skills required. Midcore games are more engaging game concepts, requiring strategic
    thinking. Hardcore games are very engaging game concepts that retain players, usually requiring prior
    gaming experience.
11  Commission decision of 12 February 2016 in case M.7866 – Activision Blizzard/King, paragraph 16.
    Action, adventure, role-playing, sport, strategy, and resource management games describe possible
    segmentations according to different game genres considered in this case.
12  Commission decision of 12 February 2016 in case M.7866 - Activision Blizzard/King, paragraph 24.
13  Commission decision of 16 April 2008 in case M.5008 - Vivendi/Activision, paragraph 23.
14  Commission decision of 16 April 2008 in case M.5008 - Vivendi/Activision, paragraph 23.
15  Commission decision of 12 February 2016 in case M.7866 - Activision Blizzard/King, paragraphs 26-27
    and Commission decision of 16 April 2008 in case M.5008 - Vivendi/Activision, paragraph 25.
16  Form CO, paragraph 189.
17  Form CO, paragraph 191.
                                                            4
 ---pagebreak---         Notifying Party submits that the difference between games for PCs and consoles will
        continue to diminish, as the majority of games published by the Parties and other
        independent game publishers are launched for both PCs and consoles. Lastly, the
        Notifying Party argues that the introduction of subscription services will continue to
        erode the differences between games published for PCs and consoles.18
(14)    The Notifying Party also argues that a distinction by game type or genre would not
        properly reflect the dynamics of the industry. It indicates that distinctions by genre
        or type are not followed by players, and therefore cannot be accurately made. In the
        Notifying Party’s view, most players buy games across several game genres (as well
        as multiple games within the same genre) and a significant number of players would
        switch to other genres of games in response to a significant price rise. In addition,
        from a supply-side perspective, a publishing studio can create many different types
        of games. Lastly, the Notifying Party submits that it is inherently difficult to classify
        games into discrete genres and types.19
(15)    The Notifying Party argues that the exact scope of the relevant product market can
        be left open, given that the Transaction would not raise concerns as to its
        compatibility with the internal market under any of the plausible alternative market
        definitions assessed for the purpose of this decision.20
4.1.1.3. The Commission’s assessment
(16)    The results of the market investigation are inconclusive regarding a possible
        segmentation of the video game publishing product market by platform (PC,
        console, and mobile). In particular, the market investigation produced no clear
        support for segmenting the relevant market according to the three platforms or for
        considering mobile games as distinct from games published for PCs and consoles.21
(17)    In light of these results, the exact market delineation can be left open. For the
        purpose of the present decision, video games publishing (i) for PCs, (ii) for consoles,
        and (iii) for mobile devices, as well as (iv) for a broader market for video games
        publishing regardless of the platform will be considered to constitute four potential
        relevant product markets.
(18)    The results of the market investigation are also inconclusive regarding a possible
        distinction between different genres of video games. Amongst video game
        publishers and distributors (including both physical and digital distributors), there is
        no clear majority supporting either a segmentation according to genres or supporting
        that, despite different genres, one single relevant product market exists.22
(19)    Therefore, for the purpose of this decision, the exact definition of the relevant
        product market will be left open. The effects of the Transaction will be assessed both
18  Form CO, paragraphs 192-193.
19  Form CO, paragraph 194.
20 Form CO, paragraph 200.
21 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 9.
22 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 10.
                                                         5
 ---pagebreak---          under the assumption that video game genres23 may constitute possible distinct
         market segments, or that they form one overall video games publishing market.
(20)     Further, the results of the market investigation are inconclusive regarding a possible
         segmentation of publishing by game type.24 Therefore, for the purpose of this
         decision, the exact definition of the relevant product market will be left open. The
         effects of the Transaction will be assessed under the assumption that the video game
         types identified by the Notifying Party (AAA, casual, stand-alone, browser, free-to-
         play, freemium, and social network25) may constitute potential distinct market
         segments, or that they form one overall video games publishing market.
(21)     In any event, the exact delineation of the relevant product market can be left open for
         the purpose of this decision, as the Transaction does not raise serious doubts as to its
         compatibility with the internal market or the functioning of the EEA Agreement
         under any of the plausible product market definitions considered.
         Relevant geographic market
4.1.2.1. The Commission’s previous practice
(22)     As regards the geographic scope of any of the plausible product market definitions
         considered in section 4.1.1.3, in previous decisions, the Commission has considered
         the market to be at least EEA-wide, if not worldwide, but ultimately left the
         geographic market definition open.26
4.1.2.2. The Notifying Party’s views
(23)     The Notifying Party submits that the relevant markets are at least EEA-wide, if not
         worldwide, since (i) there are no material price differences across the EEA, (ii) the
23  According to the Notifying Party, games may be categorised by genre into strategy, simulation (such as
    sports, driving, construction, life, and social simulation), action (including fighting and shooter),
    adventure, role-playing, music and dance. However, genre-based categorisation is bound to be imprecise,
    due to the blurred nature of genre categories and the subjectivity involved (the Parties and industry experts
    do not always agree on genre categorisations). For completeness, the Parties do not consider that there are
    specific “children/kids” genres. See footnote 11.
24 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 11.
25 According to the Notifying Party, games may be categorised by type into AAA, casual, stand-alone and
    browser games, free-to-play and freemium games, as well as social network games. AAA games are
    developed by large development studios requiring significant budgets over extended periods. Casual
    games target a mass audience, are relatively simple, and less costly to develop. Stand-alone games are
    installed as separate applications on gaming device, and may be played without connecting to the internet.
    Browser games run directly in the web browser, using standard technologies for interactive multimedia.
    Free-to-play games are free for the player to acquire, and generally advertising-funded. Freemium games
    offer basic game-play that is free, but certain aspects of play may require purchases. Social network games
    use capabilities of social network services, are generally casual games and may be played individually or
    as multi-player.
26 Commission decision of 16 April 2008 in case M.5008 - Vivendi/Activision, paragraph 29 and
    Commission decision of 12 February 2016 in case M.7866 - Activision Blizzard/King, paragraphs 31-32.
    In its decisions in the antitrust cases AT.40413 - Focus Home, AT.40414 - Koch Media, AT.40420 –
    ZeniMax, AT.40422 – Bandai Namco and AT.40424 – Capcom (decisions of 20 January 2021, paragraphs
    7-76 and 77; published public version of the decision is not yet available) […].
                                                             6
 ---pagebreak---         same publishers compete across the EEA, and (iii) digital distribution channels are
        available across all EEA jurisdictions.27
(24)    The Notifying Party argues that the exact scope of the relevant geographic markets
        can be left open, given that the Transaction would not raise concerns as to its
        compatibility with the internal market under any of the plausible market definitions
        assessed for the purpose of this decision.28
4.1.2.3. The Commission’s assessment
(25)    The market investigation has confirmed that the geographic scope of any of the
        plausible product market definitions considered in section 4.1.1.3 is at least EEA-
        wide, possibly worldwide.
(26)    A majority of distributors consider that the overall market for video games
        publishing should be worldwide in scope because, in particular, there are no
        significant price differences, and many publishers typically produce one version of a
        video game for distribution worldwide. This is confirmed by a majority of publishers
        who indicated that they develop video games for distribution in all geographies,
        which are then (possibly) localised for specific regions. 29 However, only a minority
        of game publishers responded that the relevant geographic market should be
        worldwide. These diverging views between publishers and distributors also remain if
        the replies are broken down by platform (mobile games, PC games, and console
        games).30
(27)    On this basis, the Commission considers that, for the purpose of this decision, it is
        appropriate to consider both an EEA-wide relevant geographic scope and a
        worldwide relevant geographic scope for any of the plausible product market
        definitions considered in section 4.1.1.3.
(28)    In any event, the exact delineation of the relevant geographic market can be left open
        for the purpose of this decision, as the Transaction would not raise serious doubts as
        to its compatibility with the internal market or the functioning of the EEA
        Agreement under any of the plausible geographic market definitions considered.
4.2.    Game distribution
(29)    Game distribution refers to the distribution of games to the public in either physical
        or digital form. In the case of physical distribution, games are distributed on physical
        media like cartridges and compact discs, and sold online (e.g., via the Microsoft
        Store, Apple App Store, and Google Play Store) or in brick-and-mortar stores. In the
        case of digital distribution, games are distributed through online download and/or
        streaming, e.g., as concerns Microsoft, accessed via the Microsoft Store (on
        Windows PCs), Xbox Store (now known as the Microsoft Store, on the Xbox
        Console), Xbox Game Pass (Ultimate), and Xbox Live.
27  Form CO, paragraph 199.
28  Form CO, paragraph 200.
29 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 14-14.1.
30 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 13.
                                                         7
 ---pagebreak---          Relevant product market
4.2.1.1. The Commission’s previous practice
(30)     In its decision in the case Vivendi/Activision, the Commission considered a possible
         relevant product market for physical wholesale game distribution.31
4.2.1.2. The Notifying Party’s views
(31)     The Notifying Party considers that the Commission’s decisional practice in relation
         to video games distribution does not provide clear indications as to the definition of
         the relevant market. Instead, it relies on the decisional practice in the area of physical
         and digital distribution of recorded music. The Notifying Party considers that these
         decisions are instructive for the distribution of video games, because, in their view,
         game distribution is undergoing the early stages of a transformation similar to that
         seen in the music and video industries, i.e., a shift from physical sales towards digital
         distribution, and within digital, from download to streaming.32 On this basis, the
         Notifying Party submits the following arguments.
(32)     The Notifying Party refers to Universal Music Group/EMI Music, Sony/BMG and
         Access/PLG, explaining that, like for music, physical and digital games distribution
         could fall into distinct relevant product markets, given the differences in pricing and
         characteristics.33 The Notifying Party also notes that in Vivendi/Activision, the
         Commission pointed to the different pricing mechanisms for online games (monthly
         subscription fees) as opposed to offline games (buy-to-play).34
(33)     The Notifying Party further submits that, in contrast to the physical distribution of
         games, digital distribution provides players with immediate access to games, which
         cannot be lost or destroyed.35 In terms of characteristics, the Notifying Party also
         points to the accessibility and storage of physical buy-to-play games (similar to
         books) as opposed to digital games.36 Lastly, the Notifying Party points to the
         difference in the supply chain of physical and digital distribution, highlighting that a
         shorter supply chain for digital distribution, makes the cost of digital distribution
         lower.37 The Notifying Party concludes that, given the differences in pricing and
         characteristics, physical and digital distribution fall into two distinct product
         markets.38
31  Commission decision of 16 April 2008 in case M.5008 - Vivendi/Activision, paragraphs 39-40. The
    Commission has also considered the aspect of PC video game distribution in its decisions concerning
    antitrust cases AT.40413 - Focus Home, AT.40414 - Koch Media, AT.40420 – ZeniMax, AT.40422 –
    Bandai Namco, and AT.40424 – Capcom (decisions of 20 January 2021, paragraphs 67-71; a published
    public version of the decision is not yet available). […].
32  Form CO, paragraph 232.
33  Form CO, paragraph 234. Commission decision of 3 October 2007 in case M.3333 - Sony/BMG, recital
    27, Commission decision of 21 September 2012 in case M.6458 - Universal Music Group/EMI Music,
    recital 128 and Commission decision of 14 May 2013 in case M.6884 - Access/PLG, paragraph 13.
34  Form CO, paragraph 243. Commission decision of 16 April 2008 in case M.5008 - Vivendi/Activision,
    paragraph 12.
35  Form CO, paragraph 258.
36  Form CO, paragraph 260.
37  Form CO, paragraph 261.
38  Form CO, paragraph 257.
                                                            8
 ---pagebreak--- (34)    Regarding digital distribution, the Notifying Party submits that digital storefronts
        and app stores through which PC and console video games are distributed, all fall
        into the same relevant product market.39 As native mobile games are distributed
        through mobile application stores, the Notifying Party submits that mobile app stores
        fall into a distinct relevant product market.40 Lastly, the Notifying Party submits that
        a segmentation of digital distribution with reference to the payment model (purchase
        or subscription), or between download and streaming of games is not warranted. 41
(35)    Overall, the Notifying Party submits that the distribution of games in physical and
        digital form could likely fall into two separate product markets, with no further
        segmentation.42
(36)    The Notifying Party argues that, in any case, the exact scope of the relevant product
        market can be left open, given that the Transaction would not raise concerns as to its
        compatibility with the internal market under any of the plausible market definitions
        assessed for the purpose of this decision.43
4.2.1.3. The Commission’s assessment
(37)    The market investigation has provided inconclusive results with respect to a possible
        segmentation of video game distribution by physical and digital distribution.44 While
        a majority of publishers indicate that a game developer can easily switch between
        developing video games for physical and digital distribution channels, this is not
        supported by the distributors’ replies to the market investigation.45
(38)    On this basis, the Commission considers that, for the purpose of this decision, it will
        conduct its competitive assessment on both (i) a potential single distribution market,
        and (ii) two hypothetically separate markets for physical distribution (online and
        “brick-and-mortar” retailers) and digital distribution (online download/streaming via
        digital storefronts, app stores and subscription services).
(39)    As regards a possible segmentation of digital distribution by platforms for which
        games are developed (PC, console, and mobile devices), the market investigation has
        also provided inconclusive results, as there is no majority amongst neither publishers
        nor distributors supporting or rejecting such a segmentation.46
(40)    On this basis, for the purpose of this decision, the exact definition of the relevant
        product market will be left open. The effects of the Transaction will therefore be
        assessed under the assumption that the platforms for which games are developed
        may constitute potential distinct markets, as well as under the assumption of the
        existence of an overall distribution market.
39  Form CO, paragraph 264.
40  Form CO, paragraph 266.
41  Form CO, paragraphs 273 and 284.
42  Form CO, paragraph 257.
43  Form CO, paragraph 287.
44  Q1 – Questionnaire to market participants in the video gaming industry, replies to question 15.
45  Q1 – Questionnaire to market participants in the video gaming industry, replies to question 16.
46  Q1 – Questionnaire to market participants in the video gaming industry, replies to question 17.
                                                          9
 ---pagebreak--- (41)    As regards a possible segmentation of a hypothetical digital distribution market
        based on the payment model (upfront payment vs. subscription), the results of the
        market investigation indicate that such a segmentation is not warranted, in particular
        because digital payment models to a large extent are interchangeable.47 Similarly, the
        results of the market investigation do not support segmenting the hypothetical digital
        distribution market by types of players’ access (download vs. streaming). A large
        majority of respondents in the market investigation indicated that such a
        segmentation is not appropriate in particular because different access does not
        influence the players’ purchasing behaviour and choices.48 On this basis, for the
        purpose of this decision, the Commission will not distinguish different segments in
        the digital distribution market, based on the payment model and on the types of
        access.
(42)    In any event, the exact delineation of the relevant product market can be left open for
        the purpose of this decision, as the Transaction would not raise serious doubts as to
        its compatibility with the internal market or the functioning of the EEA Agreement
        under any of the plausible product market definitions considered.
        Relevant geographic market
4.2.2.1. The Commission’s previous practice
(43)    As regards the potential market for physical game distribution, in Vivendi/Activision,
        the Commission stated that, considering the results of the market investigation in
        that case, “the markets for wholesale game distribution and logistic services tend to
        be national in scope”.49
(44)    In the market investigation in Activision Blizzard/King (which did not focus on the
        distribution markets), a respondent indicated that gaming became a worldwide
        industry with the advent of digital content distribution.50
4.2.2.2. The Notifying Party’s views
(45)    In relation to the market for physical game distribution, the Notifying Party submits
        that, similarly to the Commission’s findings in the music industry in
        Apple/Shazam,51 the market should be at least national.52
(46)    In relation to the market for digital game distribution, the Notifying Party considers
        that the market is at least EEA-wide, if not worldwide in scope. It argues that there
        are no material price differences within the EEA, that the same game publishers
47  Q1 – Questionnaire to market participants in the video gaming industry, replies to question 18-18.1.
48  Q1 – Questionnaire to market participants in the video gaming industry, replies to question 19-19.1.
49  Commission decision of 16 April 2008 in case M.5008 - Vivendi/Activision, paragraph 42.
50  Commission decision of 12 February 2016 in case M.7866 - Activision Blizzard/King, paragraph 30. In its
    decisions concerning antitrust cases AT.40413 - Focus Home, AT.40414 - Koch Media, AT.40420 –
    ZeniMax, AT.40422 – Bandai Namco, and AT.40424 – Capcom (decisions of 20 January 2021, paragraphs
    72-79; a public version of the decision is not yet available) […].
51  Commission decision of 6 September 2018 in case M.8788 - Apple/Shazam, paragraph 19.
52  Form CO, paragraph 285.
                                                            10
 ---pagebreak---         compete across the EEA, and that the same digital distribution channels are available
        anywhere in the world without cross-border restrictions.53
(47)    In any event, the Notifying Party considers that the exact scope of the geographic
        market can be left open given that the Transaction would not raise competition
        concerns under any of the alternative market definitions.54
4.2.2.3. The Commission’s assessment
(48)    The market investigation confirmed that the geographic scope of physical and digital
        game distribution is at least EEA-wide.
(49)    Both (i) game publishers and (ii) distributors that participated in the market
        investigation indicated that the relevant geographic market, including both physical
        and digital distribution, should be at least EEA-wide in scope. Only a small number
        of respondents indicated that the relevant geographic market should be national.
        Distributors even supported defining a possible worldwide market, in particular
        concerning digital distribution.55
(50)    On this basis, the Commission considers that for the purpose of this decision, it is
        appropriate to consider both an EEA-wide and a worldwide relevant geographic for
        the overall market for video games distribution, as well as any possible market
        definitions as outlined in section 4.2.1.3.
(51)    In any event, the exact delineation of the relevant geographic market can be left open
        for the purpose of this decision, as the Transaction would not raise serious doubts as
        to its compatibility with the internal market or the functioning of the EEA
        Agreement under any of the plausible geographic market definitions considered.
5.      COMPETITIVE ASSESSMENT
5.1.    Analytical framework
(52)    Article 2 of the Merger Regulation requires the Commission to examine whether
        notified concentrations are compatible with the internal market, by assessing whether
        they would significantly impede effective competition in the internal market or in a
        substantial part of it, in particular through the creation or strengthening of a
        dominant position.56
(53)    Vertical relationships involve companies operating at different levels of the supply
        chain. There are two main ways in which vertical mergers may significantly impede
        effective competition: input foreclosure and customer foreclosure.57
53  Form CO, paragraph 286.
54  Form CO, paragraph 287.
55 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 21.
56 With regard to the application of the Merger Regulation in the EEA, see Annex XIV to the EEA
    Agreement.
57 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of
    concentrations between undertakings ("Non-Horizontal Merger Guidelines"), OJ C 265, 18.10.2008.
                                                        11
 ---pagebreak--- (54)     Input foreclosure may raise competition problems only if it concerns an important
         input for the downstream market, and if the combined entity has a significant degree
         of market power upstream.58 In assessing the likelihood of an anticompetitive input
         foreclosure strategy, the Commission examines: (i) whether the combined entity
         would have the ability to substantially foreclose access to inputs; (ii) whether it
         would have the incentive to do so; and (iii) whether a foreclosure strategy would
         have a significant detrimental effect on competition downstream.
(55)     For a transaction to raise customer foreclosure competition concerns, the combined
         entity must be an important customer with a significant degree of market power in
         the downstream market.59 In assessing the likelihood of an anticompetitive customer
         foreclosure strategy, the Commission examines: (i) whether the combined entity
         would have the ability to foreclose access to downstream markets by reducing its
         purchases from upstream rivals; (ii) whether it would have the incentive to do so;
         and (iii) whether a foreclosure strategy would have a significant detrimental effect
         on consumers in the downstream market.
5.2.     Identification of affected markets
(56)     Microsoft and ZeniMax are active in the market(s) for game software publishing for
         PCs, consoles and mobile devices, across video game genres and types. Further,
         Microsoft is also active in the market(s) for physical and digital video game
         distribution for PCs and consoles.60 As set out in paragraph (8) above, and taking
         into account all plausible product market definitions in sections 4.1.1.3 and 4.2.1.3,
         the Transaction gives rise to one affected market, namely the operation of digital
         storefronts selling console games in digital form, where Microsoft is active (see
         paragraph (59) below).
(57)     First, the Transaction does not give rise to any affected conglomerate relationships,
         given the Parties’ generally limited market shares. Furthermore, ZeniMax is not
         active in a market “closely related” to the operation of digital storefronts selling
         console games in digital form, where Microsoft holds a market share in excess of
         30%.
(58)     Second, the Transaction involves no horizontally affected markets. While both
         Microsoft and ZeniMax are active as game publishers and licensors of rights for
         game-related merchandising, the Parties’ combined shares in all markets where both
         Parties are active are limited, and in any event below 20% under any product and
         geographic delineation considered.
(59)     Third, the Transaction gives rise to a vertical relationship, which involves an
         affected market at the downstream level. The identified vertical relationship consists
         of: (i) upstream: the publishing of console games in digital form 61 in the EEA
         (Microsoft: [0-5]%, ZeniMax: [0-5]%, in 2019); and (ii) downstream: the operation
         of digital storefronts selling console games in digital form in the EEA (Microsoft:
58  Non-Horizontal Merger Guidelines, paragraphs 34-35.
59  Non-Horizontal Merger Guidelines, paragraph 58.
60 For ZeniMax’s distribution activities, see footnote 6 above.
61 Although we consider that there may be a wider video game publishing market regardless of whether
    these games are in digital or physical form (see paragraph (21) above), the present competitive assessment
    will focus on digital games given that physical games are irrelevant for the identified vertical relationship.
                                                          12
 ---pagebreak---  ---pagebreak---         digital console video games on its downstream console platform, i.e., the Microsoft
        and Xbox Store; and (ii) partial foreclosure of rival publishers of console video
        games through for instance, an increase in distribution fees or a degradation of the
        terms and conditions under which Microsoft is willing to sell these rival games on its
        console platform.
5.2.2.1. Ability to engage in customer foreclosure
        (A)       The Notifying Parties’ views
(64)    The Notifying Party submits that post-Transaction, Microsoft will not have the
        ability to prevent rival game publishers from selling through the Microsoft console-
        specific digital storefronts.
(65)    First, the combined entity’s share of game publishing (however defined) will be very
        small. At the same time, most prominent new releases of video games are third-party
        games, and a console needs to offer such games in order to attract gamers. Therefore,
        Microsoft will need to continue to rely on third-party games to provide the vast
        majority of its Xbox content.65
(66)    Second, the Notifying Party argues that third-party publishers have [console
        platform’s negotiation with publishers] leverage during negotiations with console
        platforms. Rival consoles compete intensely to bring newly released games to their
        consoles first, as doing so makes their console more attractive to players. In addition,
        the emergence of new gaming platforms from large firms such as Google, Amazon,
        and Facebook are only increasing the publishers’ negotiating power, as they can look
        to many other platform providers for more attractive terms.
(67)    In particular, the Notifying Party considers that, [forecast of Xbox’s performance]. If
        Microsoft were to try and restrict access or worsen terms with third-party publishers,
        these publishers could fully or partially switch to rival consoles, rendering the
        strategy self-defeating.66
(68)    Therefore, the combined entity would not have the ability to foreclose rival game
        publishers from selling through the Microsoft console-specific storefronts.
        (B)       The Commission’s assessment
(69)    While Microsoft could technically implement a customer foreclosure strategy, the
        Commission considers that the combined entity will not have the ability to engage in
        a successful customer foreclosure strategy since there appear to be sufficient
        economic alternatives in the downstream market for upstream rivals to sell their
        output.
(70)    Market shares indicate that Microsoft, through the Xbox console platform, is an
        important distributor of console video games in the EEA with [30-40]% (for 2019,
        see Table 1 above) of the digital console video game distribution market (digital
        storefronts only). Microsoft’s main competitors in the digital distribution of console
        video games in the EEA (limited to digital storefronts) are Sony ([50-60]%, in 2019)
65  Form CO, paragraph 440.
66  Form CO, paragraph 440.
                                                  14
 ---pagebreak---         via the PlayStation console platform and Nintendo ([5-10]%, in 2019) via the Switch
        console platform.67 However, despite the importance of Microsoft as a distributor of
        console video games, the Commission concludes that Microsoft would not have the
        ability to foreclose rival publishers by ceasing to distribute third-party content and
        exclusively relying on the content of ZeniMax post-transaction or deteriorating the
        conditions under which Microsoft would distribute third-party console titles.
(71)    First, as also addressed in paragraph (93) below, ZeniMax has a very limited market
        position in the EEA (2019) with regards to the publishing of digital console video
        games ([0-5]% market share) and the Parties together do not have more than [0-5]%
        (see Table 1). It will therefore not be possible for Microsoft to exclusively rely on the
        combination of ZeniMax’s console video game content and its own content for
        distribution in the EEA.
(72)    This was confirmed by several video game publishers and distributors who
        emphasized the size of the video game publishing market and the strength of
        Microsoft and ZeniMax’s rival game publishers’ intellectual property, which
        represents attractive content for game distributors.68
(73)    Second, the results of the market investigation indicate that the majority of video
        game publishers considered that there are other (strong) players to which they could
        license their content as an alternative to the Parties in the event that Microsoft would
        cease acquiring their video game content or otherwise degrade the terms on which it
        acquires their content. Further, publishers confirmed that it is normal business
        practice to develop games across all possible distribution channels and platforms.69
        No respondents considered that there are no alternative licensors for their content. 70
        [Microsoft’s negotiation strategy with publishers].71 72
(74)    Furthermore, the majority of publishers confirmed that the Transaction would not
        affect their bargaining power in negotiations with Microsoft to sell console games
        via the Microsoft console platform.73 Only two third-party publishers considered that
        Microsoft’s bargaining power would increase post-Transaction, however one of
        these respondents clarified that “the sole acquisition of ZeniMax would be
        insufficient to tip Microsoft’s bargaining power to levels raising concern.”
(75)    Third, as set out in paragraph (119), a material proportion of console video game
        players multi-home and own multiple consoles or play games on both PC and
67 Form CO, Table 32.
68 For example, see also Commission decision of 12 February 2016 in case M.7866 - Activision
   Blizzard/King, paragraph 53 in which respondents point to “a very large number of publishers capable of
   developing and marketing games whose success will depend on the quality of their games”.
69 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 30.
70 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 29.
71 Form CO, paragraphs 484-485: for a game developer/publisher to distribute a game on any console, they
   must negotiate the distribution terms with the relevant console platform. The console platform pays a
   revenue share to the third-party developer/publishers.
72 Form CO, paragraph 486 and Memorandum of 3.2.2021.
73 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 32.
                                                          15
 ---pagebreak---         console74 which further underlines the fact that console video game publishers have
        multiple distribution options.
(76)    Overall, video game publishers that responded to the market investigation have not
        raised concerns regarding Microsoft ceasing to acquire content from them or
        otherwise degrading the terms on which it does so. Third parties did not consider
        that ZeniMax video games were significant enough for a (partial) customer
        foreclosure strategy to be profitable.75
(77)    Therefore, for the reasons set out above, the Commission concludes that the
        combined entity would not have the ability to foreclose rival console video game
        publishers by engaging in a total or partial customer foreclosure strategy.
5.2.2.2. Incentive to engage in customer foreclosure
        (A)         The Notifying Parties’ views
(78)    The Notifying Party submits that post-Transaction, Microsoft will not have the
        incentive to prevent rival game publishers from selling through the Microsoft
        console-specific digital storefronts.
(79)    The Notifying Party argues that it would be self-defeating for any console
        manufacturer to limit or restrict rival game publishers from selling through
        Microsoft console-specific digital storefronts. It explains that having a broad range
        of attractive games is the single most important factor for driving the success of a
        console, such that any policy undermining the availability of third-party games
        would be commercially irrational.76
(80)    According to the Notifying Party, the imperative to attract third-party content is
        underlined by the outcome of the last two console generations. [Microsoft’s
        performance]. Industry experts have also confirmed the correlation between a
        console’s performance and the amount of attractive gaming content it can offer
        compared to its rivals.77 Therefore, any strategy restricting third-party publishers’
        access to the Xbox would only push publishers to spend less time developing games
        for the Xbox, and more time developing exclusive content for other devices. This in
        turn would reduce Xbox’s appeal to players and publishers. Therefore, Microsoft is
        highly incentivised to continue to rely on third-party games to provide content.78
(81)    Therefore, the combined entity would not have the incentive to foreclose rival game
        publishers from selling through the Microsoft console-specific storefronts.
74  Form CO, paragraph 500, Figure 11 and Q1 – Questionnaire to market participants in the video gaming
    industry, replies to question 26.
75  Q1 – Questionnaire to market participants in the video gaming industry, replies to question 38.
76  Form CO, paragraph 440.
77  Segmentnext.com, PS4 has officially won this console generation, 26.4.2019.
78  Form CO, paragraph 440.
                                                         16
 ---pagebreak---         (B)       The Commission’s assessment
(82)    The Commission considers that Microsoft would not have the incentive to foreclose
        access to downstream markets by reducing purchases or purchasing at inferior
        conditions from upstream competing rivals for the following reasons.
(83)    As the Notifying Party argues, rich and differentiated content is key to a console’s
        ability to attract, engage and retain players.79
(84)    Several internal documents and industry reports confirm this premise. A recent IDG
        Consulting annual whitepaper (2020) thus notes that “[c]ontent in gaming remains
        the paramount success factor. Without great differentiated content, a game platform
        cannot survive.”80 The paper further points out that the most popular game titles
        (such as “GTA V”, “Assasin’s Creed”, “Zelda”, “Final Fantasy”, “Pokemon”,
        “FIFA”, etc.) also attract a certain amount of brand loyalty, i.e., “these brands exert
        a significant amount of influence over consumer behaviour and loyalty over time”.81
        These top console and PC franchises do not include ZeniMax titles (see also
        paragraph (104) below). A Microsoft presentation to the Board (2020) further states
        that, [Xbox’s business strategy].82
(85)    The majority of respondents to the market investigation confirmed that Microsoft
        would not have the incentive to prevent rival publishers from selling through the
        Microsoft console platform.83 None of the respondents considered that Microsoft
        would have the incentive to engage in a partial or total customer foreclosure strategy
        as “[t]here is no interest for Microsoft to restrict access to its platform for third
        party publishers. Quite the opposite actually”.84
(86)    Instead, a large majority of respondents, including rival console platforms Sony and
        Nintendo, confirmed that holding a broad range of (differentiated) content
        constitutes one of the drivers of success of a digital distribution channel.85 For
        instance, a video game distributor explained that “[…] the content is very important
        for the consumer to decide for a platform or console. The platform with the most and
        best games (for a reasonable price) will be the market leader”.86
(87)    Accordingly, as noted above, the Commission considers that the combined entity
        will continue to have an incentive to carry a broad range of the most attractive
        content on its platform.
(88)    Therefore, for the reasons set out above, the Commission concludes that the
        combined entity would not have the incentive to foreclose rival console video game
        publishers by engaging in a total or partial customer foreclosure strategy.
79 Commission decision of 16 April 2008 in case M.5008 - Vivendi/Activision, paragraph 67.
80 Form CO, Annex 9, IDG Consulting, State of the games industry 2020 Annual White Paper, 13.4. 2020,
   slide 28.
81 Form CO, Annex 9, IDG Consulting, State of the games industry 2020 Annual White Paper, 13.4. 2020,
   slide 28.
82 Form CO, Annex 3, Microsoft Presentation to the Board of Microsoft, August 2020, slide 2.
83 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 28.
84 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 28.
85 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 24.
86 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 24.
                                                        17
 ---pagebreak---         (C)       Impact on effective competition
(89)    Given the existence of multiple alternatives to Microsoft, to which video game
        publishers can supply their content, rival console video game publishers would not
        likely be deprived of an essential customer, and could still rely on multiple
        alternative distribution channels.
(90)    This conclusion is consistent with the results of the market investigation. The large
        majority of participants considered that the Transaction’s impact on the publishing
        market would be neutral. One respondent clarified that “[t]here is a high level of
        competition in the market for game development and publishing with numerous
        competitors active on the market. […] [L]arge publishers typically take a broad
        approach whilst others may be more specialised in the types of games they publish,
        and many publishers are active across different devices, publishing games, which
        are interchangeable from the consumer perspective. All games compete for available
        consumer funds and consumers can readily switch between mobile, PC and console
        games.”87
(91)    In light of the above, the Commission finds that a potential (partial or total) customer
        foreclosure strategy would not have a material effect on competition in the EEA.
5.2.2.3. Conclusion
(92)    In light of the above, the Commission concludes that the Transaction does not raise
        serious doubts as to the compatibility with the internal market under any of the
        considered alternative product markets for game distribution, either at the EEA- or
        worldwide levels.
        Foreclosure of rival console video game distributors by foreclosing access to
        ZeniMax digital console video games (input foreclosure)
(93)    The combined entity’s market share in the upstream market for the publishing of
        console games in digital form is very limited, amounting to [0-5]% in the EEA in
        2019.88 Worldwide, the combined entity’s market share in the overall console game
        publishing market in the same year is [0-5]%.89 Downstream, the combined entity
        has a market share of [30-40]% (2019) in the market segment of digital distribution
        of console video games via digital storefronts in the EEA.
(94)    Despite the combined entity’s limited market shares upstream, the Commission
        notes that ZeniMax, as specified below, publishes some game franchises that are
        popular among players. The Commission further notes that content plays a
        prominent role in the video gaming industry. The Commission has therefore assessed
        the risk of: (i) total foreclosure of rival console video game distributors by
        foreclosing access to some or all of ZeniMax digital console video games; and (ii)
        partial foreclosure of rival console video game distributors through a degradation of
        the terms and conditions under which ZeniMax digital console video games are
        made available for rival consoles.
87  Q1 – Questionnaire to market participants in the video gaming industry, replies to question 38.
88  See Table 1 above.
89 Form CO, Table 13.
                                                         18
 ---pagebreak--- 5.2.3.1. Ability to engage in input foreclosure
        (A)        The Notifying Parties’ views
(95)    The Notifying Party submits that it is implausible that ZeniMax’s content would
        enable Microsoft to foreclose rival console storefronts or other rival console
        distribution channels, as ZeniMax’s content and market share are not significant
        enough.90
(96)    First, the Notifying Party considers that both ZeniMax and Microsoft have a very
        modest combined market share in the publishing market in the EEA, indicating that
        the Parties lack the upstream market power to implement a foreclosure strategy. 91 In
        particular, ZeniMax’s market share in the EEA was less than [0-5]% in 2019. The
        Notifying Party considers that, even if they were to engage in an exclusivity strategy
        concerning ZeniMax games vis-à-vis other consoles, this would not raise any
        competition concerns, as ZeniMax’s content is not sufficiently strong to tip
        downstream markets in favour of Microsoft.
(97)    Second, rival consoles (and console storefronts) such as Sony and Nintendo have
        access to a very large array of popular games.92 Sony and Nintendo also have many
        blockbuster exclusive console games, some of which rank among the top-selling
        console games in Europe.93 In this regard, the Notifying Party notes that no ZeniMax
        games feature among the bestselling console games in Europe in 2018.
(98)    Third, the Notifying Party argues that Sony and Nintendo consoles (and their
        respective storefronts) are differentiated and have stronger market positions than
        Microsoft’s Xbox, both at EEA and national levels. Moreover, Sony consoles in
        particular have accumulated significant brand loyalty.
(99)    Fourth, the Notifying Party argues that Sony and Nintendo have surpassed Microsoft
        in the old console generation.94 [Microsoft’s performance].95 The Notifying Party
        concludes that ZeniMax games, even if exclusively available for the Xbox, could not
        weaken rival consoles sufficiently to result in foreclosure.96 Therefore, in the
        Notifying Party’s view, Microsoft would not have the ability to successfully engage
        in an input foreclosure strategy.
        (B)        The Commission’s assessment
(100) While Microsoft could have the technical ability to implement an exclusivity
        strategy with regard to ZeniMax games vis-à-vis rival consoles, the Commission
90  Form CO, paragraphs 445–455.
91  Form CO, paragraph 452.
92  Form CO, paragraph 381.
93  Form CO, paragraphs 446 – 447. Key Sony exclusives include blockbuster titles such as “God of War,
    “Spider Man”, “The Last of Us” and “Uncharted”. Key Nintendo exclusives on the other hand include
    several major game franchises, such as the “Super Mario”, “Zelda” and “Pokèmon” franchises.
94  Form CO, Tables 18 and 20. In 2019, Microsoft’s market share by revenues in the sale of console
    hardware was [10-20]% and [10-20]% globally and in the EU respectively. In the same year, global
    market shares of Nintendo and Sony were [30-40]% and [50-60]% respectively, while their EU market
    shares were [30-40]% and [50-60]% respectively.
95 [Xbox’s performance].
96  Form CO, paragraph 449.
                                                        19
 ---pagebreak---          considers that the combined entity will not have the ability to engage in a successful
         input foreclosure strategy. In this regard, as mentioned above, the Commission has
         carried out such analysis under both scenarios of total and partial foreclosure.
(101) Console-specific storefronts are available exclusively to users of the respective
         console, because the console manufacturer runs the storefronts through which
         players can purchase the related console games. This dynamic was confirmed by a
         publisher, which indicated that once video game players buy a certain console, they
         essentially become locked-in to that console’s ecosystem. Exclusive video games
         could therefore encourage the purchase of the relevant consoles.
(102) ZeniMax publishes popular game franchises (such as “The Elder Scrolls” and
         “Fallout”), which enjoy recognition by players. However, despite the commercial
         success of these titles, Microsoft would not have the ability to foreclose rival console
         distributors by refusing to make ZeniMax games available on rival consoles or
         degrading the terms under which these games are made available.
(103) First, market shares indicate that ZeniMax’s content represents a very limited
         position in the upstream market in the EEA, with a lower than [0-5]% share of the
         digital video games publishing market (2019). Furthermore, the Parties combined
         represent a market share of [0-5]% (2019) in the EEA (see Table 1). The
         Commission therefore considers that the combined entity cannot be considered to
         hold a significant degree of market power in the video games publishing market.
(104) Second, almost all respondents to the market investigation confirmed that, despite
         the commercial success of a number of ZeniMax games,97 the upstream publishing
         market is highly competitive.98 The Parties face strong competition from many rival
         third-party publishers owning well-known game franchises, which represent
         attractive content for game distributors. These competitors include large developers
         such as Electronic Arts (“Fifa”, “Need for Speed”), Nintendo (“Super Mario”,
         “Zelda”), Activision Blizzard (“Call of Duty”), Take Two (“GTA V”) and Ubisoft
         (“Assasin’s Creed”). For instance, 2018 data shows that no ZeniMax games feature
         among the 15 bestselling console games in Europe.99
(105) Third, exclusivity strategies are not uncommon and have already been adopted by
         rival consoles, with video games that performed better than ZeniMax titles.100 Such
         exclusive games have contributed to drive the success of Nintendo and Sony
         consoles,101 which have a stronger market position compared to Microsoft’s Xbox.102
         In this regard, almost all respondents to the market investigation consider that
         Microsoft currently holds the least attractive exclusive content compared to Sony
97  Q1 – Questionnaire to market participants in the video gaming industry, replies to question 33.
98  Q1 – Questionnaire to market participants in the video gaming industry, replies to question 22.
99  Form CO, Figure 8.
100 Form CO, Figure 8. PlayStation exclusives “God of War” and “Spider Man” ranked as the 6 th and 3rd
    highest selling games in 2018 respectively. See also paragraph (97) and footnote 93 and above.
101 Form CO, paragraph 440 and Parties’ reply to the RFI 2 of 14.1.2021, question 8. See also PS4 has
    officially won this console generation, 26.4.2019 (link available here); techradar.com: Nintendo’s Switch
    success shows that gaming is about more than graphics, 5.3.2018 (link available here); and
    mynintendonews.com: “15 Nintendo Switch exclusives in the Top 40 this weeks” 11.1.2021 (link
    available here).
102 See footnote 94 above.
                                                          20
 ---pagebreak---          and Nintendo consoles.103 Exclusive games might influence the choice of a console
         especially at the stage of the initial console purchase. However, once the choice has
         been made, players tend to remain loyal to their console, as also indicated in
         paragraph (120) below. In this regard, a slight majority of respondents to the market
         investigation pointed to the presence of some degree of player loyalty to the console
         brand.104 Publishers generally indicated that players tend to remain loyal to a brand
         once they choose it. Only a few respondents indicated that players are neutral or not
         loyal. Therefore, it is unlikely that a significant number of current PlayStation and
         Nintendo console users would switch to the Xbox console as a result of an
         exclusivity strategy in relation to ZeniMax’s games. The Commission considers that
         these reasons further limit the combined entity’s ability to weaken the position of
         rival console distributors.
(106) Therefore, for the reasons set out above, the Commission concludes that the
         combined entity would not have the ability to foreclose rival console video game
         distributors by engaging in a total or partial input foreclosure strategy.
5.2.3.2. Incentive to engage in input foreclosure
         (A)       The Notifying Parties’ view
(107) The Notifying Party submits that Microsoft has strong incentives to continue making
         ZeniMax games available for rival consoles (and their related storefronts).105
(108) The Notifying Party explains that the profitability of a strategy to make ZeniMax
         games exclusive to the Xbox console would depend on a trade-off between: (i) the
         value of attracting new players to the Xbox ecosystem; and (ii) the lost income from
         the sale of ZeniMax games for rival consoles (through the related storefronts). In this
         regard, the Notifying Party forecasts that a significant share of ZeniMax games sales
         will occur on rival consoles over the life cycle of the newly released console
         generation.106 Based on such a trade-off, the Notifying Party submits that a
         hypothetical console exclusivity strategy would be profitable only if it led to an
         increase in the number of Xbox users [forecast million] over the next five years,
         corresponding to an increase in Xbox shipments [forecast percentage] above the
         forecast level.107
(109) In the Notifying Party’s view, it is implausible that Microsoft would achieve such
         results. Firstly, the Notifying Party considers that such a strategy is likely to be
         successful if service differentiation is weak and the content at issue is extremely
103 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 36.
104 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 27.
105 Form CO, paragraphs 456–466.
106 In Annex 14 to the Form CO, the Parties provided two estimates, one based on previous sales and one
    based on data provided by IDG Consulting. According to such estimates, Microsoft’s loss from not
    distributing ZeniMax games for rival consoles would range from [forecast million] over the period 2021 –
    2028, corresponding to a percentage of ZeniMax sales on PlayStation and Nintendo Switch [forecast
    percentage].
107 Form CO, paragraph 463 and Annex 14. The Parties have calculated such switching rate by comparing the
    projected losses from lost sales of ZeniMax games for Sony and Nintendo’s consoles with the projected
    gains from new players buying an Xbox to keep playing ZeniMax games.
                                                         21
 ---pagebreak---         valuable.108 However, rival consoles are significantly differentiated, and have
        accumulated brand loyalty.
(110) Secondly, a high switching rate by players is implausible due to the considerable
        switching costs between consoles, and the relative value of ZeniMax games
        compared to the gaming landscape.109
(111) Thirdly, the Notifying Party considers that the players’ switching rates indicated
        above are conservative, as they would have to increase further if more realistic
        switching patterns were taken into account. In particular, the Notifying Party submits
        that multi-homing across consoles may further reduce the incentives for a
        foreclosure strategy.110 Players loyal to Nintendo or Sony consoles with a strong
        desire to play ZeniMax games can respond to a console exclusivity strategy by
        buying an Xbox to play ZeniMax games, while keeping most of their gaming
        activity and expenditure on their preferred console.111
(112) In this regard, the Notifying Party submits that cross-platform console ownership
        reduces the value of an incremental switcher, because players who buy an Xbox as a
        second console would not bring their entire game purchasing activity to the Xbox.
        [details about the profit, value and ownership of the Xbox and the profit made from
        the sale of ZeniMax games].112 113
(113) [Microsoft’s strategy regarding ZeniMax games].114
(114) Therefore, according to the Notifying Party, Microsoft would not have the incentive
        to cease or limit making ZeniMax games available for purchase on rival consoles.
        (B)         The Commission’s assessment
(115)    The combined entity’s incentive to foreclose rival console game distributors
        depends on the balance between: (i) the losses from not distributing ZeniMax games
        broadly on other consoles; and (ii) the higher profits obtained from the increased
        sales of Xbox consoles (and the related games and services) to new end-users
        interested in playing ZeniMax games. In light of this trade-off, the Commission
        concludes that the combined entity would not have the incentive to engage in an
        input foreclosure strategy by refusing to make ZeniMax games available on rival
        consoles or degrading the terms under which these games are made available.
108 Weeds, Helen: “TV wars: Exclusive content and platform competition in pay TV”, The Economic Journal
    126.594 (2016).
109 Form CO, paragraph 463.
110  Form CO, paragraph 464 and Parties’ reply to the RFI 2 of 14.1.2021, question 9.
111 Data provided by Microsoft shows that in the US in 2019, [30-40]% of PlayStation 4 owners and [40-
    50]% of Nintendo Switch owners also owned an Xbox One.
112 Parties’ reply to the RFI 2 of 14.1.2021, question 9. In Annex 14 to the Form CO of 29.1.2021, the Parties
    have provided data showing that the average Consumer Lifetime Value (i.e., the average gross margin that
    each additional Xbox user is worth to Microsoft over a console’s life cycle) amounts to [USD 50-100].
    The value of an additional consumer is the highest when the latter purchases an Xbox console [details
    about consumer value]. Consequently, the value of an additional Xbox consumer [details about consumer
    value].
113 Form CO, paragraph 464 and Parties’ reply to the RFI 2 of 14.1.2021, question 9.
114 Form CO, paragraph 465.
                                                           22
 ---pagebreak--- (116) The Commission notes that an input foreclosure strategy would only be
        economically viable if ZeniMax games were able to attract a sufficiently high
        number of new players to the Xbox console ecosystem, and if Microsoft could profit
        enough from their game purchasing activity.115 However, such an outcome is
        unlikely.
(117) First, both the Notifying Party and the market investigation indicate that players may
        consider switching to another console especially at the launch of a new console
        generation, an event that occurs approximately every eight years (the current console
        generation was launched in 2020 and is projected to be discontinued in 2028).116
        This is because, in addition to the purchase of a console, players’ subsequent
        purchasing activities will concern games and related services that are not portable to
        another console and are exclusively available within that console ecosystem.
        Therefore, due to these combined costs, players are likely to retain a console
        throughout its entire life cycle.
(118) In this regard, while a number of the respondents to the market investigation
        considered that players would switch to another console to enjoy exclusive
        content,117 such a scenario does not appear probable in the case at hand. While
        exclusive games are relevant for stimulating demand, high switching rates are
        unlikely and depend on several additional factors. First, distributors specified that
        players’ choices are influenced by consoles’ design, services, functionalities and the
        console brand used by peers. Second, such switching would only occur if particular
        circumstances are met. For instance, a publisher specified that content must be
        “extremely high quality […], otherwise players will tend to stick to the console they
        are used to”. Third, respondents explained that there exists large amounts of
        significantly differentiated content competing across platforms.
(119) Second, the Commission considers, in line with the Notifying Party’s explanation,
        that rival console users could also purchase an Xbox as a second console, in addition
        to the one they already own, in order to play ZeniMax games. As regards console
        multi-homing, according to an NPD Group survey,118 30.6% of PlayStation 4
        console owners also own a Microsoft Xbox 1 and 28.6% also own a Nintendo
        Switch. In this regard, several respondents to the market investigation confirmed that
        between 20% and 40% of console owners use more than one console brand.119 As a
        result, any purchase activity for the Xbox console focused solely on ZeniMax games,
        as explained in paragraph (112) above, would not likely offset the losses incurred
        from the sale of the console to the new player.120
115 See paragraph (108) above. The Parties provided the relevant calculations in Annex 14 to the Form CO.
116 Form CO, Figure 4. The life cycle of the last console generation lasted 8 years, whereas older console
    generations had a longer duration, exceeding ten years. As regards the current generation, Microsoft and
    Sony expect to discontinue the sale of the respective consoles during the course of 2028, as indicated in
    Annex 14 to the Form CO, footnote 15.
116 Form CO, Annex 3.
117 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 25.
118 Form CO, paragraph 500, data from NPD Group Presentation, Annual Video Game Presentation, 3 March
    2020.
119 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 26.
120 Form CO, paragraph 464 and Parties’ reply to the RFI 2 of 14.1.2021, question 9.
                                                         23
 ---pagebreak--- (120) Third, more generally, the Commission also notes that Sony and Nintendo consoles
        are differentiated products, due to the availability of several exclusive games, some
        of which, as detailed above,121 are highly attractive to players. Rival consoles have
        built a strong reputation and enjoy a degree of brand loyalty by players, as
        demonstrated by a Best SEO Companies’ survey.122 Therefore, on top of the
        considerations set out above, it is implausible that a sufficiently significant number
        of players would switch to the Xbox driven by the desire to play ZeniMax games,
        abandoning other ecosystems with a richer game library.123
(121) In addition, respondents to the market investigation confirmed the absence of an
        incentive for Microsoft to engage in input foreclosure. The majority of respondents
        indicated that Microsoft would not have the incentive to prevent rival console game
        distributors from selling ZeniMax games.124
(122) Furthermore, the Commission notes that the above considerations are consistent with
        the Notifying Party’s declared strategy in relation to the Transaction. [Microsoft’s
        future strategy regarding ZeniMax games].125 126 127
(123) [Microsoft’s future strategy regarding ZeniMax games].128
(124) Therefore, for the reasons set out above, the Commission concludes that the
        combined entity would not have the incentive to foreclose rival console video game
        distributors by engaging in a total or partial input foreclosure strategy.
        (C)         Impact on effective competition
(125) Even if the combined entity was to engage in a (total or partial) input foreclosure
        strategy, the Commission considers that such a strategy would not have a material
        impact on competition in the EEA. Rival consoles would not be deprived of an
        essential input, and could still rely on a large array of valuable video game content to
        attract players.
(126) This conclusion is consistent with the results of the market investigation. The
        majority of distributors considered that the Transaction, in general, would have a
        neutral impact on their company, and no respondent believed that the impact would
        be negative.129 The majority of distributors also indicated, more specifically, that the
        impact of a possible exclusivity strategy with regard to ZeniMax games would be
        neutral on the distribution market.130
121 See paragraphs (104) and (105) above.
122 Form CO, paragraph 499, Figure 11. The Best SEO Companies’ survey Generational Brand Loyalty,
    13.11.2019, shows that approximately 40% of players are loyal users of Sony’s consoles, while
    approximately 31% of players are loyal to Microsoft’s consoles and 30% to Nintendo’s consoles.
123 gamespot.com, PlayStation 4 command over exclusives leads to promising start for PlayStation 5,
    10.12.2020 (link available here). See also paragraph (80) above.
124 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 34.
125 Form CO, paragraphs 7 – 17.
126 Form CO, paragraphs 7–17 and 446.
127 Parties’ reply to the RFI 1 of 6.11.2020, question 1.
128 Form CO, Annex 3.
129 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 37.
130 Q1 – Questionnaire to market participants in the video gaming industry, replies to question 35.
                                                          24
 ---pagebreak--- (127) In light of the above, the Commission finds that a potential (partial or total) input
        foreclosure strategy would not have a material effect on competition in the EEA.
5.2.3.3. Conclusion
(128) In light of the above, the Commission concludes that the Transaction does not raise
        serious doubts as to the compatibility with the internal market with respect to
        possible input foreclosure practices under all the alternative product markets for
        game publishing, whether at EEA or at worldwide level.
6.      CONCLUSION
(129) For the above reasons, the European Commission has decided not to oppose the
        notified concentration and to declare it compatible with the internal market and with
        the functioning of the EEA Agreement. This decision is adopted in application of
        Article 6(1)(b) of the Merger Regulation and Article 57 of the EEA Agreement.
                                                     For the Commission
                                                     (Signed)
                                                     Margrethe VESTAGER
                                                     Executive Vice-President
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